UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-5418
Walker International Industries, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 13-2637172
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
370 Old Country Road
Garden City, New York 11530
(Address of principal executive offices)
(516) 746-4141
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were a total of 698,688 shares
of the registrant's common stock, par value $.10 per share, outstanding as of
August 13, 2002.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Walker International Industries, Inc.
Quarterly Report on Form 10-QSB
Quarter Ended June 30, 2002
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet (Unaudited) as of June 30, 2002............................ 3
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended
June 30, 2002 and 2001........................................................................ 4
Condensed Consolidated Statement of Stockholders' Equity (Unaudited) for the Six Months Ended
June 30, 2002................................................................................. 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30,
2002 and 2001................................................................................. 6
Notes to Condensed Consolidated Financial Statements............................................ 7
Item 2. Management's Discussion and Analysis or Plan of Operation................................. 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 16
Item 2. Changes in Securities..................................................................... 16
Item 3. Defaults Upon Senior Securities........................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....................................... 16
Item 5. Other Information......................................................................... 16
Item 6. Exhibits and Reports on Form 8-K.......................................................... 16
Signatures......................................................................................... 18
Exhibit Index...................................................................................... 19
- 2 -
PART II. FINANCIAL INFORMATION
Item 1. Financial Statements.
WALKER INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 2002
ASSETS
Current assets -
Cash and cash equivalents..................................................................... $ 300,865
Accounts receivable........................................................................... 201,250
Inventories................................................................................... 36,640
Prepaid expenses and other current assets..................................................... 35,776
------------------
Total current assets........................................................................ $ 574,531
Property and equipment, net...................................................................... 448,564
Other assets -
Other assets.................................................................................. 3,690
Intangibles - customer list................................................................... 329,614
----------------
Total assets.............................................................................. $ 1,356,399
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities -
Accounts payable and accrued expenses......................................................... $ 284,821
Customer deposits............................................................................. 6,414
----------------
Total current liabilities................................................................... $ 291,235
Other liabilities -
Long term debt................................................................................ 165,315
----------------
Total liabilities........................................................................... 456,550
----------------
Stockholders' equity -
Common stock.................................................................................. 68,768
Additional paid in capital.................................................................... 3,600,692
Accumulated deficit........................................................................... (2,769,611)
----------------
Total stockholders' equity.................................................................. 899,849
----------------
Total liabilities and stockholders' equity................................................ $ 1,356,399
================
See notes to condensed consolidated financial statements
- 3 -
WALKER INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
Net sales.......................................... $ 630,483 $ -- $ 828,752 --
Costs of sales..................................... 153,652 -- 195,903 --
------------- ------------- ------------- --------------
Gross profit.................................... 476,831 -- 632,849 --
Operating expenses................................. 579,688 687,043 849,092 818,874
------------- ------------- ------------- --------------
Operating loss.................................. (102,857) (687,043) (216,243) (818,874)
Interest income (expense).......................... 927 (6,525) (10,320) (18,225)
------------- ------------- ------------- --------------
(Loss) income before extraordinary item......... (101,930) (693,568) (226,563) (837,099)
Extraordinary item................................. -- -- 158,690 --
------------- ------------- ------------- --------------
Net loss...................................... $ (101,930) $ (693,568) $ (67,873) $ (837,099)
============= ============= ============= ==============
Basic and diluted net loss per common
share........................................... $ (0.28) $ (2.99) $ (0.19) $ (3.70)
============= ============= ============= ==============
Weighted average number of common shares
outstanding................................... 370,710 231,772 354,435 226,546
============= ============= ============= ==============
See notes to condensed consolidated financial statements
- 4 -
WALKER INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional
----------------------------
Par Value Paid-In Accumulated
Shares $0.10 Capital Deficit Total
------------- ------------- ------------- ------------- -------------
BALANCE - January 1, 2002, as previously
reported.................................... 7,374,398 $ 73,744 $ 2,040,873 $ (2,701,738) $ (587,121)
Conversion of shares pursuant to merger
(See Note 1).............................. (7,110,948) (47,399) 47,399 -- --
------------- ------------- ------------- ------------- ------------
BALANCE - January 1, 2002, restated............ 263,450 26,345 2,088,272 (2,701,738) (587,121)
Sale of common stock........................... 9,303 930 84,070 -- 85,000
Accrued wages contributed pursuant to
merger (See Note 1)......................... -- -- 304,025 -- 304,025
Common stock issued as payment of
accrued salaries............................ 2,680 268 56,584 -- 56,852
Common stock issued for the acquisition
of American Data Source, Inc................ 183,984 18,398 476,519 -- 494,917
Outstanding common stock of Walker
International Industries, Inc............... 228,271 22,827 591,222 -- 614,049
Net loss....................................... -- -- -- (67,873) (67,873)
------------- ------------- ------------- ------------- -------------
BALANCE - June 30, 2002........................ 687,688 $ 68,768 $ 3,600,692 $ (2,769,611) $ 899,849
============= ============= ============= ============= =============
See notes to condensed consolidated financial statements
- 5 -
WALKER INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
---------------------------------
2002 2001
--------------- ----------------
Cash Flows From Operating Activities:
Net loss..................................................................... $ (67,873) $ (837,099)
--------------- ----------------
Adjustments to reconcile net loss to net cash used in operating activities -
Extraordinary item........................................................ (158,690) --
Depreciation and amortization............................................. 52,642 2,652
Accrued interest.......................................................... 9,450 --
Stock based compensation.................................................. -- 804,726
Changes in operating assets and liabilities:
Accounts receivable..................................................... (56,491) --
Inventories............................................................. 9,673 --
Prepaid expense and other current assets................................ 80,498 --
Customer deposits....................................................... 5,214 --
Other assets............................................................ 14,055 --
Accounts payable and accrued expenses................................... 14,121 (57,538)
Note payable............................................................ -- 12,570
--------------- ----------------
Total adjustments..................................................... (29,528) 762,410
--------------- ----------------
Net cash used in operating activities................................. (97,401) (74,689)
--------------- ----------------
Cash Flows from Investing Activities -
Net cash received in merger transaction...................................... 472,209 --
Purchase of property and equipment........................................... (46,843) --
--------------- ----------------
Net cash provided by investing activities............................... 425,366 --
--------------- ----------------
Cash Flows from Financing Activities -
Principal repayment of notes payable......................................... (175,000) --
Proceeds from notes payable.................................................. 80,000 12,500
Proceeds from sale of common stock........................................... 85,000 100,000
Repayment of due to stockholder.............................................. (17,100) (32,995)
--------------- ----------------
Net cash (used in) provided by financing activities..................... (27,100) 79,505
--------------- ----------------
Net increase in cash and cash equivalents.................................... 300,865 4,816
Cash and cash equivalents - beginning........................................ -- 6,671
--------------- ----------------
Cash and cash equivalents - ending........................................... $ 300,865 $ 11,487
=============== ================
See notes to condensed consolidated financial statements
- 6 -
WALKER INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 1 - Merger and Organization of Entities
On March 19, 2002, effective as of March 1, 2002, Walker International
Industries, Inc. and subsidiaries ("Walker") (which operates in the film
processing industry through its wholly-owned subsidiary, Kelly Color, Inc.)
acquired all of the issued and outstanding common stock of American DataSource,
Inc. ("ADS") and National Preplanning, Inc. ("NPI") through a series of
simultaneous mergers.
In the merger with ADS, Walker issued to James N. Lucas, Sr., the sole
stockholder of ADS, 183,984 shares of common stock, and $325,000 in cash. In
addition, the Company issued 18% subordinated promissory notes to the sole
stockholder of ADS and his assignees in the aggregate principal amount of
$500,000 due November 30, 2002. These notes are being held in escrow pending the
completion of a certain acquisition (as defined). If the acquisition is not
completed by September 30, 2002, the notes will be canceled. ADS provides trust
administrative services to independent funeral homes, state master trusts and
companies that own funeral homes or cemeteries for pre-need funeral and cemetery
trust accounts.
In the merger with NPI, Walker issued to the stockholders of NPI a total of
272,573 shares of common stock. In addition, the Company issued 18% subordinated
promissory notes in the aggregate principal amount of $750,000, due November 30,
2002. These notes are being held in escrow pending the completion of a certain
acquisition (as defined). If the acquisition is not completed by September 30,
2002, the notes will be canceled. Mitchell Segal, the president, chief executive
officer, and the owner of approximately 67.5% of the outstanding shares of NPI,
received 183,967 of the shares of common stock and $506,221 principal amount of
the notes. Mr. Segal also agreed to forego $304,000 of unpaid salary. NPI, which
was a development stage company through February 28, 2002, is a managing general
insurance agency and third party marketer of prearranged death care services to
corporations, unions and affinity groups.
Walker has agreed to register a total of 91,308 shares of common stock that was
issued in the ADS and NPI acquisitions for resale by the former stockholders of
ADS and NPI. Such 91,308 shares represent approximately 20% of the shares of
common stock that were issued in the two acquisitions.
The mergers were accounted for as purchase transactions, pursuant to the
guidance of Staff Accounting Bulletin Topic 2a issued by the Securities and
Exchange Commission (the "SEC"), whereby NPI not Walker was the accounting
acquirer. The historical financial statements prior to March 1, 2002 are those
of NPI. NPI has established a new basis for Walker and ADS assets and
liabilities based upon an allocation of the fair value of the merger. The
subordinated promissory notes are considered contingent consideration and will
be recorded when the contingency is resolved. The condensed consolidated
financial statements reflect the Company's best estimate at the date of the
mergers. Such estimate may be subject to adjustment in the near term. The
adjustments to reflect the fair values of the assets and liabilities of ADS and
Walker acquired by NPI in the merger transactions are as follows:
American DataSource, Inc.
Number of shares of common stock issued..................... 183,984
Per share fair value of stock issued........................ $ 2.69
----------------
Fair value of common stock ................................. $ 494,917
Cash........................................................ 325,000
---------------
Total purchase price................................... $ 819,917
================
- 7 -
WALKER INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
Fair value of net assets acquired -
Current assets............................................. $ 293,446
Property and equipment..................................... 401,933
Intangibles - customer list................................ 371,597
Liabilities assumed........................................ (247,059)
---------------
Fair value of net assets acquired.......................................... $ 819,917
================
Walker International Industries, Inc.
Number of shares of common stock outstanding [i]........................................ 228,271
Per share fair value of stock outstanding............................................... $ 2.69
----------------
Fair value of common stock.............................................................. $ 614,049
Merger costs............................................................................ 55,000
--------------
Total purchase price............................................................... $ 669,049
================
Fair value of net assets acquired -
Current assets............................................. $ 866,110
Property and equipment [ii]................................ --
Other assets [ii].......................................... --
Liabilities assumed........................................ (38,371)
---------------
Fair value of net identifiable assets acquired............................. $ 827,739
Negative goodwill [iii].................................................... (158,690)
----------------
$ 669,049
================
[i] The number of shares of common stock outstanding is net of 249,539
shares of treasury stock which were retired as part of the merger
transactions.
[ii] The excess of fair value of net assets acquired over the purchase price
was allocated first to reduce property and equipment and other assets
to zero, then to negative goodwill.
[iii] Negative goodwill was immediately reflected as an extraordinary gain in
the condensed consolidated financial statements for the three months
ended March 31, 2002.
The pro forma unaudited condensed consolidated results of operations for the six
months ended June 30, 2002, as if the mergers occurred on January 1, 2002, are
as follows:
Pro forma
Net sales...................................................................................... $ 1,189,299
Cost of sales.................................................................................. 317,195
------------------
Gross profit................................................................................ 872,104
Operating expenses............................................................................. 1,125,300
-----------------
Operating loss.............................................................................. (253,196)
Extraordinary item............................................................................. 297,068
------------------
Net income.................................................................................. $ 43,872
==================
Basic and diluted net income per common share.................................................. $ 0.06
==================
Weighted average number of common shares outstanding........................................... 684,578
==================
This pro forma information does purport to be indicative of what would have
occurred had the mergers been completed as of January 1, 2002 or results which
may occur in the future.
- 8 -
WALKER INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
Subsequent to the mergers, Walker changed its fiscal year end from November 30th
to December 31st to correspond with the fiscal year end of NPI.
NOTE 2 - Basis of Presentation
The condensed consolidated balance sheet of the Company as of June 30, 2002, the
related statements of operations, and cash flows for the six months ended June
30, 2002 and June 30, 2001 include the operations of NPI for the six months
ended June 30, 2002 and 2001, and for four months ended June 30, 2002 for both
Walker and ADS. The condensed consolidated financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the SEC. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying condensed
consolidated financial statements include all adjustments (consisting of normal,
recurring adjustments) necessary to summarize fairly the Company's financial
position and results of operations. The results of operations for the six months
ended June 30, 2002 are not necessarily indicative of the results of operations
for the full year or any other interim period. These financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in Walker's Annual Report on Form 10-KSB for the year ended November
30, 2001, Quarterly Report on Form 10-QSB for the three months ended February
28, 2002, Quarterly Report on Form 10-QSB for the three months ended March 31,
2002, Current Report on Form 8-K (Date of Report: March 19, 2002) and Current
Report on Form 8-K (Date of Report: May 14, 2002), which Form 8-K includes
historical financial statements of NPI and ADS, as filed with the SEC.
Reclassifications
Certain accounts in the prior year's financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year's
financial statements. These reclassifications have no effect on previously
reported income.
NOTE 3 - Selected Significant Accounting Policies
Earnings Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 requires the
presentation of basic and diluted earnings per share ( "EPS"). Basic EPS is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
includes the potential dilution that could occur if options or other contracts
to issue common stock were exercised or converted. The effect of the shares
issued in the NPI merger transaction on the Company has been given retroactive
application in the earnings per share calculation. The Company's outstanding
warrants are out-of-the-money and are not reflected in diluted earnings per
share. Accordingly, basic and diluted earnings per share are identical.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the use of the purchase method of accounting for
business combinations initiated after June 30, 2001, and eliminates the pooling-
of-interests method. SFAS No. 142 requires, among other things, the use of a
non-amortization approach for
- 9 -
WALKER INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
purchased goodwill and certain intangibles. Under a non-amortization approach,
goodwill and certain intangibles will not be amortized in earnings, but instead
will be reviewed for impairment at least annually.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supercedes SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long- Lived Assets to Be Disposed
Of." SFAS No. 144 retains the fundamental provisions of SFAS No. 121 but sets
forth new criteria for asset classification and broadens the scope of qualifying
discontinued operations.
The Company implemented these standards effective January 1, 2002 and they
resulted in an extraordinary gain of $158,690, pursuant to the acquisition of
the Company by NPI (Note 1).
On April 30, 2002, FASB issued SFAS 145, "Rescission of SFAS Statements No. 4,
44 and 64, Amendment of SFAS Statement No. 13, and Technical Corrections". SFAS
145 eliminates the requirement that gains and losses from the extinguishment of
debt be aggregated and, if material, classified as an extraordinary item, net of
the related income tax effect and eliminates an inconsistency between the
accounting for sale-leaseback transactions and certain lease modifications that
have economic effects that are similar to sale-leaseback transactions.
Generally, SFAS 145 is effective for transactions occurring after May 15, 2002.
The adoption of this standard is expected to have no impact to the Company.
Intangibles
Intangibles consist of a customer list obtained in the merger with ADS. The
customer list was recorded at its estimated fair value at the merger date and is
being amortized using the greater of the income forecast method or straight-line
method over its estimated useful life of three years.
Software Development Costs
The Company capitalizes software development costs from the point in time when
technological feasibility has been established until the computer software
product is available for use. The annual amortization of the capitalized amounts
will be the greater of the ratio of the current revenue to total projected
revenue for a product or the straight- line method, and is applied over periods
ranging up to five years. The Company performs periodic reviews to ensure that
unamortized costs remain recoverable through the generation of future revenues.
NOTE 4 - Stockholders' Equity
Pre Merger
During the three months ended March 31, 2002, the Company issued 6,443 shares of
its Common Stock to an investor in a separate private equity transaction
resulting in total proceeds of $60,000.
During the three months ended March 31, 2002, the Company issued 2,680 shares of
common stock as settlement of $56,852 of accrued wages.
Post Merger
During June 2002, the Company issued 2,860 shares of common stock to an investor
in a separate private equity transaction resulting in gross proceeds of $25,000.
- 10 -
WALKER INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(Continued)
In July 2002, the Company issued 11,000 shares of common stock as settlement of
$10,000 in professional fees.
NOTE 5 - Commitment and Contingencies
Litigation
The Company is involved in litigation through the normal course of business. The
Company believes that the resolution of these matters will not have a material
adverse effect on the financial position of the Company.
Commitments
The Company has entered into an employment agreement with Mitchell Segal to
serve as the Company's president and chief executive officer through December
31, 2005. Under Mr. Segal's employment agreement, the Company will pay Mr. Segal
an annual base salary of $200,000 for 2002, with annual increases of not less
than $10,000, plus a bonus equal to a minimum of 3% to a maximum of 5% of the
gross proceeds received from equity financings and a minimum of 3% to a maximum
of 7.5% of the Company's net income, provided the Company's net income is at
least $500,000. The bonus is payable through 2008, even if Mr. Segal's
employment with the Company is terminated by the Company except in the event the
termination is for cause. In no event may the bonuses due Mr. Segal exceed an
aggregate of $304,025. Mr. Segal also is entitled to discretionary bonuses, if
any, awarded by the Company's board of directors.
The Company also has entered into an employment agreement with Peter Walker to
serve as president of the Company's Kelly Color Laboratories, Inc. subsidiary
through March 18, 2012. Under Mr. Walker's employment agreement, the Company
will pay Mr. Walker an annual base salary of $100,000, plus a monthly
non-accountable expense allowance of $1,000. Mr. Walker's employment agreement
does not require Mr. Walker to devote a minimum number of hours to the business
of Kelly Color. Mr. Walker's employment agreement does require the Company to
use the Company's best efforts to cause Mr. Walker to be nominated for election
to the Company's board of directors during the term of Mr. Walker's employment
agreement.
NOTE 6 - Segment Reporting
Commencing March 1, 2002, the Company began classifying its operations into two
business segments: (a) the administrative services to independent funeral homes,
state master trusts and companies that own funeral homes or cemeteries for
pre-need funeral and cemetery accounts and (b) film processing. Information
concerning the Company's business segments is as follows:
Segment
-------------------------------------
(a) (b) Total
----------------- ------------------ ------------------
Three Months Ended June 30, 2002
Revenue............................................. $ 368,743 $ 261,740 $ 630,483
================= ================== ==================
Loss before extraordinary item...................... $ (95,048) $ (6,882) $ (101,930)
================= ================== ==================
Six Months Ended June 30, 2002
Revenue............................................. $ 505,053 $ 323,699 $ 828,752
================= ================== =================
Loss before extraordinary item...................... $ (208,221) $ (18,342) $ (226,563)
================= ================== ==================
Total identifiable assets at June 30, 2002............. $ 1,008,890 $ 347,509 $ 1,356,399
================= ================== ==================
- 11 -
Item 2. Management's Discussion and Analysis or Plan of Operation.
Throughout this Quarterly Report on Form 10-QSB, the terms "we," "us," "our" and
"our company" refers to Walker International Industries, Inc. ("Walker") and,
unless the context indicates otherwise, includes Walker's wholly-owned
subsidiaries, National Preplanning, Inc. ("NPI"), American DataSource, Inc.
("ADS") and Kelly Color, Inc. ("Kelly").
Introductory Comment - Forward-Looking Statements
Statements contained in this report include "forward-looking statements" within
the meaning of such term in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
involve known and unknown risks, uncertainties and other factors which could
cause actual financial or operating results, performances or achievements
expressed or implied by such forward-looking statements not to occur or be
realized. Such forward-looking statements generally are based on our best
estimates of future results, performances or achievements, predicated upon
current conditions and the most recent results of the companies involved and
their respective industries. Forward-looking statements may be identified by the
use of forward-looking terminology such as "may," "will," "could," "should,"
"project," "expect," "believe," "estimate," "anticipate," "intend," "continue,"
"potential," "opportunity" or similar terms, variations of those terms or the
negative of those terms or other variations of those terms or comparable words
or expressions. Potential risks and uncertainties include, among other things,
such factors as:
o the results our business strategies and future plans of operations,
o our ability to integrate our recent mergers of ADS and NPI into our
business and administrative operations so that they may work together and
grow successfully,
o our ability to obtain stockholder approval for the issuance of shares to
permit the conversion of promissory notes we issued in connection with the
merger transactions, if required,
o general economic conditions in the United States and elsewhere, as well as
the economic conditions affecting the industries in which we operate,
o our historical losses,
o the decline in sales by our Kelly subsidiary due to the rising use of
digital cameras,
o the competitive environments within the photographic development, funeral
home administrative services and pre-arranged death care services
industries,
o our ability to raise additional capital, if and as needed,
o the cost-effectiveness of our product and service development activities,
o political and regulatory matters affecting the industries in which we
operate,
o the market acceptance, revenues and profitability of our current and future
products and services,
o the extent that our sales network and marketing programs achieve
satisfactory response rates, and
o the other risks detailed in this Quarterly Report on Form 10-QSB and, from
time to time, in our other filings with the Securities and Exchange
Commission.
Readers are urged to carefully review and consider the various disclosures made
by us in this Form 10-QSB, our Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2002, our Current Reports on Form 8-K (Date of Reports: March
19, 2001 and May 14, 2002), our Annual Report on Form 10-KSB for the year ended
November 30, 2001 and our other filings with the SEC. These reports attempt to
advise interested parties of the risks and factors that may affect our business,
financial condition and results of operations and prospects. The forward-
looking statements made in the Form 10-QSB speak only as of the date hereof and
we disclaim any obligation to provide updates, revisions or amendments to any
forward-looking statements to reflect changes in our expectations or future
events.
Introductory Comment - Historical Results of Operations and Cash Flow Based on
Operations of NPI
Effective as of March 1, 2002, Walker acquired all of the issued and outstanding
common stock of ADS and NPI through a series of simultaneous mergers.
- 12 -
The mergers were accounted for as purchase transactions, pursuant to the
guidance of Staff Accounting Bulletin Topic 2a issued by the Securities and
Exchange Commission, whereby NPI not Walker was the accounting acquirer. The
historical financial statements prior to March 1, 2002 are those of NPI. NPI has
established a new basis for Walker and ADS assets and liabilities based upon an
allocation of the fair value of the merger.
Subsequent to the closing of the acquisitions of NPI and ADS, we changed our
fiscal year end from November 30th to December 31st to correspond with the
fiscal year end of NPI.
Our condensed consolidated balance sheet as of June 30, 2002 and the related
statements of operations and cash flows for the three and six months ended June
30, 2002 and 2001 include the operations of NPI for the three and six months
ended June 30, 2002 and 2001, and the three months and four months ended June
30, 2002 for both Walker and ADS.
Financial Condition and Liquidity
We had working capital of $283,296 at June 30, 2002, compared to working capital
of $353,440 at March 31, 2002. The decline in our working capital is primarily a
result of our net loss of approximately $102,000, offset in part by a reduction
in accounts payable and accrued expenses and an increase in accounts receivable,
all with respect to the three months ended June 30, 2002.
Net cash used in operating activities was approximately $97,000 for the six
months ended June 30, 2002, compared to net cash used in operating activities of
$75,000 for the six months ended June 30, 2001. During the six months ended June
30, 2001, NPI had no operations which resulted in NPI incurring significant
expenses without any offsetting operating source of revenues. For the six months
ended June 30, 2002, the operations of Walker and ADS from March 1, 2002 are
included, which operations allowed us to pay for a large portion of our
operating expenses. In addition, for the six months ended June 30, 2002, we
recorded an extraordinary gain of $159,000 attributable to the write-off of
negative goodwill resulting from the excess of the fair value of net assets over
the purchase price of Walker acquired in the merger transaction.
Net cash provided by investing activities was approximately $425,000 for the six
months ended June 30, 2002, resulting from the cash proceeds of $472,000
received as a result of the acquisition transactions, offset by purchases of
property and equipment of $47,000. There were no cash flows generated by
investing activities of NPI during the six months ended June 30, 2001.
Net cash used in financing activities was approximately $27,000 for the six
months ended June 30, 2002, resulting from the issuance of a promissory note in
the principal amount of $80,000, sales of common stock for gross proceeds of
$85,000, offset by the repayment of outstanding notes totaling $175,000 of ADS
and repayment of debt due a stockholder of $17,000. There were no cash flows
generated by financing activities during the six months ended June 30, 2001.
As a result of these activities, our cash and cash equivalents increased to
$300,865 as of June 30, 2002, compared to $11,487 cash and cash equivalents at
June 30, 2001.
Plan of Operations
We intend to become a leading financial services company operating in the death
care industry. Through NPI, we anticipate seeking to market and sell
pre-arrangements of death care as a voluntary benefit to corporations, unions
and affinity groups. Through ADS, we intend to seek to increase the amount of
pre-need trust dollars currently under our administration. We anticipate
continuing to operate our Kelly Color subsidiary as a non-digital photographic
development laboratory to the photographic profession.
NPI is currently developing relationships with various distribution channels in
which to sell pre-arranged death care plans. NPI will seek to earn insurance
commissions and channel trust administration fees to ADS upon the sale of
pre-arrangements. Additionally, NPI may seek to acquire direct third party
marketers of pre-arranged death care
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which market pre-arranged death care services primarily by direct mail, as well
as run the pre-arrangement office in many funeral home locations.
ADS is currently seeking to increase the amount of pre-need trust monies it
currently administrates. Currently, ADS administers approximately $215 million
in trust funds. We anticipate that ADS will seek to administer trust funds held
by various state funeral association trusts, establish and market master trusts
to the independent funeral home community and to acquire existing trust
administration companies.
There can be no assurance that we will achieve successful and profitable results
from our distribution and marketing efforts or that we will be able to complete
acquisitions within the third party marketer segment of the death care services
industry.
We intend any acquisitions to be accomplished through issuances of stock, debt
and cash, or a combination of such forms of consideration. Accordingly, any
future merger or acquisition may have a dilutive effect on our stockholders as
of the time of such mergers and acquisitions. Additionally, our ability to
accomplish any future acquisitions may depend on our cash position, our ability
to raise capital, the stock price of our common stock, and our ability to
service any debt we may incur.
We believe that our operating results may fluctuate greatly quarter to quarter
due to several factors, including the success of our merger and acquisition
strategy and the impact of any increases in our results of operations as we
pursue new business in the death care services industry.
Results of Operations
Three Months Ended June 30, 2002
Net sales for the three months ended June 30, 2002 were approximately $630,000,
of which $262,000 was generated by Walker and $368,000 was generated by ADS.
Walker continues to see a deterioration in its revenues as the professional
photography industry migrates to the use of digital imagery from film.
Cost of sales for the three months ended June 30, 2002 was approximately
$154,000, all of which was incurred by Walker. Costs of sales as a percentage of
net sales at Walker was 58.8%. Walker has seen a trend in the photographic
development industry of reduced costs of certain raw materials. The benefits of
this trend at Walker has been offset in part by an inability at Walker to reduce
all costs of sales proportionally as net sales are reduced.
Operating expenses for the three months ended June 30, 2002 were approximately
$580,000, of which $125,000 was generated by NPI, $116,000 was generated by
Walker and $339,000 was generated by ADS. The operating loss for the three
months ended June 30, 2001 of $687,000 was incurred by NPI alone. We have
endeavored to reduce operating expenses, through the reduction in compensation
paid at Walker as its operations are requiring less general and administrative
oversight and expenses. However, we anticipate that, as we expand the operations
of ADS and commence business operations at NPI, we will be required to add
personnel and incur greater general and administrative expenses.
Interest income for the three months ended June 30, 2002 was less than $1,000.
Interest income is derived from interest generated by our available cash and
cash equivalents, offset by the costs of borrowing funds. The cash and cash
equivalents were derived from Walker. As such funds are depleted, and if ADS and
NPI continue to incur debt, interest income will be reduced and we may incur
interest expense in future periods.
As a result of the foregoing, we incurred a net loss of approximately $102,000
for the three months ended June 30, 2002 or $0.28 per share, compared to a loss
of $694,000 or $2.99 per share for the three months ended June 30, 2001. Of the
loss for the three months ended June 30, 2002, a loss of $7,000 can be
attributable to Walker, income of $29,000 can be deemed attributable to ADS and
a loss of $124,000 can be attributable to NPI.
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Six Months Ended June 30, 2002
Net sales for the six months ended June 30, 2002 were approximately $829,000, of
which $324,000 was generated by Walker and $505,000 was generated by ADS. The
net sales for Walker and ADS only includes those revenues generated in the four
month period commencing March 1, 2002. Walker continues to see a deterioration
in its revenues as the professional photography industry migrates to the use of
digital imagery from film. We anticipate growth in net sales by ADS and
commencement of business operations by NPI during the second half of our fiscal
year ending December 31, 2002.
Cost of sales for the six months ended June 30, 2002 was approximately $195,000,
all of which was incurred by Walker.
Operating expenses for the six months ended June 30, 2002 were approximately
$849,000, of which $230,000 was incurred by NPI, $147,000 was incurred by Walker
and $484,000 was incurred by ADS. The operating expenses for Walker and ADS only
includes those expenses incurred in the four month period commencing March 1,
2002. The operating loss for the three months ended June 30, 2001 of $819,000
was incurred by NPI alone. We have endeavored to reduce operating expenses,
through the reduction in compensation paid at Walker as its operations are
requiring less general and administrative oversight and expenses. However, we
anticipate that, as we expand the operations of ADS and commence business
operations at NPI, we will be required to add personnel and incur greater
general and administrative expenses.
Interest expense for the six months ended June 30, 2002 was approximately
$10,000. NPI incurred an interest expense of $11,700 and Walker had interest
income of $1,380 for the six months ended June 30, 2001. The interest income for
Walker for the current six month period only includes that income generated in
the four month period commencing March 1, 2002. Interest income is derived from
interest generated by our available cash and cash equivalents, offset by the
costs of borrowing funds. The cash and cash equivalents were derived from of
Walker. As such funds are depleted, and ADS and NPI continue to incur debt,
interest income will be reduced and we may incur interest expense in future
periods.
We had an extraordinary item of approximately $159,000 resulting from the
write-off of negative goodwill of NPI in connection with the acquisition
transactions. There were no extraordinary items for the six months ended June
30, 2001.
As a result of the foregoing, we incurred a net loss of approximately $68,000
for the six months ended June 30, 2002 or $0.19 per share, compared to a loss of
$837,000 or $3.70 per share for the six months ended June 30, 2001. Of the loss
for the six months ended June 30, 2002, net income of $140,000 can be
attributable to Walker, net income of $21,000 can be deemed attributable to ADS
and a net loss of $230,000 can be attributable to NPI.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is hereby made to Item 3 of our Annual Report on Form 10-KSB, for the
fiscal year ended November 30, 2001, filed with the Securities and Exchange
Commission on February 26, 2002 (Commission File No.:0-5418), and to the
references made in such Item, for a discussion of all material pending legal
proceedings to which we or any of our subsidiaries are parties.
Item 2. Changes in Securities.
In June 2002, we issued 2,860 shares of our common stock to one individual for
consideration of $25,000. The issuance of such shares was exempt from
registration under the Securities Act pursuant to the provisions of Section 4(2)
of the Securities Act.
In July 2002, we issued 11,000 shares of our common stock to our outside legal
counsel as settlement of $10,000 in professional fees. The issuance of such
shares was exempt from registration under the Securities Act pursuant to the
provisions of Section 4(2) of the Securities Act.
Item 3. Defaults on Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Set forth below is a list of the exhibits to this Quarterly Report on Form
10-QSB.
Exhibit
Number Description
2.1 Agreement and Plan of Merger, dated as of March 19, 2002, among Walker
International Industries, Inc., NPI Acquisition Corp. and National
Preplanning, Inc.*
2.2 Agreement and Plan of Merger, dated as of March 19, 2002, among Walker
International Industries, Inc., Walker Mergerco, Inc. and American
DataSource, Inc.*
10.1 Form of 18% Subordinated Promissory Note issued in connection with
National Preplanning, Inc. acquisition.*
10.2 Form of 18% Subordinated Promissory Note issued in connection with
American DataSource, Inc. acquisition.*
10.3 Employment Agreement, dated as of March 19, 2002, among Walker
International, Inc., Kelly Color, Inc. and Peter Walker.*
10.4 Employment Agreement, dated as of March 19, 2002, between Walker
International Industries, Inc., National Preplanning, Inc. and
Mitchell Segal.*
10.5 Form of Registration Rights Agreement among Walker International
Industries, Inc. and the former stockholders of National Preplanning,
Inc.*
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10.6 Form of Registration Rights Agreement among Walker International
Industries, Inc. and the former stockholders of American DataSource,
Inc.*
10.7 Form of Escrow Agreement among Walker International Industries, Inc.,
National Preplanning, Inc., and Snow Becker Krauss P.C., as escrow
agent.*
10.8 Form of Escrow Agreement among Walker International Industries, Inc.,
American DataSource, Inc. and Snow Becker Krauss P.C., as escrow
agent.*
99.1 Certification pursuant to 18 U.S.C.ss.1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
* Incorporated by reference. See Exhibit Index on page 19.
(b) Reports on Form 8-K.
A Current Report on Form 8-K (Date of Report: March 19, 2002) was filed with the
Securities and Exchange Commission on April 3, 2002, reporting, under Items 1, 2
and 7, a change of control in our company and our acquisition of ADS and NPI.
This Form 8-K included historical financial statements for ADS and NPI. Pro
forma financial information concerning the parties to the ADS and NPI
acquisitions is provided in Item 5 of Part II to this Current Report on Form
10-QSB.
A Current Report on Form 8-K (Date of Report: May 14, 2002) was filed with the
Securities and Exchange Commission on May 16, 2002, reporting, under Item 4, our
change in certifying accountant and, under Item 5, the change in our fiscal
year.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 14, 2002 Walker International Industries, Inc.
By: /s/ Mitchell S. Segal
------------------------------
Mitchell S. Segal, President
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Walker International Industries, Inc.
Quarterly Report on Form 10-QSB
Quarter Ended June 30, 2002
EXHIBIT INDEX
Exhibit
Number Description
2.1 Agreement and Plan of Merger, dated as of March 19, 2002, among Walker
International Industries, Inc., NPI Acquisition Corp. and National
Preplanning, Inc. (Incorporated by reference to exhibit 2.1 to the
registrant's Current Report on Form 8-K (Date of Report: March 19,
2002) (Commission file number: 0-5418), filed with the Securities and
Exchange Commission on April 3, 2002.)
2.2 Agreement and Plan of Merger, dated as of March 19, 2002, among Walker
International Industries, Inc., Walker Mergerco, Inc. and American
DataSource, Inc. (Incorporated by reference to exhibit 2.2 to the
registrant's Current Report on Form 8-K (Date of Report: March 19,
2002) (Commission file number: 0-5418), filed with the SEC on April 3,
2002.)
10.1 Form of 18% Subordinated Promissory Note issued in connection with
National Preplanning, Inc. acquisition. (Incorporated by reference to
exhibit 3.1(c) of exhibit 2.1 to the registrant's Current Report on
Form 8-K (Date of Report: March 19, 2002) (Commission file number:
0-5418), filed with the SEC on April 3, 2002.)
10.2 Form of 18% Subordinated Promissory Note issued in connection with
American DataSource, Inc. acquisition. (Incorporated by reference to
exhibit 3.1(c) of exhibit 2.2 to the registrant's Current Report on
Form 8-K (Date of Report: March 19, 2002) (Commission file number:
0-5418), filed with the SEC on April 3, 2002.)
10.3 Employment Agreement, dated as of March 19, 2002, among Walker
International, Inc., Kelly Color, Inc. and Peter Walker. (Incorporated
by reference to exhibit 10.3 to the registrant's Current Report on
Form 8-K (Date of Report: March 19, 2002) (Commission file number:
0-5418), filed with the SEC on April 3, 2002.)
10.4 Employment Agreement, dated as of March 19, 2002, between Walker
International Industries, Inc., National Preplanning, Inc. and
Mitchell Segal. (Incorporated by reference to exhibit 10.4 to the
registrant's Current Report on Form 8-K (Date of Report: March 19,
2002) (Commission file number: 0-5418), filed with the SEC on April 3,
2002.)
10.5 Form of Registration Rights Agreement among Walker International
Industries, Inc. and the former stockholders of National Preplanning,
Inc. (Incorporated by reference to exhibit 8.2(h) to exhibit 2.1 to
the registrant's Current Report on Form 8-K (Date of Report: March 19,
2002) (Commission file number: 0-5418), filed with the SEC Commission
on April 3, 2002.)
10.6 Form of Registration Rights Agreement among Walker International
Industries, Inc. and the former stockholders of American DataSource,
Inc. (Incorporated by reference to exhibit 8.2(g) to exhibit 2.2 to
the registrant's Current Report on Form 8-K (Date of Report: March 19,
2002) (Commission file number: 0-5418), filed with the SEC on April 3,
2002.)
10.7 Form of Escrow Agreement among Walker International Industries, Inc.,
National Preplanning, Inc., and Snow Becker Krauss P.C., as escrow
agent. (Incorporated by reference to exhibit 3.4 to exhibit 2.1 to the
registrant's Current Report on Form 8-K (Date of Report: March 19,
2002) (Commission file number: 0-5418), filed with the SEC on April 3,
2002.)
10.8 Form of Escrow Agreement among Walker International Industries, Inc.,
American DataSource, Inc. and Snow Becker Krauss P.C., as escrow
agent. (Incorporated by reference to exhibit 3.4 to exhibit 2.2 to the
registrant's Current Report on Form 8-K (Date of Report: March 19,
2002) (Commission file number: 0-5418), filed with the SEC on April 3,
2002.)
99.1 Certification pursuant to 18 U.S.C.ss.1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.
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