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 June 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)
Nevada 26-1516355
- ---------------------- ---------------------------
(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: July 21, 2008: 500,016
----------------------
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
[PG NUMBER]
SMSA El Paso 1 Acquisition Corp.
Form 10-QSB for the Quarter ended June 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 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 16
Item 4 - Controls and Procedures 16
Part II - Other Information
Item 1 - Legal Proceedings 17
Item 2 - Recent Sales of Unregistered Securities and Use of Proceeds 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits 17
Signatures 17
Part I
Item 1 - Financial Statements
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Balance Sheet
June 30, 2008
(Unaudited)
June 30,
2008
--------
ASSETS
------
Current Assets
Cash on hand and in bank $ --
Due from controlling shareholder --
--------
Total Assets $ --
========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities
Accounts payable - trade $ --
Working capital advances from controlling stockholder 18,486
--------
Total Liabilities 18,486
--------
Commitments and Contingencies
Stockholders' Equity (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
Additional paid-in capital 500
Deficit accumulated during the development stage (19,436)
--------
Total Stockholders' Equity (Deficit) (18,436)
--------
Total Liabilities and
Stockholders' Equity (Deficit) $ --
========
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.
3
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Statement of Operations and Comprehensive Loss
Six and Three months ended June 30, 2008 and
Period from August 1, 2007 (date of bankruptcy
settlement) through June 30, 2008
(Unaudited)
Period from
August 1, 2007
(date of
bankruptcy
Six months Three months settlement)
ended ended through
June 30, June 30, June 30,
2008 2008 2008
--------- --------- ---------
Revenues $ -- $ -- $ --
--------- --------- ---------
Operating expenses
Reorganization costs 4,690 2,840 8,053
Legal and professional fees 11,433 6,175 11,433
--------- --------- ---------
Total operating expenses 16,123 9,015 19,486
--------- --------- ---------
Loss from operations (16,123) (9,015) (19,486)
Provision for income taxes -- -- --
--------- --------- ---------
Net loss (16,123) (9,015) (19,486)
Other comprehensive income -- -- --
--------- --------- ---------
Comprehensive loss $ (16,123) $ (9,015) $ (19,486)
========= ========= =========
Loss per weighted-average share
of common stock outstanding,
computed on net loss - basic
and fully diluted $ (0.03) $ (0.02) $ (0.04)
========= ========= =========
Weighted-average number of shares
of common stock outstanding -
basic and fully diluted 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.
4
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Statement of Cash Flows
Six months ended June 30, 2008 and
Period from August 1, 2007(date of bankruptcy settlement) through June 30, 2008
(Unaudited)
Period from
August 1, 2007
(date of
bankruptcy
Six months settlement)
ended through
June 30, June 30,
2008 2008
-------- --------
Cash Flows from Operating Activities
Net loss for the period $(16,123) $(19,486)
Adjustments to reconcile net loss
to net cash provided by
operating activities
Increase in accounts payable-trade -- --
-------- --------
Net cash used in operating activities (16,123) (19,486)
-------- --------
Cash Flows from Investing Activities -- --
-------- --------
Cash Flows from Financing Activities
Cash funded from bankruptcy trust -- 1,000
Working capital advances from majority stockholder 16,123 18,486
-------- --------
Net cash provided by financing activities 16,123 19,486
-------- --------
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.
5
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements
June 30, 2008
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.
6
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
June 30, 2008
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.
7
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
June 30, 2008
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.
8
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
June 30, 2008
Note D - Going Concern Uncertainty - Continued
The Company's certificate of incorporation authorizes the issuance of up to
10,000,000 million shares of preferred stock and 100,000,000 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.
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 June 30, 2008, 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 June 30, 2008, 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.
9
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
June 30, 2008
Note E - Summary of Significant Accounting Policies - Continued
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).
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 June 30, 2008, 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.
(Remainder of this page left blank intentionally)
10
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
June 30, 2008
Note G - Income Taxes
The components of income tax (benefit) expense for the six month period ended
June 30, 2008 and for the period from August 1, 2007(date of bankruptcy
settlement) through June 30, 2008 is as follows:
Period from
August 1, 2007
Six months (date of bankruptcy
ended settlement) through
June 30, 2008 June 30, 2008
------------- -------------
Federal:
Current $ -- $ --
Deferred -- --
------------- -------------
-- --
------------- -------------
State:
Current -- --
Deferred -- --
------------- -------------
-- --
------------- -------------
Total $ -- $ --
============= =============
As of June 30, 2008, the Company had a net operating loss carryforward of
approximately $19,500 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 six months ended June 30, 2008 and for
the period from August 1, 2007 (date of bankruptcy settlement) through June 30,
2008 is as follows:
Period from
August 1, 2007
(date of
bankruptcy
Six months settlement)
ended through
June 30, June 30,
2008 2008
------- -------
Statutory rate applied to
income before income taxes $(5,500) $(6,700)
Increase (decrease) in income
taxes resulting from:
State income taxes -- --
Other, including reserve for
deferred tax asset and application
of net operating loss carryforward 5,500 6,700
------- -------
Income tax expense $ -- $ --
======= =======
11
SMSA El Paso 1 Acquisition Corp.
(a development stage company)
Notes to Financial Statements - Continued
June 30, 2008
Note G - Income Taxes - Continued
The Company's only temporary differences as of June 30, 2008 relate to the
Company's net operating loss. Accordingly, any deferred tax asset, as fully
reserved, or liability, if any, as of June 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.
12
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
13
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 six or three month periods ended
June 30, 2008.
General and administrative expenses for the six and three month periods ended
June 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 six and three month periods ended June 30,
2008 were $(0.03) and $(0.02) 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 June 30, 2008, the Company had working capital of approximately $(18,500).
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
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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 not 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 not 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 not 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
15
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 if 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 June 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 June 30, 2008
that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
16
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: June 21, 2008 /s/ Richard Crimmins
------------- ------------------------------------
Richard Crimmins
President, Chief Executive Officer,
Chief Financial Officer and Sole Director
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