UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission file number: 000-30480
The Neptune Society, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2492929
- ----------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4312 Woodman Avenue, 3rd Floor,
Sherman Oaks, California 91505 91423
- ----------------------------------- -------------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (818) 953-9995
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
4,157,090 shares of Common Stock, $0.001 par value, outstanding as of November
7, 2002.
The Neptune Society, Inc.
Form 10-Q
Index
Page
PART 1 -- FINANCIAL INFORMATION..............................................1
Item 1: Financial Statements...................................................1
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................9
Item 3: Quantitative and Qualitative Disclosures About Market Risk...........19
Item 4. Controls and Procedures..............................................19
PART II -- OTHER INFORMATION................................................19
Item 1. Legal Proceedings....................................................19
Item 2. Changes in Securities................................................20
Item 3. Defaults Upon Senior Securities......................................20
Item 4. Submission of Matters to a Vote of Security Holders.................20
Item 5. Other Information....................................................20
Item 6. Exhibits and Reports on Form 8-K.....................................21
PART 1 -- FINANCIAL INFORMATION
Item 1: Financial Statements
1
Neptune Society, Inc.
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
------------------ -----------------
September 30, 2002 December 31, 2001
------------------ -----------------
Assets
Current assets:
Cash $ 513,364 213,219
Accounts receivable 2,292,610 1,751,276
Prepaid expenses and other
current assets 101,322 113,645
------- -------
Total current assets 2,907,296 2,078,139
Property and equipment, net 496,094 548,469
Names and reputations, net 24,374,713 24,364,472
Non compete agreements, net 12,082 48,333
Deferred financing costs 1,108,553 1,539,132
Deferred charges and other assets 6,365,797 4,343,159
--------- ---------
35,264,535 32,921,704
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt 2,365,319 2,890,215
Accounts payable 1,223,573 1,700,487
Accrued and other current liabilities 1,652,106 1,478,188
--------- ---------
Total current liabilities 5,240,998 6,068,889
Long-term debt 266,715 2,291,575
Convertible debentures 5,861,653 5,000,000
Other long-term liabilities 1,080,575 848,861
Deferred pre-need revenues 17,569,354 11,688,952
---------- ----------
30,019,295 25,898,278
Shareholders' equity:
Common stock 4,157 2,153
Additional paid-in capital 30,513,681 27,901,241
Accumulated deficit (25,272,598) (20,879,968)
----------- -----------
Total shareholders' equity 5,245,240 7,023,426
--------- ---------
$ 35,264,535 32,921,704
========== ==========
See accompanying notes to consolidated financial statements.
Neptune Society, Inc.
Consolidated Statements of Operations
Three and Nine Months ended September 30, 2002
--------------- --------------- ------------------ ------------------
Three months Three months
ended September ended September Nine months ended Nine months ended
30, 2002 30, 2001 September 30, 2002 September 30, 2001
--------------- --------------- ------------------ ------------------
Revenues:
Services and merchandise $ 2,562,381 3,599,326 8,015,748 8,712,407
Management and finance fees 216,237 255,308 655,121 1,015,466
--------------- --------------- ------------------ ------------------
Total revenues 2,778,618 3,854,634 8,670,869 9,727,873
Costs and expenses 1,520,376 1,604,905 4,337,910 4,376,677
--------------- --------------- ------------------ ------------------
Gross profit 1,258,242 2,249,729 4,332,959 5,351,196
General and administrative
expenses 2,334,199 1,866,244 6,347,950 5,779,131
Amortization and depreciation
expense 72,107 518,506 203,897 1,576,278
Professional fees 153,388 277,020 526,469 823,183
--------------- --------------- ------------------ ------------------
Total general and administrative
expenses 2,559,694 2,661,770 7,078,316 8,178,592
--------------- --------------- ------------------ ------------------
Income (Loss) from operations (1,301,452) (412,041) (2,745,357) (2,827,396)
Interest expense 531,684 671,125 1,647,273 1,716,043
--------------- --------------- ------------------ ------------------
Loss before income taxes (1,833,136) (1,083,166) (4,392,630) (4,543,439)
Income tax expense - - - -
--------------- --------------- ------------------ ------------------
Net loss $ (1,833,136) (1,083,166) (4,392,630) (4,543,439)
=============== =============== ================== ==================
Loss per share - Basic and Diluted $ (0.45) (0.54) (1.29) (2.31)
Weighted average number of shares-
Basic and Diluted 4,077,251 2,010,159 3,394,493 1,966,660
See accompanying notes to consolidated financial statements.
Neptune Society, Inc.
Consolidated Statements of Cash Flows
Three and Nine Months ended September 30, 2002 and 2001
------------------ ------------------ ----------------- ------------------
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30,2002 September 30, 2001
------------------ ------------------ ----------------- ------------------
Net loss $ (1,833,136) (1,083,166) (4,392,630) (4,543,439)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 72,107 518,506 203,897 1,576,278
Accretion of discount on notes payable 42,844 5,200 93,045 62,699
Non-cash interest & amortization of
deferred finance 314,042 484,575 951,189 1,050,159
Stock issued for professional services - - - -
Stock compensation 81,243 75,000 237,301 455,532
Loss on disposal of assets - - - -
Deferred tax benefit - - - -
Change in operating assets and liabilities:
Accounts receivable (74,425) (459,133) (541,335) (1,537,681)
Prepaid expenses and other current assets 114,274 65,654 12,322 25,759
Deferred charges and other assets (1,266,695) (353,445) (2,269,456) (1,401,826)
Accounts payable (165,125) 439,854 (476,914) 119,147
Accrued and other liabilities 738,049 111,737 847,965 453,484
Deferred pre-need revenues 1,927,115 389,189 5,880,402 3,779,813
--------- ------- --------- ---------
Net cash provided by (used in) operating
activities (49,708) 193,971 545,786 39,925
--------- ------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (16,847) (669) (115,271) (8,198)
Acquisitions, net of cash acquired - - (10,240) -
--------- ------- --------- ---------
Net cash used in investing activities (16,847) (669) (125,511) (8,198)
--------- ------- --------- ---------
Cash flows from financing activities:
Payments on notes payable (306,912) (2,006,197) (1,820,129) (2,018,173)
Proceeds from issuance of debt, net - 1,500,000 200,000 1,500,000
Net proceeds of common stock issued - - 1,500,000 -
--------- ------- --------- ---------
Net cash provided by (used in) financing
activities (306,912) (506,197) (120,129) (518,173)
--------- ------- --------- ---------
Net increase (decrease) in cash (373,467) (312,895) 300,145 (486,446)
Cash, beginning of period 886,831 891,788 213,219 1,065,339
--------- ------- --------- ---------
Cash, end of period $ 513,364 578,893 513,364 578,893
========= ======= ======= =======
Supplemental disclosure of cash flow
information - Cash paid during the
period for Interest $ 174,798 181,350 603,039 603,185
========= ======= ======= =======
See accompanying notes to consolidated financial statements.
THE NEPTUNE SOCIETY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 and 2001
(Unaudited)
(1) The Business
The Neptune Society, Inc., (the "Company") a Florida Corporation, is the
holding company for Neptune America, Inc., a California Corporation. On
March 31, 1999, the Company acquired a group of private companies engaged
in marketing and administering pre-need and at-need cremation services in
California, Florida and New York. 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, $26,809,237,
was recorded as names and reputations. The Company currently operates
crematories in Los Angeles, California, Ankeny, Iowa and Spokane,
Washington.
As of September 30, 2002, the Company had a working capital deficit of
approximately $2.3 million. The Company is currently exploring various
financing alternatives to address such working capital deficiency.
(2) Interim Financial Statements (Unaudited)
Basis of Presentation
The accompanying condensed consolidated financial statements for the three
and nine months ended September 30, 2002 and 2001 include the accounts of
the Company and all majority-owned subsidiaries and are unaudited but
include all adjustments, consisting of normal recurring accruals and any
other adjustments which management considers necessary for a fair
presentation of the results for these periods. These condensed consolidated
financial statements have been prepared in a manner consistent with the
accounting policies described in the annual report on Form 10-K filed with
the Securities and Exchange Commission (the "Commission") for the year
ended December 31, 2001, and should be read in conjunction therewith.
Operating results for interim periods are not necessarily indicative of the
results that may by expected for the full year period.
Summary of Significant Accounting Policies
At-need cremation services--The Company recognizes revenue on at-need
cremation services and merchandise sales at the time the services are
provided and the merchandise is delivered.
Pre-need cremation arrangements--The Company sells pre-need cremation
services and merchandise 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 services are performed.
Prior to 2000, revenue related to merchandise sold with a pre-need
cremation service arrangement was recognized upon meeting certain state
regulatory criteria, which, in California and Washington may be prior to
the performance of cremation services. The Company considered such criteria
met when the Company was permitted to receive one hundred percent of the
2
unrestricted funds associated with the merchandise sale, the merchandise
was in a condition for its intended use and the Company did not retain any
specific performance obligations essential to the functionality of the
merchandise, the customer accepted the merchandise as evidenced by a
written transfer of title to the customer and certificate of ownership,
and, if the customer so requested, the Company stored the merchandise in an
insured location on the customer's behalf until customer pick-up or the
time of need, but no later than the customer's death. Customers that
purchase pre-need cremation arrangements do not have cancellation rights
with respect to the purchase of merchandise.
In response to SAB No. 101, the Company changed its revenue recognition
accounting policy with respect to merchandise sold in a pre-need
arrangement to include certain conditions beyond state regulatory
requirements. As of January 1, 2000, the Company added the following
criteria related to its revenue recognition policy for the sale of
merchandise: (i) a definitive delivery date, (ii) stored merchandise is
required to be segregated and specifically identified by customer, and
(iii) a customer's merchandise is labeled or marked for such customer and
may not be used to fill another customer's order, and exchange for a
different piece of merchandise in the future is remote. In addition, the
merchandise must not be subject to claims of the Company's creditors, the
risks and rewards of merchandise ownership must have transferred to the
customer, and the Company's custodial risks are insurable and insured. The
Company shall defer pre-need merchandise sales until such time as the
merchandise has been physically delivered or upon satisfaction of the
additional criteria noted. The Company recognizes revenue on the sale of
future pre-need merchandise sales upon the physical delivery of the
merchandise or upon the satisfaction of the Company's current revenue
recognition policy criteria outlined above.
Florida and New York do not allow the Company to deliver cremation
merchandise prior to the provision of cremation services, and as such,
revenue related to merchandise sold with a pre-need cremation arrangement
in these states is not recognized until the merchandise is delivered, which
is generally concurrent with the period services are performed.
The Company is allowed under state regulations in Colorado, Illinois, Iowa,
Washington, Oregon and Florida to retain certain cash receipts received
related to services to be performed in the future. These cash receipts are
recorded as deferred revenue and recognized when services are provided.
During the three months ended September 30, 2002, the Company recognized
previously deferred pre-need merchandise revenues and costs of
approximately $15,000 and $6,000, respectively, related to the fiscal year
2000 cumulative effect of change in accounting principle adjustment. During
the nine months ended September 30, 2002, the Company recognized previously
deferred pre-need merchandise revenues and costs of approximately $38,000
and $15,000, respectively related to the above-mentioned cumulative effect
of change in accounting principle adjustment.
Pre-need installment sales--The Company also sells pre-need cremation
arrangements under installment plans. Under such plans, the customer makes
an initial down-payment and pays the balance in monthly installments plus
interest. To the extent that cash received is not trusted, the Company
accounts for this cash as deferred revenue until the transaction qualifies
for revenue recognition under its accounting policies. Prior to January 1,
2001, due to the uncertainty of collections of these accounts, the Company
recorded these transactions in accordance with its revenue recognition
accounting policies as cash was received.
Worldwide travel sales--The Company sells a worldwide travel assurance plan
(the "plan") which guarantees the provision of cremation services anywhere
in the world to the extent the plan holder is more than 75 miles away from
their legal residence at the time of death. The plan is underwritten by a
third party carrier who receives a premium payment, and is obligated to
perform services if the above criteria is met. The Company recognizes
revenue related to these plans at the time of sale. The Company also sells
worldwide travel plans under installment plans. Under such plans, the
customer makes an initial down-payment and pays the balance in monthly
installments plus interest.
3
Commission income-- 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, is recognized at
the point at which the commission is no longer subject to refund, generally
3 to 5 days after the contract is sold. Policy proceeds are paid to the
Company as cremation services and merchandise are delivered.
Direct and indirect costs--The Company expenses direct and indirect costs
in the period incurred, with the exception of expenses specifically
identifiable to individual pre-need cremation arrangements, such as
commissions. Such expenses are recognized when the related pre-need
merchandise and/or service revenues, respectively, are recognized.
(3) Computation of Earnings (Loss) Per Common Share
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 three and nine months ended September 30, 2002, options to purchase
607,296 of common stock at prices ranging from $10.00 to $56.04 per share,
13% convertible debentures (which are convertible into 1,666,667 shares of
common stock at $3.00 per share with detachable warrants to purchase
200,000 shares of common stock at $3.00 per share) and 13.75% convertible
debentures (which are convertible into 893,045 shares of common stock at
$1.20 per share), were not included in the computation of diluted loss per
share because the effect would be antidilutive.
For the three and nine months ended September 30, 2001, options to purchase
17,046 and 235,671 shares, respectively, of common stock at prices ranging
from $10.00 to $56.04 per share and 13% convertible debentures (which are
convertible into 125,000 shares of common stock at $40.00 per share with
detachable warrants to purchase 50,000 shares of common stock at prices
ranging from $41.68 to $50.00 per share) and 8% convertible debentures
(which are convertible into 20,833 shares of common stock at $48.00 per
share), were not included in the computation of diluted loss per share
because the effect would be antidilutive.
(4) Shareholders' Equity
Effective as of March 22, 2002, the Company's Board of Directors authorized
and affected a 1 for 4 reverse split of its common stock. Per share amounts
in the accompanying consolidated financial statements give retroactive
effect to the reverse stock split.
On May 31, 2002, the Company amended its Articles of Incorporation to
increase the authorized capital to consist of 85,000,000 shares, including
75,000,000 shares of common stock, $0.001 par value, and 10,000,000 share
of preferred stock, $0.001 par value.
On July 31, 2002, the holder of a 13%, $75,000 convertible debenture
maturing July 31, 2002 converted its debenture into 225,000 shares of the
Company's common stock.
During the three and nine months ended September 30, 2002, no options to
acquire common stock were granted. 2,625 options were canceled during the
three- and nine-month periods ended September 30, 2002.
At September 30, 2002, 4,157,090 shares of the Company's common stock were
issued and outstanding.
4
(5) Debt
Long-term debt at September 30, 2002 and December 31, 2001, respectively,
is as follows:
September 30, December 31,
2002 2001
13% Convertible debentures,
due February 24, 2005. $ 5,000,000 5,000,000
Note payable, amortizing,
interest accruing at 13%, due
July 31, 2003. 1,955,181 2,391,940
Note payable to a private investor,
non-interest bearing, non-amortizing,
due on September 30, 2001. - 1,000,000
13.75% Convertible debentures,
non-amortizing, due March 2004.
The balance is net of unaccreted
discount of $210,000. (c) 790,000 800,000
Note payable, 13% non-amortizing,
due July 2003. 350,000 350,000
13% Convertible debentures,
non-amortizing due July 31, 2002. (d) - 75,000
Notes payable, due November 2003
and February 2004. The balance is
net of unaccreted discount of $38,014. 256,947 369,872
Note payable, non-interest bearing
revolving debt. 39,203 94,102
Notes payable, interest accruing
at 9%, due May 31, 2002. - 10,876
Line of credit, interest accruing
at 9%, due April 1, 2002 (e). - 90,000
13.75% Convertible debentures,
non-amortizing, due April 2004. (b) 71,653 -
Note payable, non-amortizing,
due April 2005. The balance
is net of unaccreted discount of $3,615. (a) 30,703 -
------- -------
8,493,687 10,181,790
Less current installments 2,365,319 2,890,215
--------- ---------
$ 6,128,368 7,291,575
========== =========
a) In April 2002, the Company issued an amortizing, non-interest bearing, note
payable in the amount of $34,318 in connection with the purchase of vehicles.
The note was collateralized by the vehicle. The note was discounted to its
approximate fair market value.
b) In May 2002, the Company issued 13.75% convertible debentures in the
principal amount of $71,653 to
5
certain convertible debt holders in connection with their exercise of preemptive
rights granted under the terms of a Debenture and Warrant Amendment Agreement
dated effective December 31, 2001. The convertible debentures are convertible
into common stock at $1.20 per share.
c) In May 2002, the Company completed a private placement of 13.75% convertible
debentures in the principal amount of $1,000,000 to CCD Consulting Commerce
Distribution AG in consideration of $200,000 in cash and the satisfaction of a
promissory note in the principal amount of $800,000. The convertible debenture
is exercisable for shares of common stock of The Neptune Society, Inc. at $1.20
per share. The Company became obligated to issue 83,333 shares of the Company's
common stock as a loan conversion fee. These debentures automatically convert
into common shares at $1.20 per share on March 31, 2004. The Company granted
resale registration rights to this investor.
d) In July 2002, a 13% convertible debenture in the principal amount of $75,000
due July 31, 2002 was converted by Green Leaf Investors I, LLC into 225,000
shares of our common stock.
e) In July 2002, the Company terminated a line-of-credit acquired with the
Portland, Oregon businesses.
f) The Company has an obligation under Convertible Debentures dated December 24,
1999, due February 24, 2005 in the initial principal amount of $5,000,000 to
maintain a fixed charge coverage ratio (the "Coverage Ratio"). Although the
Company is current in all our debt obligations under the debentures, the Company
did not maintain the Coverage Ratio for the quarter ended September 30, 2002. If
the holders provide the Company with written notice, the Company would have 30
days to meet the Coverage Ratio or the holders could accelerate the due date of
the debentures, which would have a material adverse affect on the Company's
business and results of operations. The holders have not provided the Company
with written notice. A default under the debentures could cause the Company to
default under other obligations.
(6) Income Taxes
As a result of the Company's continuing losses, during the three and nine
months ended September 30, 2002, the Company did not recognize any tax
benefit related to its tax net operating losses.
(7) Contingent Liabilities
The Company guaranteed the obligations of Wilhelm Mortuary, Inc.
("Wilhelm"), a wholly-owned subsidiary, to Green Leaf Investors I, LLC
("Green Leaf") in the principal amount of $1.5 million due July 31, 2002.
This obligation was assumed by Western Management Services, LLC ("Western")
in connection with the sale of the assets of Wilhelm. The Company remains
obligated under its guarantee to Green Leaf, which is secured by a security
interest granted in the Company's assets. On August 12, 2002, the Company
received notice that Western and Green Leaf agreed in principle to extend
the due date of the note to November 1, 2002. The Company anticipates that
Western will satisfy the obligation in full in November, 2002.
(8) New Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill,
noting that any purchase price allocable to an assembled workforce may not
be accounted for separately. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 also requires that intangible
assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company adopted the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002.
Statement 141 requires upon adoption of Statement 142, that the Company
evaluate its
6
existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition
apart from goodwill. Upon adoption of Statement 142, the Company was
required to reassess the useful lives and residual values of all intangible
assets acquired in purchase business combinations, and make any necessary
amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company was required to
test the intangible asset for impairment in accordance with the provisions
of Statement 142 within the first interim period. Any impairment loss was
measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 required the Company to perform an assessment of whether
there is an indication that goodwill was impaired as of the date of
adoption. To accomplish this the Company identified its reporting units and
determine the carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to
those reporting units as of the date of adoption. The Company then had six
months from the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount. To
the extent a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired and
the Company must perform the second step of the transitional impairment
test. In the second step, the Company compared the implied fair value of
the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of it assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in
accordance with Statement 141, to its carrying amount, both of which were
measured as of the date of adoption. This second step was required to be
completed no later than the end of the year of adoption. Any transitional
impairment loss was recognized as the cumulative effect of a change in
accounting principle in the Company's statement of earnings.
As of the date of adoption, the Company had unamortized goodwill in the
amount of $24.4 million which was subject to the transition provisions of
Statements 141 and 142. Amortization expense related to goodwill was $1.8
million and $1.7 million, respectively, for the years ended December 31,
2001 and 2000. The Company has, as of September 30, 2002, completed the
first step of determining the fair value of each reporting unit and
comparing it to the reporting unit's carrying amount, and does not believe
that an impairment exists.
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144), which supersedes both FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (Statement 121) and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (Opinion 30), for the disposal of a segment of a business (as
previously defined in that Opinion). Statement 144 retains the fundamental
provisions in Statement 121 for recognizing and measuring impairment losses
on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated
with Statement 121. Statement 144 retains the basic provisions of Opinion
30 on how to present discontinued operations in the income statement but
broadens that presentation to include a component of an entity (rather than
a segment of a business). Unlike Statement 121, an impairment assessment
under Statement 144 will never result in a write-down of goodwill. Rather,
goodwill is evaluated for impairment under Statement No. 142.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value
of a liability for asset
7
retirement obligations in the period in which they occurred. The statement
applies to a company's legal obligations associated with the retirement of
a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a
long-lived asset. When a liability is initially recorded, the company would
capitalize the cost, thereby increasing the carrying amount of the related
asset. The capitalized asset retirement cost is depreciated over the life
of the respective asset while the liability is accreted to its present
value. Upon settlement of the liability, the obligation is settled at its
recorded amount or the company incurs a gain or loss. The statement is
effective for fiscal years beginning after June 30, 2002. The Company does
not expect the adoption to have a material impact to the Company's
financial position or results of operations.
The Company was required to adopt Statement 144 no later than the year
beginning after December 15, 2001. Accordingly, the Company adopted
Statement 144 in the first quarter of 2002. Management does not expect the
adoption of Statement 144 for long-lived assets held for use to have a
material impact on the Company's financial statements because the
impairment assessment under Statement 144 is largely unchanged from
Statement 121. The provisions of the Statement for assets held for sale or
other disposal generally are required to be applied prospectively after the
adoption date to newly initiated disposal activities. Therefore, management
cannot determine the potential effects that adoption of Statement 144 will
have on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Issued 4/02)" which the Company does not believe will
materially affect our financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan, as previously required under Emerging Issues Task Force
("EITF") Issue 94-3. A fundamental conclusion reached by the FASB in this
statement is that an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective
for initial measurement of the liability. The provisions of this statement
are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company believes that this SFAS will not have a
significant impact on our results of operations or financial position.
8
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934, as amended. Any statements that express or
involve discussions with respect to predictions, expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
using words and phrases such as "expects," "believe," "believes," "plans,"
"anticipate," "anticipates," "is anticipated," or stating that certain actions,
events or results "will," "may," "should," or "can" be taken, occur or be
achieved) are not statements of historical fact and may be "forward-looking
statements." Forward-looking statements are based on expectations, estimates and
projections at the time the statements are made that involve a number of risks
and uncertainties which could cause actual results or events to differ
materially from those anticipated by the Company. Such forward-looking
statements reflect our current views with respect to future events and are
subject to certain risks, uncertainties and assumptions, including our ability
to expand our operations, our ability to manage an increasing number of sales
offices, our ability to retain key management personnel and to continue to
attract and retain skilled funeral home and crematory management personnel, our
ability to comply with state and federal regulations, our ability to satisfy our
debt obligations as they become due, changes in the death rate or deceleration
of the trend towards cremation, the 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. Important factors which could cause actual results of the Company
to differ materially from those in forward-looking statements include, among
others, the following:
1) Changes in general economic conditions impacting financial markets that
could negatively affect the Company.
2) Changes in credit relationships impacting the availability of credit and
the general availability of credit in the marketplace.
3) Changes in consumer demand and/or pricing for the Company's products and
services caused by several factors, such as local death rates, cremation
rates, competitive pressures and local economic conditions.
4) The Company's ability to successfully finance and implement certain
strategic growth initiatives that could result in increased pre-need
contract sales and case volume.
5) Changes in domestic political and/or regulatory environments in which the
Company operates, including tax and accounting policies.
6) The Company's ability to successfully raise financing to extinguish certain
debt coming due in the current year.
Other specific risks and uncertainties are set forth in the Company's
annual report on Form 10-K filed with the Securities and Exchange Commission.
Our management has included projections and estimates in this quarterly report,
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. The Company undertakes no
obligation to publicly release the results of any revision to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
9
Overview
We are a provider of cremation services in North America. As of November
13, 2002, we operate 18 locations serving Arizona, California, Colorado,
Florida, Illinois, Iowa, Oregon, New York and Washington. Our strategy is to
grow by: (i) initiating start-up operations; (ii) selectively acquiring small,
family-owned cremation service providers strategically located across the United
States; (iii) operating all of our locations under one nationally branded name,
"The Neptune Society" (where permitted); (iv) avoiding direct competition with
the larger competitors in the death care industry by concentrating solely on
marketing and selling cremation services and cremation products; and (v)
improving revenue and profitability of newly acquired operations by
consolidating administrative and management functions within our organization.
We believe that implementing these initiatives are critical to achieving
profitability and are our most important challenges in competing effectively in
the death care industry.
We have made no acquisitions since August 2000. We opened offices in the
suburbs of Denver, Colorado, Chicago, Illinois, and Tempe, Arizona in January
2002, June 2002, and September 2002, respectively.
Effective March 22, 2002, we completed a consolidation of our share capital
on a four share (old) for one share (new) basis (the "Reverse Split"). As a
result of the Reverse Split, our authorized capital was reduced from 25,000,000
shares of common stock to 6,250,000 shares of common stock, and our issued and
outstanding share capital consisting of 9,697,604 shares of common stock was
reduced to 2,424,401 shares. Information contained in this report gives effect
to the Reverse Split.
On May 31, 2002, we amended our Articles of Incorporation to increase our
authorized capital to consist of 85,000,000 shares, including 75,000,000 shares
of common stock, $0.001 par value, and 10,000,000 share of preferred stock,
$0.001 par value. Information contained in this report gives effect to the
amendment.
SELECTED FINANCIAL INFORMATION
The selected financial information presented below as of and for the three
and nine months ended September 30, 2002 and 2001 are derived from our unaudited
condensed consolidated financial statements. The following discussion and
analysis is provided to increase understanding of, and should be read in
conjunction with, the unaudited condensed consolidated financial statements and
accompanying notes.
10
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
(in 000's except number of offices) 2002 2001 2002 2001
------------ ------------ ----------- -----------
INCOME STATEMENT DATA:
Total Revenue $ 2,779 3,855 8,671 9,728
Gross Profit 1,258 2,250 4,333 5,351
General and Administrative
Expenses 2,334 1,866 6,348 5,779
Professional Fees 153 277 526 823
Amortization and Depreciation
Expense 72 519 204 1,576
Operating Loss (1,301) (412) (2,745) (2,827)
Interest Expense 532 671 1,647 1,716
Net Loss (1,833) (1,083) (4,393) (4,543)
Loss per share $ (0.45) (0.54) (1.29) (2.31)
The following table set forth the Company's comparable financial information as
a percentage of revenues:
Total Revenue 100% 100% 100% 100%
Gross Profit 45% 58% 50% 55%
General and Administrative Expenses 84% 48% 73% 59%
Professional Fees 6% 7% 6% 8%
Amortization and Depreciation Expense 3% 13% 2% 16%
Operating Loss -47% -11% -32% -29%
Interest Expense 19% 17% 19% 18%
Net Loss -66% -28% -51% -47%
BALANCE SHEET DATA:
September December 31,
2002 2001
---- ----
(in 000's except number of offices) (unaudited) (audited)
----------- ---------
Current Assets $ 2,907 2,078
Current Liabilities 5,241 6,069
Long-Term Debt 267 2,292
Convertible Debentures 5,862 5,000
Shareholders' Equity $ 5,245 7,023
OTHER DATA:
Number of Offices 18 18
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2001:
Results of Operations
The following discussion compares our results of operations for the three
and nine months ended September 30, 2002 to our results of operations for the
three and nine months ended September 30, 2001.
Revenues
- --------
Effective on October 1, 2001, we adopted changes to our inventory
management policy in an effort to reduce expenses related to storing certain
delivered merchandise in connection with the sale of pre-need contracts. We will
continue to deliver and store certain merchandise sold in connection with pre-
11
need sales contracts as required by applicable law, but because this certain
merchandise is identical in each pre-need contract, we will no longer segregate
and specifically identify such merchandise by customer. As a result of this
change in our inventory management policy, we will not continue to recognize
revenue on the sale of certain future pre-need merchandise sales. Merchandise
and service sales of $5,880,000 were deferred during the nine months ended
September 30, 2002. Our change in inventory management is expected to result in
an improvement in cash flow and a reduction in the revenue we recognize from
sales of pre-need contracts. We anticipate recognizing cost savings of
approximately $300,000 during the year ending December 31, 2002. See "Liquidity
and Capital Resources."
Whether pre-need merchandise and service revenues were recognized or not
recognized, there was no effect on our cash flows during the three- and
nine-month periods ended September 30, 2002 and 2001, respectively, except for
the cash effect of our change in inventory management policy.
Cremation service and merchandise revenues were $2,562,000 for the three
months ended September 30, 2002 compared to $3,599,000 for the same period in
2001, a decrease of $1,037,000 or 28.8%. The decrease was primarily due to our
decision to change our inventory management policy on October 1, 2001. We
recognized pre-need merchandise revenues of $393,000 during the three months
ended September 30, 2002 compared to $1,460,000 for the same period in 2001. The
decrease was partially off-set by increased travel plan sales, $748,000 during
the quarter ended September 30, 2002, compared to $530,000 during the same
quarter in 2001.
Cremation service and merchandise revenues were $8,016,000 for the nine
months ended September 30, 2002 compared to $8,712,000 for the same period in
2001, a decrease of $697,000 or 8.0%. The decrease was primarily due to our
decision to change our inventory management policy on October 1, 2001. We
recognized pre-need merchandise revenues of $1,206,000 during the nine months
ended September 30, 2002 compared to $2,062,000 for the same period in 2001. The
decrease was partially off-set by increased travel plan sales, $2,226,000 during
the nine months ended September 30, 2002, compared to $1,418,000 during the same
period in 2001. This increase was partially off-set by a reduction in cremation
service revenues. The reduction of cremation revenues resulted primarily from
the sale of our crematory business in Portland, Oregon.
During the three months ended September 30, 2002 and 2001, pre-need
merchandise and service revenues of $1,927,000 and $389,000, respectively, were
deferred as we did not meet our revenue recognition criteria. The $1,538,000 or
395.4% increase was due to our decision to change our inventory management
policy on October 1, 2001.
During the nine months ended September 30, 2002 and 2001, pre-need
merchandise and service revenues of $5,880,000 and $3,780,000, respectively,
were deferred as we did not meet our revenue recognition criteria. The
$2,100,000 or 55.6% increase was due to our decision to change our inventory
management policy on October 1, 2001.
We opened new offices in the suburbs of Denver, Colorado in January 2002,
Chicago, Illinois in June 2002 and Tempe, Arizona in September 2002. We did not
acquire or open any new properties or offices during the same nine month-period
in 2001. We operated 18 offices at September 30, 2002.
Cremation service and merchandise revenues related to new office openings
after December 31, 2000 were $143,000 and $245,000 for the three and nine month
periods ended September 30, 2002.
Revenues earned for the three months ended September 30, 2002 and 2001 from
trust fund management and finance fees were $216,000 and $255,000, respectively.
Trust fund management and finance fees declined $39,000 or 15.3%, when compared
to the same quarter in 2001. Trust fund management fees decreased $19,000 or
11.3% as a result of declining investment yields. Finance fees decreased $15,000
or 18.5% due to a decrease in pre-need contracts sold on an installment sales
basis.
Revenues earned for the nine months ended September 30, 2002 and 2001 from
trust fund management and finance fees were $655,000 and $1,015,000,
respectively. Trust fund management and
12
finance fees declined $360,000 or 35.5%, when compared to the same period in
2001. Trust fund management fees decreased $122,000 or 21.2% as a result of
declining investment yields. Finance fees decreased $223,000 or 53.2% due to a
decrease in pre-need contracts sold on an installment sales basis.
Costs and Expenses and Gross Profit
- -----------------------------------
Direct costs and expenses were $1,520,000 or 54.7% of revenues for the
three months ended September 30, 2002 compared to $1,605,000 or 41.6% of
revenues for the comparable period in 2001. The $85,000 or 5.3% decrease was
primarily attributable to the deferral of certain pre-need contract acquisition
costs, reduced variable costs related to travel revenues and the sale of our
Portland, Oregon crematory operations. These cost reductions were partially
off-set by the costs to open new offices. The gross profit during the three
months ended September 30, 2002 was $1,258,000 or 45.3% of total revenues
compared to $2,250,000 or 58.4% for the comparable period in 2001, a $991,000 or
44.1% decrease.
The gross profit margin for the three months ended September 30, 2002
decreased 22.4% compared to the same period in 2001. The decrease was due
primarily to the deferral of pre-need merchandise revenues in the third quarter
of 2002.
Direct costs and expenses were $4,338,000 or 50.0% of revenues for the nine
months ended September 30, 2002 compared to $4,377,000 or 45.0% of revenues for
the comparable period in 2001. The $39,000 or 0.9% decrease was primarily
attributable to the deferral of certain pre-need contract acquisition costs and
the sale of our Portland, Oregon crematory operations. These cost reductions
were partially off-set by the costs to open new offices. The gross profit during
the nine months ended September 30, 2002 was $4,333,000 or 50.0% of total
revenues compared to $5,351,000 or 55.0% for the comparable period in 2001, a
$1,018,000 or 19.0% decrease.
The gross profit margin for the nine months ended September 30, 2002
decreased 9.1% over the comparable 2001 period. The decrease was due primarily
to the deferral of pre-need merchandise revenues during the first nine months of
2002.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses for the three months ended September
30, 2002 were $2,334,000 or 84.0% of revenues. General and administrative
expenses for the three months ended September 30, 2001 were $1,866,000 or 48.4%
of revenues. General and administrative expenses increased $468,000 or 25.1% in
the third quarter of 2002 compared to 2001 due primarily to additional costs
associated with supporting an increased number of geographic locations and
activities related to seeking financing to recapitalize the company and fund
expansion. These increased costs were partially off-set by reduced general and
administrative costs resulting from the sale of our crematory in Portland,
Oregon.
General and administrative expenses for the nine months ended September 30,
2002 were $6,348,000 or 73.2% of revenues. General and administrative expenses
for the nine months ended September 30, 2001 were $5,779,000 or 59.4% of
revenues. General and administrative expenses increased $569,000 or 9.8% in the
first nine months of 2002 compared to 2001 due primarily to additional costs
associated with supporting an increased number of geographic locations and
activities related to seeking financing to recapitalize the company and fund
expansion. These increased costs were partially off-set by reduced general and
administrative costs resulting from the sale of our crematory in Portland,
Oregon.
Amortization and Depreciation Expenses
- --------------------------------------
Amortization and depreciation expenses were $72,000 and $519,000,
respectively, for the three months ended September 30, 2002 and 2001.
Amortization and depreciation expenses were $204,000 and $1,576,000,
respectively, for the nine months ended September 30, 2002 and 2001. The
decrease in amortization and depreciation expenses resulted from the adoption of
FASB Statements No. 141 and 142 and the divestiture of the Portland, Oregon
properties. See "New Accounting Pronouncements."
13
Professional Fees
- -----------------
Professional fees were $153,000 or 5.5% of revenues for the three months
ended September 30, 2002 compared to $277,000 or 7.2% of revenues for the three
months ended September 30, 2001. Professional fees were $526,000 or 6.1% of
revenues for the nine months ended September 30, 2002 compared to $823,000 or
8.5% of revenues for the nine months ended September 30, 2001. The decreases in
the three- and nine-month periods were primarily due to the completion of the
registration of our common stock with Securities and Exchange Commission in June
2001 and the settlement of a certain trademark infringement claim in October
2001. Professional fees primarily related to general business matters and audit
and tax services. Professional fees also include $167,000 of consulting fees
paid by us to the former principal shareholder for marketing and sales
consultation services in the first nine months of 2001. The consulting agreement
with the former principal shareholder was terminated effective December 31,
2001, and we incurred no consulting fees as a result of that agreement in 2002.
Interest Expense
- ----------------
Interest expense was $532,000 or 19.1% of revenues for the three months
ended September 30, 2002 compared to $671,000 or 17.4% of revenues for the three
months ended September 30, 2001. Interest expense was $1,647,000 or 19.0% of
revenues for the nine months ended September 30, 2002 compared to $1,716,000 or
17.6% of revenues for the nine months ended September 30, 2001. Interest expense
decreased primarily due to the amortization of certain acquisition debt and
deferred financing costs incurred to acquire or refinance certain debt during
the fourth quarter of 2001 and/or the first half of 2002. Interest expense also
decreased as a result of disposition of certain debt in connection with the sale
of our Portland crematory and building and the July 2001 expiration of a "stock
purchase guarantee" obligation related to a July 2000 restructuring of
acquisition debt.
Net Loss
- --------
Net loss was $1,833,000 ($0.45 per share) and $1,083,000 ($0.54 per share)
for the three months ended September 30, 2002 and 2001, respectively. Net loss
was $4,393,000 ($1.29 per share) and $4,543,000 ($2.31 per share) for the nine
months ended September 30, 2002 and 2001, respectively. During the comparative
three-month periods, we deferred net earnings of $1,216,000 and $36,000,
respectively, as we did not meet our revenue recognition criteria. During the
nine-month comparative periods, we deferred net earnings of $3,880,000 and
$2,378,000, respectively, as we did not meet our revenue recognition criteria.
The net loss related to each respective period also differed for the other
reasons described above.
Liquidity and Capital Resources
At September 30, 2002, we had current assets of $2,907,000, which is
comprised of $513,000 in cash, $2,293,000 in accounts receivable and $101,000 in
prepaid expenses and other current assets. We had total current liabilities of
$5,241,000, comprised mainly of $1,224,000 in accounts payable, $1,652,000 in
accrued liabilities, and $2,365,000 in the current portion of long-term debt. We
had long-term debt of $267,000, convertible debentures with a carrying value of
$5,862,000 and other long-term liabilities of $1,081,000. We also had deferred
pre-need revenue of $17,569,000. We had a working capital deficit of $2,334,000
at September 30, 2002.
Debt Obligations
- ----------------
As of September 30, 2002, we had the following debt obligations:
Obligations as of September 30, 2002: Principal Monthly Interest Due
Due Payment Rate Date
Convertible debentures 5,000,000 Interest 13.00% Feb-2005
Convertible debentures 71,653 Interest 13.75% Apr-2004
14
Note payable (original acquisition debt) 1,955,181 Prin. & Int. 13.00% Jul-2003
Convertible debentures, net discount of $210,000 790,000 Interest 13.75% Mar-2004
Notes payable, net discount of $38,014 256,947 Principal 11.87% Nov-2003
Note payable 350,000 Interest 13.00% Jul-2003
Note payable 39,203 Principal 0.00% *
Notes payable, net discount of $3,615 30,703 Prin. & Int. 10.00% Apr-2005
---------
8,493,687
Obligations coming due over next 12 months $ 2,365,319
---------
Long-term obligations at carrying value $ 6,128,368
=========
* Revolving note
We had net cash (used by) provided by operating activities of $(50,000) and
$194,000 for the three months ended September 30, 2002 and 2001, respectively.
We had net cash provided by operating activities of $546,000 and $40,000 for the
nine months ended September 30, 2002 and 2001, respectively. Interest paid for
the three months ended September 30, 2002 and 2001 was $175,000 and $181,000,
respectively. Interest paid for the nine months ended September 30, 2002 and
2001 was $603,000 and $603,000, respectively.
In addition, we guaranteed the obligations of Wilhelm Mortuary, Inc., our
wholly-owned subsidiary, to Green Leaf Investors I, LLC in the principal amount
of $1.5 million due July 31, 2002, secured by a security interest granted in our
assets. This obligation was assumed by Western Management Services, LLC in
connection with the sale of the assets and properties used in our Portland,
Oregon crematory operations by Wilhelm. We did not included a reserve in our
financial statements in connection with our guarantee, which is disclosed as a
contingent liability under Note 7 of our financial statements. We anticipate
that Western Management Services, LLC will satisfy this obligation in November,
2002.
In July 2002, a 13% convertible debenture in the principal amount of
$75,000 due July 31, 2002 was converted by Green Leaf Investors I, LLC into
225,000 shares of our common stock.
In July 2002, we terminated a line-of-credit acquired with the Portland,
Oregon businesses.
We have an obligation under Convertible Debentures dated December 24, 1999,
due February 24, 2005 in the initial principal amount of $5,000,000, to maintain
a fixed charge coverage ratio (the "Coverage Ratio"). Although we are current in
all our debt obligations under the debentures, we did not maintain the Coverage
Ratio for the quarter ended September 30, 2002. If the holders provide us with
written notice, we would have 30 days to meet the Coverage Ratio or the holders
could accelerate the due date of the debentures, which would have a material
adverse affect on our business and results of operations. The holders have not
provided us with written notice. A default under the debentures could cause us
to default under other obligations.
Plan of Operation
Our plan of operation is based, in part, on information provided in the
reports of our consultants and the decisions of management. Our independent
auditors have not examined, compiled or otherwise applied procedures to the plan
of operations presented herein, and, accordingly, do not express an opinion or
any other form of assurance on it. Information contained in this plan of
operation is presented on a cash basis, which is not in accordance with US GAAP,
and represents projections and assumptions of management. Actual results can
vary materially from the estimates of management and investors are cautioned not
to place undue reliance on management's projections and assumptions. See
"Forward-Looking Statements."
15
Management has revised its plan of operation for the fiscal year ending
December 31, 2002 as a result of weaker than anticipated sales of pre-need
contracts during the first nine months of 2002. As a result, our plan of
operations differs from projections made in our annual report on Form 10-K for
the year ended December 31, 2001. Set out below is a summary of our revised Plan
of Operation for the fiscal year ending December 31, 2002.
Material Commitments--Short-term Funding Requirements
Operating expenditures (incl. working capital) $17.5 million
Interest payments 1.1 million
Current portion of long-term debt 2.1 million
Capital expenditures 0.2 million
---------------
Estimated total Short-term commitments 20.9 million
Estimated total Cash from Operations 18.7 million
Cash from Equity Sales 1.5 million
Cash from Debt Proceeds 0.2 million
---------------
Estimated net Cash (Deficit) $(0.5) million
---------------
Net Cash Flow operations: Management's current year forecast for the year ending
December 31, 2002 projects it will achieve approximately $1.2 million in
positive net cash flows from operations before the payment of debt and interest
and capital expenditures. We anticipate generating cash from operations (cash
receipts from sales and other income) of approximately $18.7 million, and
operating expenditures (cash expenditures) of approximately $17.5 million.
Working capital: Management had a net working capital deficit of approximately
$2,334,000 as of September 30, 2002. We had current assets of $2,907,000, offset
by the current portion of long-term debt of $2,365,000 coming due over the next
twelve months. See "Liquidity & Capital Resources". The remainder relates to
accounts payable of $1,224,000 and accrued expenses of $1,652,000 in connection
with our on-going operations.
Interest payments: We carry outstanding debt, including convertible debt,
requiring annual cash interest payments of approximately $1.1 million, payable
in monthly installments for the year ending December 31, 2002. There is no
guarantee that any convertible debt will be converted; therefore the maximum
amount of interest payments have been projected.
Capital Expenditures: We anticipate capital expenditures to amount to
approximately $200,000 for the year ending December 31, 2002. These expenditures
include office furniture and telephone and computer equipment.
We anticipate that we will have to raise capital during the next 12 months
to meet our obligations under the portions of long-term debt due. See "Liquidity
and Capital Resources". We intend to raise the capital required to fund our
financing needs by issuance of debt and equity. There can be no assurance
financing will be available or accessible on reasonable terms. Our management
has also been exploring a variety of other options to meet our obligations and
future capital requirements, including the possibility of debt financing,
business combination or a leveraged buyout.
Our total operating and capital budgets for the fiscal year ended December
31, 2002 is estimated to be approximately $21 million. There is no assurance
that our actual expenditures for the fiscal year ending December 31, 2002 will
not exceed our estimated operating budgets. Actual expenditures will depend on a
number of factors, some of which are beyond our control including, among other
things, timing of regulatory approval of its projects, the availability of
financing on acceptable terms, reliability of the assumptions of management in
estimating cost and timing, the death and cremation rates in the geographical
locations that we serve, consumer acceptance of our pre need plans, changes in
governmental regulation as they relate to our business, certain economic and
political factors, the time expended by consultants and professionals and fees
associated with applications related to obtaining and maintaining licenses for
our locations and the professional fees associated with our reporting
obligations under the
16
Securities Exchange Act of 1934. If the actual expenditures for such costs
exceed the estimated costs or if events occur that require additional
expenditures, we will be required to raise additional financing or to defer
certain expenditures to meet other obligations. If we cannot raise adequate
financing to fund our plan of operation, we may be required to suspend our
growth strategy; consolidate our operations through reductions in staffing,
marketing and sales, promotion and hours of operation; terminate our operations
in unprofitable or difficult to service markets; sell assets or operations in
some of the markets we service and/or suspend our operations in certain markets.
The failure to meet certain expenditures may cause us to default on material
obligations and such default may have a material adverse effect on our business
and results of operations.
We expect operating cash flows, before debt servicing and expansion
expenditures, to be adequate to finance our basic operations. We anticipate that
we will finance long-term debt, additional acquisitions, if any, and growth, in
part, by issuing equity and/or debt securities.
New Accounting Pronouncements
- -----------------------------
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 141 also specifies that intangible
assets acquired in a purchase method business combination must meet certain
criteria to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
We were required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002.
Statement 141 will require upon adoption of Statement 142, that we evaluate
our existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, we will be required to reassess
the useful lives and residual values of all intangible assets acquired in
purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, we will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require us to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this we must identify our reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. We will then have up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the reporting
unit's carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and we must perform the second step of the transitional impairment
test. In the second step, we must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of it assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation in accordance with Statement 141,
to its carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as possible, but
no later than the end
17
of the year of adoption. Any transitional impairment loss will be recognized as
the cumulative effect of a change in accounting principle in our statement of
earnings.
As of the date of adoption, we had unamortized goodwill in the amount of
$24.4 million which was subject to the transition provisions of Statements 141
and 142. Amortization expense related to goodwill was $1.8 million and $1.7
million, respectively, for the years ended December 31, 2001 and 2000. We have,
as of September 30, 2002, completed the first step of determining the fair value
of each reporting unit and comparing it to the reporting unit's carrying amount,
and does not believe that an impairment exists.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they occurred.
The statement applies to a company's legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, we would capitalize the cost,
thereby increasing the carrying amount of the related asset. The capitalized
asset retirement cost is depreciated over the life of the respective asset while
the liability is accreted to its present value. Upon settlement of the
liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. We do not expect the adoption to have a material impact to
our financial position or results of operations.
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144), which supersedes both FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (Statement 121) and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (Opinion 30), for the disposal of a segment of
a business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. Statement 144 retains the basic provisions of Opinion 30 on how
to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142.
We were required to adopt Statement 144 no later than the year beginning
after December 15, 2001. Accordingly, we adopted Statement 144 in the first
quarter of 2002. The adoption of Statement 144 for long-lived assets held for
use did not have a material impact on our financial statements because the
impairment assessment under Statement 144 was largely unchanged from Statement
121. The provisions of the Statement for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities. Therefore, management cannot determine the
potential effects that adoption of Statement 144 will have on our financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(Issued 4/02)" which we do not believe will materially affect our financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan, as
previously required under Emerging Issues Task Force ("EITF") Issue 94-3. A
fundamental conclusion reached by the FASB in this statement is that an entity's
commitment to a plan, by itself, does not create a present obligation to others
that meets the definition of a liability. SFAS No. 146 also establishes that
fair
18
value is the objective for initial measurement of the liability. The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002. We believe that this SFAS will not have a
significant impact on our results of operations or financial position.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our market risk sensitive instruments and
positions is the potential change arising from increases or decreases in
interest rates as discussed below. Our 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. Our 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.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act of 1934
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in connection with the filing
of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any significant deficiencies or material weaknesses
of internal controls that would require corrective action.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Our operations are subject to numerous laws, regulations and guidelines
adopted by various governmental authorities in the jurisdictions in which we
operate. Liabilities are recorded when liabilities are either known or
considered probable and can be reasonably estimated. Our policies are designed
to control risk upon acquisition through extensive due diligence and corrective
measures taken prior to acquisition. We believe liabilities to be immaterial
individually and in the aggregate.
On June 13, 2002, the Iowa State Board of Mortuary Science Examiners (No.
01-011, DIA No. 01DPHMS002 and No. 01-015, DIA No. 01DPHMS001) issued an order
against our Iowa operations and an employee of the Neptune Society under the
Iowa Code for failure to comply with appropriate procedures related to its
operations. Under the order, our license to operate a funeral establishment and
cremation establishment in Iowa was suspended for a period of thirty days; we
were required to make arrangements during the period of suspension with other
licensed funeral and/or cremation establishments to provide funeral or cremation
services; we were required to pay a civil penalty in the amount of $7,500 and we
were placed on probation for a period of two years, subject to certain terms and
conditions. On June 26, 2002, we filed a rehearing application with the Iowa
Board, which was denied by order dated July 9, 2002. On July 18, 2002, we filed
a petition with the Iowa State Board of Mortuary Science
19
requesting a temporary stay of the 30-day suspension of our Iowa office's
license. Our petition for the temporary stay was denied on July 24, 2002. At the
instruction of our legal counsel in Iowa, our Iowa office surrendered its
license on July 23, 2002 and our Iowa office suspended providing cremation
services for a 30-day period ending on August 23, 2002. Our Iowa office's
license was reinstated on August 23, 2002. On September 18, 2002, our Iowa
office was served with a subpoena issued by the Iowa Board of Mortuary Science
requesting the records related to services provided to two clients on July 20,
2002, in connection with the Board's investigation of whether our Iowa office
performed services while its license was suspended. We have received no further
notices from the Iowa Board of Mortuary Science concerning this investigation.
We believe these services were performed prior to the suspension period and that
our Iowa office is in compliance with the Board's June 13, 2002 order.
We are not currently subject to any other material litigation proceeding.
We are party to other legal proceedings in the ordinary course of its business,
but do not expect the outcome of any of other proceedings, individually or in
the aggregate, to have a material adverse effect on our financial position,
results of operations or liquidity.
Item 2. Changes in Securities.
In July 2002, a 13% convertible debenture in the principal amount of
$75,000 due July 31, 2002 was converted by Green Leaf Investors I, LLC into
225,000 shares of our common stock.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On July 1, 2002, we entered into an agreement for Mr. Irving to act as our
Chief Operating Officer. Mr. Irving's annual base compensation is $144,000 per
annum, and a bonus of no less than 25% of base compensation upon successful
performance as defined by us. We are obligated to grant stock options to
purchase 50,000 shares of its common share at $2.00 per share. Such stock
options shall vest June 30, 2003. The term of the agreement extends to June 30,
2005, unless terminated prior to that date. We may terminate the agreement upon
written notice and payment of any and all balances due. Mr. Irving may terminate
the agreement upon four weeks written notice.
In October 2002, we filed a Form S-1 Registration Statement under the
Securities Act of 1933 (the "S-1 Registration Statement"). The S-1 Registration
Statement registered for resale shares of our common stock issued or issuable
pursuant to certain debentures convertible into our common stock or warrants to
purchase shares of our common stock. Total shares of approximately 4,900,000
were included in the S-1 Registration Statement. The Registration Statement was
declared effective on November 13, 2002.
On October 1, 2002, David Schroeder resigned as a director of The Neptune
Society, Inc. On October 21, 2002, Mr. Schroeder resigned as president of The
Neptune Society, Inc. and entered into a Consulting Agreement to provide
services as our Senior Vice President of Operations and Development. The
Consulting Agreement was effective October 1, 2002.
20
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBIT INDEX
Exhibit
Number Description
------------------------------------------------------------------------
3.1(1) Articles of Incorporation of L R Associates, Inc., filed
January 4, 1985
3.2(1) Articles of Amendment of L R Associates, Inc. changing name
to Lari Corp., filed August 3, 1998
3.3(1) Articles of Amendment of Lari Corp. changing name to Neptune
Society, filed April 26, 1999
3.4(1) 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(1) Articles of Amendment of The Neptune Society, Inc. effective
as of March 22, 2002, related to a combination of the
Corporation's shares of common stock
3.6(6) Articles of Amendment of The Neptune Society, Inc.
3.7(1) Bylaws of Neptune Society (previously filed as Exhibit 3.6)
10.1(1) Form of Stock Option Plan
10.2(1) 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(1) Share Purchase Agreement dated March 31, 1999 by and between
Lari Acquisition Company, Inc., Lari Corp. and Stanley
Zicklin
10.4(1) Share Purchase Agreement dated March 31, 1999 by and between
Lari Acquisition Company, Inc., Lari Corp. and Jill Schulman
10.5(1) Agreement dated August 1, 1999 by and between Lari
Acquisition Company, Inc., Neptune Society and Stanley
Zicklin
10.6(1) Agreement dated August 1, 1999 by and between Lari
Acquisition Company, Inc., Neptune Society, Emmanuel
Weintraub and Emmanuel Weintraub Inter Vivos Trust
10.7(1) 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(1) 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(1) Consulting Agreement dated March 31, 1999 by and between
Lari Acquisition Company, Inc. and Emanuel Weintraub
10.10(1) Amendment to Consulting Agreement dated August 1, 1999 by
and between Lari Acquisition Company, Inc. and Emanuel
Weintraub
10.11(1) $19,000,000 Promissory Note dated March 31, 1999 by Lari
Acquisition Company, Inc.
10.12(1) 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(1) $2,000,000 Promissory Note dated March 31, 1999 by Lari
Acquisition Company, Inc.
10.14(1) 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(1) Pre-Need Trust Agreement dated October 1, 1993 by and
between Neptune Management Corp. and Sunbank/South Florida,
N.A.
10.16(1) Asset Purchase Agreement dated March 31, 1992 by and between
Heritage Cremation Services, Inc., Joseph Estephan, Elie
Estephan and Emanuel Weintraub
21
Exhibit
Number Description
------------------------------------------------------------------------
10.17(1) Form of Commissioned Contractor Agreement
10.18(1) Agency Agreement dated for reference July 22, 1999 by and
between Neptune Society and Standard Securities Capital
Corporation
10.19(1) Amendment to Agency Agreement dated August 5, 1999 by and
between Neptune Society and Standard Securities Capital
Corporation
10.20(1) Form of Subscription Agreement
10.21(1) Form of Registration Rights Agreement
10.22(1) Debenture and Warrant Purchase Agreement dated November 24,
1999.
10.23(1) Form of Convertible Debenture
10.24(1) Asset Purchase Agreement dated December 31, 1999, by and
among Neptune Society, Crematory Society of Washington,
Inc., and John C. Ayres.
10.25(1) Asset Purchase Agreement dated March 15, 2000, by and among
Neptune Society, Cremation Society of Iowa, Inc., Dave
Noftsger, and John Bethel
10.26(1) Asset Purchase Agreements and Merger Agreement dated July 5,
2000, by and among Neptune Society, Heritage Memorial,
Community Memorial Centers, David Schroeder, and Michael
Ashe
10.27(1) Agency Agreement dated for reference July 31, 2000 by and
between Neptune Society and Standard Securities Capital
Corporation
10.28(2) Employment Agreement by and between the Company and Marco
Markin
10.29(2) Employment Agreement by and between the Company and David
Schroeder
10.30(2) Employment Agreement by and between the Company and Rodney
M. Bagley
10.31(2) Memorandum of Understanding by and between the Company and
Private Investment Company
10.32(2) Loan Agreement dated August 8, 2001 with Green Leaf
Investors I, LLC, a California limited liability company
10.33(2) Warrant issued to Green Leaf
10.34(2) Guaranty issued to Green Leaf
10.35(3) Second Debt Restructuring Agreement
10.36(3) Third Debt Restructuring Agreement
10.37(4) Asset Purchase Agreement effective as of January 31, 2002 by
and between Western Management Services, L.L.C., an Oregon
limited liability company, Wilhelm Mortuary, Inc., a
corporation incorporated under the laws of the State of
Oregon, and The Neptune Society, Inc., a Florida
corporation, and Neptune Society of America, Inc., a
California corporation.
10.38(4) Service Agreement effective as of March 8, 2002, by and
between Western Management Services, L.L.C., an Oregon
limited liability company, and The Neptune Society, Inc., a
Florida Corporation.
10.39(4) Note Extension And Assumption Agreement effective as of
January 31, 2002, and is made by and between Western
Management Services, L.L.C., an Oregon limited liability
company, Wilhelm Mortuary, Inc., an Oregon corporation, The
Neptune Society, Inc., a Florida corporation, Neptune
Society of America, Inc., a California corporation, and
Green Leaf Investors I, LLC, a California limited liability
company.
10.40(4) Convertible Debenture in the principal amount of $75,000,
due July 31, 2002, issued to Green Leaf Investors I, LLC, a
California limited liability company.
10.41(4) Debenture and Warrant Amendment Agreement effective as of
December 31, 2001, by and between The Neptune Society, Inc.,
a Florida corporation, CapEx, L.P., a Delaware limited
partnership, and D.H. Blair Investment Banking Corp., a New
York corporation.
10.42(4) Form of CapEx, L.P. Debenture Amendment
10.43(4) Form of D.H. Blair Investment Banking Corp. Debenture
Amendment
10.44(4) Form of Warrant Amendment
22
Exhibit
Number Description
------------------------------------------------------------------------
10.45(5) Form of Debenture
10.46 Employment Agreement by and between the Company and Douglas
Irving
99.1 Section 906 Certificate of Chief Executive Officer
99.2 Section 906 Certificate of Chief Financial Officer
- ----------
(1) Previously filed on February 12, 2001.
(2) Previously filed as an exhibit to Form 10-Q (for the Period ended June 30,
2001) on August 14, 2001.
(3) Previously filed as an exhibit to Form 10-Q/A (for the Period ended June
30, 2001) on August 20, 2001.
(4) Previously filed as an exhibit to Form 10-K (for the period ended December
31, 2001) on April 2, 2002.
(5) Previously filed on Form 10-Q (for the period ended March 31, 2002) on May
15, 2002.
(6) Previously filed on Form 8-K on June 3, 2002.
- ----------
(b) Reports on Form 8-K
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q, period ending September 30, 2002 to
be signed on its behalf by the undersigned duly authorized.
THE NEPTUNE SOCIETY
/s/ Marco Markin
November 14, 2002 --------------------------------------
Marco Markin, Chief Executive Officer
(Principal Executive Officer)
/s/ Rodney M. Bagley
November 14, 2002 --------------------------------------
Rodney M. Bagley, Chief Financial Officer
(Principal Accounting Officer)
24
CERTIFICATIONS
SECTION 302 CERTIFICATION
I, Marco Markin, certify that:
1. I have reviewed this quarterly report of The Neptune Society, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statement, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which the quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls, and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Marco Markin
-------------------------------------
Marco Markin, Chief Executive Officer
November 14, 2002
25
SECTION 302 CERTIFICATION
I, Rodney Bagley, certify that:
1. I have reviewed this quarterly report of The Neptune Society, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statement, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which the quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls, and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Rodney Bagley
--------------------------------------
Rodney Bagley, Chief Financial Officer
November 14, 2002
26