UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark one)
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2008
Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______________ to _____________
Commission File Number: 0-53132
SMSA El Paso 1 Acquisition Corp.
(Exact name of small business issuer as specified in its charter)
| Delaware | 20-5456276 | |
| (State of incorporation) | (IRS Employer ID Number) |
12890 Hilltop Road, Argyle, TX 76226
(Address of principal executive offices)
(972) 233-0300
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES X NO
State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: October 28, 2008: 900,036
Transitional Small Business Disclosure Format (check one): YES NO X
SMSA El Paso 1 Acquisition Corp.
Form 10-Q for the Quarter ended September 30, 2008
Table of Contents
| Page | |||
|---|---|---|---|
| Part I - Financial Information | |||
| Item 1 - Financial Statements | 3 | ||
| Item 2 - Management's Discussion and Analysis or Plan of Operation | 12 | ||
| Item 3 - Quantitative and Qualitative Disclosures About Market Risk | 15 | ||
| Item 4 - Controls and Procedures | 16 | ||
| Part II - Other Information | |||
| Item 1 - Legal Proceedings | 16 | ||
| Item 2 - Recent Sales of Unregistered Securities and Use of Proceeds | 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 | 16 | ||
| Signatures | 17 |
Part I
Item 1 - Financial Statements
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Balance Sheets
September 30, 2008 and December 31, 2007
| (Unaudited) | (Audited) | |||||||
|---|---|---|---|---|---|---|---|---|
| September 30, | December 31, | |||||||
| 2008 | 2007 | |||||||
ASSETS | ||||||||
| Current Assets | ||||||||
| Cash on hand and in bank | $ | -- | $ | -- | ||||
| Due from controlling shareholder | -- | 1,000 | ||||||
| Total Assets | $ | -- | $ | 1,000 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable - trade | $ | -- | $ | -- | ||||
| Working capital advances from controlling stockholder | 20,356 | -- | ||||||
| Total Liabilities | 20,356 | -- | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders' deficit | ||||||||
| Preferred stock - $0.001 par value | ||||||||
| 10,000,000 shares authorized. | ||||||||
| None issued and outstanding | -- | -- | ||||||
| Common stock - $0.001 par value. | ||||||||
| 100,000,000 shares authorized. | ||||||||
| 500,016 shares issued and outstanding | 500 | 500 | ||||||
| Additional paid-in capital | 500 | 500 | ||||||
| Deficit accumulated during the development stage | (21,356 | ) | -- | |||||
| Total Stockholders' Equity (Deficit) | (21,356 | ) | 1,000 | |||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | -- | $ | 1,000 | ||||
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Statement of Operations and Comprehensive Loss
Six and Three months ended September 30, 2008 and
Period from August 1, 2007 (date of bankruptcy settlement) through September 30, 2007 and
Period from August 1, 2007 (date of bankruptcy settlement) through September 30, 2008
(Unaudited)
| Period from | Period from | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| August 1, 2007 | August 1, 2007 | |||||||||||||
| (date of | (date of | |||||||||||||
| bankruptcy | bankruptcy | |||||||||||||
| Nine months | Three months | settlement) | settlement) | |||||||||||
| ended | ended | through | through | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||
| 2008 | 2008 | 2007 | 2008 | |||||||||||
| Revenues | $ | -- | $ | -- | $ | -- | $ | -- | ||||||
| Operating expenses | ||||||||||||||
| Reorganization costs | 4,690 | -- | -- | 8,053 | ||||||||||
| Legal and professional fees | 13,303 | 1,870 | -- | 13,303 | ||||||||||
| Total operating expenses | 17,993 | 1,870 | -- | 21,356 | ||||||||||
| Loss from operations | (17,993 | ) | (1,870 | ) | -- | (21,356 | ) | |||||||
| Provision for income taxes | -- | -- | -- | -- | ||||||||||
| Net loss | (17,993 | ) | (1,870 | ) | -- | (21,356 | ) | |||||||
| Other comprehensive income | -- | -- | -- | -- | ||||||||||
| Comprehensive loss | $ | (17,993 | ) | $ | (1,870 | ) | $ | -- | $ | (21,356 | ) | |||
| Loss per weighted-average share | ||||||||||||||
| of common stock outstanding, | ||||||||||||||
| computed on net loss - basic | ||||||||||||||
| and fully diluted | $ | (0.04 | ) | nil | nil | $ | (0.04 | ) | ||||||
| Weighted-average number of shares | ||||||||||||||
| of common stock outstanding - | ||||||||||||||
| basic and fully diluted | 500,016 | 500,016 | 500,016 | 500,016 | ||||||||||
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Statement of Cash Flows
Nine months ended September 30, 2008 and
Period from August 1, 2007 (date of bankruptcy settlement) through September 30, 2007 and
Period from August 1, 2007(date of bankruptcy settlement) through September 30, 2008
(Unaudited)
| Period from | Period from | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| August 1, 2007 | August 1, 2007 | ||||||||||
| (date of | (date of | ||||||||||
| bankruptcy | bankruptcy | ||||||||||
| Nine months | settlement) | settlement) | |||||||||
| ended | through | through | |||||||||
| September 30, | September 30, | September 30, | |||||||||
| 2008 | 2007 | 2008 | |||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net loss for the period | $ | (17,993 | ) | $ | -- | $ | (21,356 | ) | |||
| Adjustments to reconcile net loss | |||||||||||
| to net cash provided by | |||||||||||
| operating activities | |||||||||||
| Increase in accounts payable-trade | -- | -- | -- | ||||||||
| Net cash used in operating activities | (17,993 | ) | -- | (21,356 | ) | ||||||
| Cash Flows from Investing Activities | -- | -- | -- | ||||||||
| Cash Flows from Financing Activities | |||||||||||
| Cash funded from bankruptcy trust | -- | 1,000 | 1,000 | ||||||||
| Working capital advances from (to) majority stockholder | 17,993 | (1,000 | ) | 20,356 | |||||||
| Net cash provided by financing activities | 17,993 | -- | 21,356 | ||||||||
| Increase in Cash | -- | -- | -- | ||||||||
| Cash at beginning of period | -- | -- | -- | ||||||||
| Cash at end of period | $ | -- | $ | -- | $ | -- | |||||
| Supplemental Disclosure of | |||||||||||
| Interest and Income Taxes Paid | |||||||||||
| Interest paid during the period | $ | -- | $ | -- | $ | -- | |||||
| Income taxes paid during the period | $ | -- | $ | -- | $ | -- | |||||
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements
September 30, 2008 and 2007
Note A - Background and Description of Business
SMSA El Paso I Acquisition Corp. (Company) was organized on September 26, 2007 as a Nevada corporation to effect the reincorporation of Senior Management Services of El Paso Sunset, Inc., a Texas corporation, mandated by the plan of reorganization discussed below.
The Company’s emergence from Chapter 11 of Title 11 of the United States Code on August 1, 2007 created the combination of a change in majority ownership and voting control - that is, loss of control by the then-existing stockholders, a court-approved reorganization, and a reliable measure of the entity’s fair value - resulting in a fresh start, creating, in substance, a new reporting entity. Accordingly, the Company, post bankruptcy, has no significant assets, liabilities or operating activities. Therefore, the Company, as a new reporting entity, qualifies as a “development stage enterprise” as defined in Statement of Financial Accounting Standard No. 7, as amended and a shell company as defined in Rule 405 under the Securities Act of 1933, (Securities Act), and Rule 12b-2 under the Securities Exchange Act of 1934, (Exchange Act).
In accordance with the confirmed plan of reorganization, our current business plan is to seek to identify a privately-held operating company desiring to become a publicly held company by merging with the Company through a reverse merger or acquisition.
Note B - Bankruptcy Action
On January 17, 2007, Senior Management Services of El Paso Sunset, Inc. and its affiliated companies (SMS Companies) filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. During the three years prior to filing the reorganization petition, SMS Companies operated a chain of skilled nursing homes in Texas, which prior to the bankruptcy proceedings consisted of 14 nursing facilities, ranging in size from approximately 114 beds to 325 beds. In the aggregate, SMS Companies provided care to approximately 1,600 resident patients and employed over 1,400 employees. A significant portion of the SMS Companies cash flow was provided by patients covered by Medicare and Medicaid. The SMS Companies facilities provided round-the-clock care for the health, well-being, safety and medical needs of its patients. The administrative and operational oversight of the nursing facilities was provided by an affiliated management company located in Arlington, Texas. In 2005, SMS Companies obtained a secured credit facility from a financial institution. The credit facility eventually was comprised of an $8.3 million term loan and a revolving loan of up to $15 million which was utilized for working capital and to finance the purchase of the real property on which 2 of its nursing care facilities operated. By late 2006, SMS Companies were in an "overadvance" position, whereby the amount of funds by the lender exceeded the amount of collateral eligible to be borrowed under the credit facility. Beginning in September 2006, SMS Companies entered into the first of a series of forbearance agreements whereby the lender agreed to forebear from declaring the financing in default provided SMS Companies obtained a commitment from a new lender to refinance and restructure the credit facility. SMS Companies were unsuccessful in obtaining a commitment from a new lender and, on January 5, 2007, the lender declared SMS Companies in default and commenced foreclosure and collection proceedings. On January 9, 2007, the lender agreed to provide an additional $1.7 million to fund payroll and permit a controlled transaction to bankruptcy. Subsequently, on January 17, 2007, the SMS Companies filed a petition for reorganization under Chapter 11 of the Bankruptcy Code.
All assets, liabilities and other claims against the Company and it’s affiliated entities were combined for the purpose of distribution of funds to creditors. Each of the entities otherwise remained separate corporate entities. From the commencement of the bankruptcy proceedings through August 1, 2007 (the effective date of the plan of reorganization), all secured claims and/or administrative claims during this period were satisfied through either direct payment or negotiation.
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
September 30, 2008 and 2007
Note B - Bankruptcy Action - Continued
We will remain subject to the jurisdiction of the bankruptcy court until we consummate a merger or acquisition. Pursuant to the confirmation order, if we do not consummate a business combination prior to February 10, 2009, the Plan Shares will be deemed canceled, the pre-merger or acquisition injunction provisions of the confirmation order, as they pertain to the Company, shall be deemed dissolved and no discharge will be granted to the Company, all without further order of the bankruptcy court. If we timely consummate a merger or acquisition with an entity which is engaged in business, we will file a certificate of compliance with the bankruptcy court which will state that the requirements of the Plan have been met, resulting in the discharge to be deemed granted. Thereafter, the post discharge injunction provisions set forth in the Plan and the confirmation order shall then become effective.
The First Amended, Modified Chapter 11 Plan, (the Plan) as presented by SMS Companies and their creditors was approved by the United States Bankruptcy Court, Northern District of Texas - Dallas Division on August 1, 2007. The Plan, which contemplates the Company entering into a reverse merger transaction, provided that certain identified claimants as well as unsecured creditors, in accordance with the allocation provisions of the Plan of Reorganization, and the Company’s new controlling stockholder would receive “new” shares of the Company’s post-reorganization common stock, pursuant to Section 1145(a) of the Bankruptcy Code. As a result of the Plan’s approval, all liens, security interests, encumbrances and other interests, as defined in the Plan of Reorganization, attach to the creditor’s trust. Specific injunctions prohibit any of these claims from being asserted against the Company prior to the contemplated reverse merger.
The cancellation of all existing shares at the date of the bankruptcy filing and the issuance of “new” shares of the reorganized entity caused an issuance of shares of common stock and a related change of control of the Company with more than 50.0% of the “new” shares being held by persons and/or entities which were not pre-bankruptcy stockholders. Accordingly, per American Institute of Certified Public Accountants’ Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”, the Company adopted “fresh-start” accounting as of the bankruptcy discharge date whereby all continuing assets and liabilities of the Company were restated to the fair market value. As of August 1, 2007, by virtue of the Plan, the only asset of the Company was approximately $1,000 in cash due from the Bankruptcy Estate.
Note C - Preparation of Financial Statements
The Company follows the accrual basis of accounting in accordance with generally accepted accounting principles and has established a year-end for accounting purposes of December 31.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
September 30, 2008 and 2007
Note C - Preparation of Financial Statements - Continued
During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements filed with the U. S. Securities and Exchange Commission on its Registration Statement on Form 10 containing the Company’s financial statements for the year ended December 31, 2007. The information presented within these interim financial statements may not include all disclosures required by generally accepted accounting principles and the users of financial information provided for interim periods should refer to the annual financial information and footnotes when reviewing the interim financial results presented herein.
In the opinion of management, the accompanying interim financial statements, prepared in accordance with the U. S. Securities and Exchange Commission’s instructions for Form 10-Q, are unaudited and contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows of the Company for the respective interim periods presented. The current period results of operations are not necessarily indicative of results which ultimately will be reported for the full fiscal year ending December 31, 2008.
Note D - Going Concern Uncertainty
The Company has no post-bankruptcy operating history, no cash on hand, no assets and has a business plan with inherent risk. Because of these factors, the Company’s auditors have issued an audit opinion on the Company’s financial statements which includes a statement describing our going concern status. This means, in the auditor’s opinion, substantial doubt about our ability to continue as a going concern exists at the date of their opinion.
The Company’s majority stockholder maintains the corporate status of the Company and has provided all nominal working capital support on the Company's behalf since the bankruptcy discharge date. Because of the Company's lack of operating assets, its continuance is fully dependent upon the majority stockholder's continuing support. The majority
stockholder intends to continue the funding of nominal necessary expenses to sustain the corporate entity.
The Company's continued existence is dependent upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient resources to retire existing liabilities and obligations on a timely basis. Further, the Company faces considerable risk in it’s business plan and a potential shortfall of funding due to our inability to raise capital in the equity securities market. If no additional operating capital is received during the next twelve months, the Company will be forced to rely on existing cash in the bank and additional funds loaned by management and/or significant stockholders.
The Company’s business plan is to seek an acquisition or merger with a private operating company which offers an opportunity for growth and possible appreciation of our stockholders’ investment in the then issued and outstanding common stock. However, there is no assurance that the Company will be able to successfully consummate an acquisition or merger with a private operating company or, if successful, that any acquisition or merger will result in the appreciation of our stockholders’ investment in the then outstanding common stock.
The Company remains dependent upon additional external sources of financing; including being dependent upon its management and/or significant stockholders to provide sufficient working capital in excess of the Company’s initial capitalization to preserve the integrity of the corporate entity.
The Company anticipates offering future sales of equity securities. However, there is no assurance that the Company will be able to obtain additional funding through the sales of additional equity securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.
The Company’s certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock and 40,000,000 shares of common stock. The Company’s ability to issue preferred stock may limit the Company’s ability to obtain debt or equity financing as well as impede potential takeover of the Company, which takeover may be in the best interest of stockholders. The Company’s ability to issue these authorized but unissued securities may also negatively impact our ability to raise additional capital through the sale of our debt or equity securities.
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
September 30, 2008 and 2007
Note D - Going Concern Uncertainty - Continued
It is the intent of management and significant stockholders to provide sufficient working capital necessary to support and preserve the integrity of the corporate entity. However, no formal commitments or arrangements to advance or loan funds to the Company or repay any such advances or loans exist. There is no legal obligation for either management or significant stockholders to provide additional future funding.
In such a restricted cash flow scenario, the Company would be unable to complete its business plan steps, and would, instead, delay all cash intensive activities. Without necessary cash flow, the Company may become dormant during the next twelve months, or until such time as necessary funds could be raised in the equity securities market.
While the Company is of the opinion that good faith estimates of the Company’s ability to secure additional capital in the future to reach its goals have been made, there is no guarantee that the Company will receive sufficient funding to sustain operations or implement any future business plan steps.
Note E - Summary of Significant Accounting Policies
1. Cash and cash equivalents
The Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
2. Reorganization costs
The Company has adopted the provisions of AICPA Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities” whereby all costs incurred with the incorporation and reorganization, post-bankruptcy, of the Company were charged to operations as incurred.
3. Income taxes
The Company uses the asset and liability method of accounting for income taxes. At September 30, 2008 and 2007, the deferred tax asset and deferred tax liability accounts, as recorded when material to the financial statements, are entirely the result of temporary differences. Temporary differences represent differences in the recognition of assets and liabilities for tax and financial reporting purposes, primarily accumulated depreciation and amortization, allowance for doubtful accounts and vacation accruals.
As of September 30, 2008 and 2007, the deferred tax asset related to the Company’s net operating loss carryforward is fully reserved. Due to the provisions of Internal Revenue Code Section 338, the Company may have no net operating loss carryforwards available to offset financial statement or tax return taxable income in future periods as a result of a change in control involving 50 percentage points or more of the issued and outstanding securities of the Company.
4. Income (Loss) per share
Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the respective period presented in our accompanying financial statements.
Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants).
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
September 30, 2008 and 2007
Note E - Summary of Significant Accounting Policies - Continued
4. Income (Loss) per share - continued
Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company’s net income (loss) position at the calculation date.
As of September 30, 2008 and 2007, and subsequent thereto, the Company had no outstanding stock warrants, options or convertible securities which could be considered as dilutive for purposes of the loss per share calculation.
Note F - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions.
Interest rate risk is the risk that the Company’s earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company’s earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any.
Note G - Income Taxes
The components of income tax (benefit) expense for the nine month period ended September 30, 2008, the period from August 1, 2007 (date of bankruptcy settlement) through September 30, 2007 and for the period from August 1, 2007(date of bankruptcy settlement) through September 30, 2008 is as follows:
| Period from | Period from | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| August 1, 2007 | August 1, 2007 | ||||||||||
| Nine months | (date of bankruptcy | (date of bankruptcy | |||||||||
| ended | settlement) through | settlement) through | |||||||||
| September 30, | September 30, | September 30, | |||||||||
| 2008 | 2007 | 2008 | ||||||||
| Federal: | |||||||||||
| Current | $ | -- | $ | -- | $ | -- | |||||
| Deferred | -- | -- | -- | ||||||||
| State: | |||||||||||
| Current | -- | -- | -- | ||||||||
| Deferred | -- | -- | -- | ||||||||
| Total | $ | -- | $ | -- | $ | -- | |||||
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
September 30, 2008 and 2007
Note G - Income Taxes - Continued
As of September 30, 2008, the Company had a net operating loss carryforward of approximately $21,300 to offset future taxable income. The amount and availability of any net operating loss carryforwards will be subject to the limitations set forth in the Internal Revenue Code. Such factors as the number of shares ultimately issued within a three year look-back period; whether there is a deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of historical business; and subsequent income of the Company all enter into the annual computation of allowable annual utilization of any net operating loss carryforward(s).
The Company's income tax expense for the nine months ended September 30, 2008, the period from August 1, 2007 (date of bankruptcy settlement) through September 30, 2007 and for the period from August 1, 2007 (date of bankruptcy settlement) through September 30, 2008 differs from the statutory rate of 34% as follows:
| Period from | Period from | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| August 1, 2007 | August 1, 2007 | ||||||||||
| Nine months | (date of bankruptcy | (date of bankruptcy | |||||||||
| ended | settlement) through | settlement) through | |||||||||
| September 30, | September 30, | September 30, | |||||||||
| 2008 | 2007 | 2008 | |||||||||
| Statutory rate applied to income before income taxes | $ | (6,100 | ) | $ | -- | $ | (7,300 | ) | |||
| Increase (decrease) in income taxes resulting from: | |||||||||||
| State income taxes | -- | -- | -- | ||||||||
| Other, including reserve for | |||||||||||
| deferred tax asset and application | |||||||||||
| of net operating loss carryforward | 6,100 | -- | 7,300 | ||||||||
| Income tax expense | $ | -- | $ | -- | $ | -- | |||||
The Company’s only temporary differences as of September 30, 2008 relate to the Company’s net operating loss. Accordingly, any deferred tax asset, as fully reserved, or liability, if any, as of September 30, 2008 is nominal and not material to the accompanying financial statements.
Note H - Capital Stock Transactions
Pursuant to the Plan affirmed by the U. S. Bankruptcy Court - Northern District of Texas - Dallas Division, the Company will issue a sufficient number of Plan shares to meet the requirements of the Plan. Such number was estimated in the Plan to be approximately 500,000 Plan Shares relative to each Post Confirmation Debtor.
As provided in the Plan, 80.0% of the Plan Shares of the Company were issued to Halter Financial Group, Inc. (HFG). In exchange for the release of its Allowed Administrative Claims and for the performance of certain services and the payment of certain fees related to the anticipated reverse merger or acquisition transactions described in the Plan. The remaining 20.0% of the Plan Shares of the Company were issued to other holders of various claims as defined in the Plan.
Based upon the calculations provided by the Creditor’s Trustee, the Company issued an aggregate 500,016 shares of the Company’s “new” common stock to all unsecured creditors and the controlling stockholder in settlement of all unpaid pre-confirmation obligations of the Company and/or the bankruptcy trust.
Effective September 26, 2007, HFG transferred its 400,000 Plan Shares to Halter Financial Investments, L.P. (HFI), a Texas limited partnership controlled by Timothy P. Halter, who is also the controlling officer of HFG.
Part I - Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(1) | Caution Regarding Forward-Looking Information |
Certain statements contained in this quarterly filing, including, without limitation, statements containing the words "believes", "anticipates", "expects" and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the following: international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-Q and investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
(2) | Background |
SMSA El Paso I Acquisition Corp. (Company) was organized on September 26, 2007 as a Nevada corporation to effect the reincorporation of Senior Management Services of El Paso Sunset, Inc., a Texas corporation, mandated by the plan of reorganization discussed below.
On January 17, 2007, Senior Management Services of El Paso Sunset, Inc. and its affiliated companies (SMS Companies) filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. During the three years prior to filing the reorganization petition, SMS Companies operated a chain of skilled nursing homes in Texas, which prior to the bankruptcy proceedings consisted of 14 nursing facilities, ranging in size from approximately 114 beds to 325 beds. In the aggregate, SMS Companies provided care to approximately 1,600 resident patients and employed over 1,400 employees. A significant portion of the SMS Companies cash flow was provided by patients covered by Medicare and Medicaid. The SMS Companies facilities provided round-the-clock care for the health, well-being, safety and medical needs of its patients. The administrative and operational oversight of the nursing facilities was provided by an affiliated management company located in Arlington, Texas. In 2005, SMS Companies obtained a secured credit facility from a financial institution. The credit facility eventually was comprised of an $8.3 million term loan and a revolving loan of up to $15 million which was utilized for working capital and to finance the purchase of the real property on which 2 of its nursing care facilities operated. By late 2006, SMS Companies were in an "overadvance" position, whereby the amount of funds by the lender exceeded the amount of collateral eligible to be borrowed under the credit facility. Beginning in September 2006, SMS Companies entered into the first of a series of forbearance agreements whereby the lender agreed to forebear from declaring the financing in default provided SMS Companies obtained a commitment from a new lender to refinance and restructure the credit facility. SMS Companies were unsuccessful in obtaining a commitment from a new lender and, on January 5, 2007, the lender declared SMS Companies in default and commenced foreclosure and collection proceedings. On January 9, 2007, the lender agreed to provide an additional $1.7 million to fund payroll and permit a controlled transaction to bankruptcy. Subsequently, on January 17, 2007, the SMS Companies filed a petition for reorganization under Chapter 11 of the Bankruptcy Code.
All assets, liabilities and other claims against the Company and it’s affiliated entities were combined for the purpose of distribution of funds to creditors. Each of the entities otherwise remained separate corporate entities. From the commencement of the bankruptcy proceedings through August 1, 2007 (the effective date of the plan of reorganization), all secured claims and/or administrative claims during this period were satisfied through either direct payment or negotiation.
We will remain subject to the jurisdiction of the bankruptcy court until we consummate a merger or acquisition. Pursuant to the confirmation order, if we do not consummate a business combination prior to February 10, 2009, the Plan Shares will be deemed canceled, the pre-merger or acquisition injunction provisions of the confirmation order, as they pertain to the Company, shall be deemed dissolved and no discharge will be granted to the Company, all without further order of the bankruptcy court. If we timely consummate a merger or acquisition with an entity which is engaged in business, we will file a certificate of compliance with the bankruptcy court which will state that the requirements of the Plan have been met, resulting in the discharge to be deemed granted. Thereafter, the post discharge injunction provisions set forth in the Plan and the confirmation order shall then become effective.
The First Amended, Modified Chapter 11 Plan, (the Plan) as presented by SMS Companies and their creditors was approved by the United States Bankruptcy Court, Northern District of Texas - Dallas Division on August 1, 2007. The Plan, which contemplates the Company entering into a reverse merger transaction, provided that certain identified claimants as well as unsecured creditors, in accordance with the allocation provisions of the Plan of Reorganization, and the Company’s new controlling stockholder would receive “new” shares of the Company’s post-reorganization common stock, pursuant to Section 1145(a) of the Bankruptcy Code. As a result of the Plan’s approval, all liens, security interests, encumbrances and other interests, as defined in the Plan of Reorganization, attach to the creditor’s trust. Specific injunctions prohibit any of these claims from being asserted against the Company prior to the contemplated reverse merger.
The cancellation of all existing shares at the date of the bankruptcy filing and the issuance of “new” shares of the reorganized entity caused an issuance of shares of common stock and a related change of control of the Company with more than 50.0% of the “new” shares being held by persons and/or entities which were not pre-bankruptcy stockholders. Accordingly, per American Institute of Certified Public Accountants’ Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”, the Company adopted “fresh-start” accounting as of the bankruptcy discharge date whereby all continuing assets and liabilities of the Company were restated to the fair market value. As of August 1, 2007, by virtue of the Plan, the only asset of the Company was approximately $1,000 in cash due from the Bankruptcy Estate.
The Company’s emergence from Chapter 11 of Title 11 of the United States Code on August 1, 2007 created the combination of a change in majority ownership and voting control - that is, loss of control by the then-existing stockholders, a court-approved reorganization, and a reliable measure of the entity’s fair value - resulting in a fresh start, creating, in substance, a new reporting entity. Accordingly, the Company, post bankruptcy, has no significant assets, liabilities or operating activities. Therefore, the Company, as a new reporting entity, qualifies as a “development stage enterprise” as defined in Statement of Financial Accounting Standard No. 7, as amended and a shell company as defined in Rule 405 under the Securities Act of 1933, (Securities Act), and Rule 12b-2 under the Securities Exchange Act of 1934, (Exchange Act).
In accordance with the confirmed plan of reorganization, our current business plan is to seek to identify a privately-held operating company desiring to become a publicly held company by merging with the Company through a reverse merger or acquisition.
The Company filed a General Form for Registration of Securities of Small Business Issuers under Section 12(b) or (g) of The Securities Exchange Act of 1934, as amended, on Form 10 on March 12, 2008. This Registration Statement went effective on May 11, 2008.
(3) Plan of Operations
The Company had no revenue for either of the nine or three month periods ended September 30, 2008 or for the period from August 1, 2007 (date of bankruptcy settlement) through September 30, 2007.
General and administrative expenses for the nine and three month periods ended September 30, 2008 have been directly related to the court mandated reorganization of the Company in accordance with the August 2007 affirmation of the Company’s Plan of Reorganization, maintaining the corporate entity and maintaining compliance with the Securities Exchange Act of 1934, as amended.
It is anticipated that future expenditure levels may increase as the Company intends to fully comply with it’s periodic reporting requirements.
Earnings per share for the respective nine and three month periods ended September 30, 2008 were $(0.04) and $(0.00) based on the weighted-average shares issued and outstanding at the end of each respective period.
The Company does not expect to generate any meaningful revenue or incur operating expenses for purposes other than fulfilling the obligations of a reporting company under the Securities Exchange Act of 1934 unless and until such time that the Company’s operating subsidiary begins meaningful operations.
At September 30, 2008 and 2007, the Company had working capital of approximately $(20,356) and $(1,000).
It is the belief of management and significant stockholders that they will provide sufficient working capital necessary to support and preserve the integrity of the corporate entity. However, there is no legal obligation for either management or significant stockholders to provide additional future funding. Should this pledge fail to provide financing, the Company has not identified any alternative sources. Consequently, there is substantial doubt about the Company's ability to continue as a going concern.
The Company's need for working capital may change dramatically as a result of any business acquisition or combination transaction. There can be no assurance that the Company will identify any such business, product, technology or company suitable for acquisition in the future. Further, there can be no assurance that the Company would be successful in consummating any acquisition on favorable terms or that it will be able to profitably manage the business, product, technology or company it acquires.
Plan of Business
General
The Company intends to locate and combine with an existing, privately-held company which is profitable or, in management's view, has growth potential, irrespective of the industry in which it is engaged. However, the Company does not intend to combine with a private company which may be deemed to be an investment company subject to the Investment Company Act of 1940. A combination may be structured as a merger, consolidation, exchange of the Company's common stock for stock or assets or any other form which will result in the combined enterprise's becoming a publicly-held corporation.
Pending negotiation and consummation of a combination, the Company anticipates that it will have, aside from carrying on its search for a combination partner, no business activities, and, thus, will have no source of revenue. Should the Company incur any significant liabilities prior to a combination with a private company, it may not be able to satisfy such liabilities as are incurred.
If the Company's management pursues one or more combination opportunities beyond the preliminary negotiations stage and those negotiations are subsequently terminated, it is foreseeable that such efforts will exhaust the Company's ability to continue to seek such combination opportunities before any successful combination can be consummated. In that event, the Company's common stock will become worthless and holders of the Company's common stock will receive a nominal distribution, if any, upon the Company's liquidation and dissolution.
Combination Suitability Standards
In its pursuit for a combination partner, the Company's management intends to consider only combination candidates which are profitable or, in management's view, have growth potential. The Company's management does not intend to pursue any combination proposal beyond the preliminary negotiation stage with any combination candidate which does not furnish the Company with audited financial statements for at least its most recent fiscal year and unaudited financial statements for interim periods subsequent to the date of such audited financial statements, or is in a position to provide such financial statements in a timely manner. The Company will, if necessary funds are available, engage attorneys and/or accountants in its efforts to investigate a combination candidate and to consummate a business combination. The Company may require payment of fees by such combination candidate to fund the investigation of such candidate. In the event such a combination candidate is engaged in a high technology business, the Company may also obtain reports from independent organizations of recognized standing covering the technology being developed and/or used by the candidate. The Company's limited financial resources may make the acquisition of such reports difficult or even impossible to obtain and, thus, there can be no assurance that the Company will have sufficient funds to obtain such reports when considering combination proposals or candidates. To the extent the Company is unable to obtain the advice or reports from experts, the risks of any combined enterprise's being unsuccessful will be enhanced. Furthermore, to the knowledge of the Company's officers and directors, neither the candidate nor any of its directors, executive officers, principal stockholders or general partners:
(1) | will have been convicted of securities fraud, mail fraud, tax fraud, embezzlement, bribery, or a similar criminal offense involving misappropriation or theft of funds, or be the subject of a pending investigation or indictment involving any of those offenses; |
(2) | will have been subject to a temporary or permanent injunction or restraining order arising from unlawful transactions in securities, whether as issuer, underwriter, broker, dealer, or investment advisor, may be the subject of any pending investigation or a defendant in a pending lawsuit arising from or based upon allegations of unlawful transactions in securities; or |
(3) | will have been a defendant in a civil action which resulted in a final judgement against it or him awarding damages or rescission based upon unlawful practices or sales of securities. |
The Company's officers and directors will make these determinations by asking pertinent questions of the management of prospective combination candidates. Such persons will also ask pertinent questions of others who may be involved in the combination proceedings. However, the officers and directors of the Company will not generally take other steps to verify independently information obtained in this manner which is favorable. Unless something comes to their attention which puts them on notice of a possible disqualification which is being concealed from them, such persons will rely on information received from the management of the prospective combination candidate and from others who may be involved in the combination proceedings.
(4) Liquidity and Capital Resources
It is the belief of management and significant stockholders that they will provide sufficient working capital necessary to support and preserve the integrity of the corporate entity will be present. However, there is no legal obligation for either management or significant stockholders to provide additional future funding. Should this pledge fail to provide financing, the Company has not identified any alternative sources. Consequently, there is substantial doubt about the Company's ability to continue as a going concern.
The Company has no current plans, proposals, arrangements or understandings with respect to the sale or issuance of additional securities prior to the location of a merger or acquisition candidate. Accordingly, there can be no assurance that sufficient funds will be available to the Company to allow it to cover the expenses related to such activities.
Regardless of whether the Company’s cash assets prove to be inadequate to meet the Company’s operational needs, the Company might seek to compensate providers of services by issuances of stock in lieu of cash.
(5) Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note E of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company may be subject to certain market risks, including changes in interest rates and currency exchange rates. At the present time, the Company does not undertake any specific actions to limit those exposures.
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of September 30, 2008. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to our Company required to be included in our reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls
There were no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II - Other Information
Item 1 - Legal Proceedings
None
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has held no regularly scheduled, called or special meetings of stockholders during the reporting period.
Item 5 - Other Information
None
Item 6 - Exhibits
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002
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.
SMSA El Paso 1 Acquisition Corp. | |
| Dated: October 28, 2008 | /s/ Richard Crimmins |
| Richard Crimmins | |
| President, Chief Executive Officer, | |
| Chief Financial Officer and Sole Director |