UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-5418
Walker Financial Corporation
(Exact name of small business issuer as specified in its charter)
Delaware 13-2637172
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
990 Stewart Avenue - Suite 60A
Garden City, New York 11530
(Address of principal executive offices)
(516) 832-7000
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were a total of 13,393,102
shares of the registrant's common stock, par value $.10 per share, outstanding
as of May 19, 2005.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
Walker Financial Corporation
Quarterly Report on Form 10-QSB
Quarter Ended March 31, 2005
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet (Unaudited) as of March 31, 2005. 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months Ended March 31, 2005 and 2004........................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 2005 and 2004........................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)...... 6
Item 2. Management's Discussion and Analysis or Plan of Operation....... 15
Item 3. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ... 20
Item 3. Defaults Upon Senior Securities ............................... 21
Item 4. Submission of Matters to a Vote of Security Holders ........... 21
Item 5. Other Information ............................................. 21
Item 6. Exhibits ...................................................... 21
Signatures ............................................................. 22
Exhibit Index .......................................................... 23
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
2005
-----------
ASSETS
Current assets -
Cash $ 5,860
Accounts receivable 29,462
Deferred financing costs, net 88,625
Discontinued assets 22,437
Prepaid expenses and other current assets 307
-----------
Total current assets 146,691
-----------
Property and equipment, net 232,636
Other assets 9,949
-----------
Total assets $ 389,276
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities -
Accounts payable and accrued expenses $ 268,144
Line of credit, bank 134,504
Bridge notes payable, net of debt discount of $23,750 601,250
Note payable 105,000
10% Senior Subordinated Secured Convertible Promissory Notes 50,000
Due to officer-stockholder 40,000
Accrued interest 36,788
Discontinued liabilities 15,440
-----------
Total current liabilities 1,251,126
-----------
Stockholders' deficiency -
Common stock, par value $.10 per share, 100,000,000
authorized, 13,393,102 shares issued and outstanding 1,339,310
Additional paid-in capital 6,188,188
Deferred offering costs (599,321)
Accumulated deficit (7,790,027)
-----------
Total stockholders' deficiency (861,850)
-----------
Total liabilities and stockholders' deficiency $ 389,276
===========
See notes to condensed consolidated financial statements
3
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
----------------------------
2005 2004
------------ ------------
Net revenues $ 68,994 $ 50,000
Operating expenses (618,941) (373,770)
------------ ------------
Operating loss (549,947) (323,770)
Debt conversion expense (933,793) --
Interest expense (193,711) (27,004)
------------ ------------
Loss from continuing operations (1,677,451) (350,774)
Loss from discontinued operations -- (55,356)
------------ ------------
Net loss $ (1,677,451) $ (406,130)
============ ============
Per share data - basic and diluted
Loss from continuing operations $ (0.13) $ (0.05)
Loss from discontinued operations -- (0.00)
------------ ------------
Net loss per common share $ (0.13) (0.05)
============ ============
Weighted average number of common shares outstanding 13,201,794 7,501,510
============ ============
See notes to condensed consolidated financial statements
4
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $(1,677,451) $ (350,774)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization 25,034 44,791
Compensatory element of stock issuance 105,000 --
Amortization of deferred compensation 157,500 --
Debt conversion expense 933,793 --
Interest - deferred financing cost 161,376 --
Accretion of debt discount 14,750 --
Changes in operating assets and liabilities -
Accounts receivable, net (8,950) (4,692)
Prepaid expenses and other current assets 5,393 3,496
Accounts payable and accrued expenses 38,666 (25,097)
Accrued interest 35,541 25,162
----------- -----------
Total adjustments 1,468,103 43,660
----------- -----------
Net cash used in operating activities (209,348) (307,114)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
OF DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (55,356)
Change in -
Assets from discontinued operations -- 40,815
Liabilities from discontinued operations -- 6,371
----------- -----------
Net cash used in operating activities
of discontinued operations -- (8,170)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit, bank (6,370) 15,029
Repayment of advances from stockholder (10,000) --
Proceeds from sale of bridge notes 201,000 --
Fees paid in connection with debt acquisition (48,750) --
Principal repayment of notes payable -- (10,000)
----------- -----------
Net cash provided by financing activities 135,880 5,029
----------- -----------
Net decrease in cash and cash equivalents (73,468) (310,255)
Cash and cash equivalents - beginning 79,328 587,626
----------- -----------
Cash and cash equivalents - ending $ 5,860 $ 277,371
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 2,936,890 shares of common stock
for the settlement of 10% Senior Subordinated
Secured Convertible Promissory Notes and
accrued interest $ 980,203 $ --
=========== ===========
93,750 warrants to be issued in connection
with sale of bridge notes $ 28,500 $ --
=========== ===========
187,500 warrants to be issued in connection
with sale of bridge notes $ 57,600 $ --
=========== ===========
See notes to condensed consolidated financial statements
5
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
NOTE 1 - Organization and Basis of Presentation
Organization
Walker Financial Corporation (collectively with its subsidiaries, the "Company")
provides various death care pre-arrangement services through two of its
wholly-owned subsidiaries, National Preplanning, Inc. ("NPI") and American
DataSource ("ADS"). NPI is a managing general insurance agency and third party
marketer of pre-arranged death care services to corporations, unions and
affinity groups. ADS provides trust administration services to independent
funeral homes, state master trusts and companies that own funeral homes or
cemetery for pre-need funeral and cemetery trust accounts.
Through its wholly owned subsidiary, Kelly Color, Inc. ("Kelly Color"), the
Company operated in the film processing business through February 2004. As
further discussed in Note 11 to these unaudited financial statements, the
operations of Kelly Color have been included in these unaudited financial
statements as discontinued operations.
Basis of Presentation
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying condensed
consolidated financial statements include all adjustments (consisting of normal,
recurring adjustments) necessary to make the Company's financial position,
results of operations and cash flows not misleading as of March 31, 2005 and for
all periods presented. The results of operations for the three months ended
March 31, 2005 are not necessarily indicative of the results of operations for
the full year or any other interim period. These financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2004.
NOTE 2 - Going Concern Uncertainty
The accompanying unaudited consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United Sates
of America, which contemplate continuation of the Company as a going concern.
However, for the three months ended March 31, 2005, the Company incurred a net
loss of $1,677,451 and, at March 31, 2005, had a working capital deficiency of
$1,104,435, an accumulated deficit of $7,790,027 and a stockholders' deficiency
of $861,850.
The Company has begun implementing various marketing plans to increase revenues
for both NPI and ADS. The Company also is attempting to sell the real estate,
building and improvements at which Kelly Color formerly conducted its operations
(the "Kelly Color property"), as well as seeking to make strategic acquisitions.
In addition, the Company will attempt to raise additional capital to assist in
the further execution of its marketing plans and to fund any possible future
acquisitions. The Company believes that the cash flows from a combination of any
future sale of the Kelly Color property, the successful execution of its
marketing plans resulting in increased sales and any additional capital that the
Company may obtain through sales of its equity and debt securities will be
sufficient to pay that portion of its debt that is due within the next twelve
months, as well as to fund the Company's operations. During the three months
ended March 31, 2005, the Company settled 10% Senior Subordinated Secured
Convertible Promissory Notes in the aggregate principal amount of $795,000 and
accrued interest of $185,203 in exchange for the issuance of 2,936,890 shares of
Company common stock (see Notes 5 and 8) and issued bridge notes in the
principal amount of $201,000 (see Note 6). There can be no assurance that the
Company will be successful in any of its plans as discussed in this Note 2. To
the extent that the Company is unsuccessful in its plans to increase its cash
position, the Company may find it necessary to further curtail some of its
operations and possible future acquisitions. These matters raise substantial
doubt about the Company's ability to continue as a going concern. However, the
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of the
liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recovery of assets or the classification
of liabilities that might be necessary should the Company be unable to continue
as a going concern.
6
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
NOTE 3 - Selected Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries NPI, Kelly Color and ADS, collectively referred to
as the "Company." All significant intercompany transactions and balances have
been eliminated in consolidation.
Use of Estimates
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 these estimates.
Revenue Recognition
Revenue is recognized at the time the administrative services are performed and
provided, or made available to its customers. Services are billed monthly based
upon a predetermined percentage of the total assets included in the respective
pre-need funeral master trust fund.
Loss Per Share
Basic earnings per share ("EPS") is computed by dividing net loss available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS includes the potential dilution that could occur if
options or other contracts to issue common stock were exercised or converted.
The Company's outstanding options, warrants and convertible securities, as set
forth below, are not reflected in diluted earnings per share because their
effects would be anti-dilutive. Accordingly, basic and diluted earnings per
share are identical.
March 31,
-----------------------------
2005 2004
--------- ---------
Options 52,170 25,000
Warrants 1,169,906 999,904
Convertible debt 598,592 1,222,869
--------- ---------
1,820,668 2,247,773
========= =========
Stock Based Compensation
7
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
Stock Options and Similar Equity Instruments
At March 31, 2005, the Company had a Equity Incentive Plan. As permitted under
Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"), which
amended SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
the Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation arrangements as defined by
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and related interpretations including "Financial Accounting
Standards Board Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB No. 25. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation. Since no options were granted during the respective periods net
loss and pro forma net loss are identical.
Three Months Ended
March 31,
-----------------------------
2005 2004
-------------- ------------
Net loss, as reported $ (1,677,451) $ (406,130)
Add: Stock-based employee compensation expense
included in reported loss -- --
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effect -- --
-------------- ------------
Pro forma loss $ (1,677,451) $ (406,130)
============= ===========
Basic and diluted net loss per share, as reported $ (0.13) $ (0.05)
============= ===========
Basic and diluted pro forma net loss per share $ (0.13) $ (0.05)
============= ===========
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation of Accounting Research Bulletin ("ARB") No. 51,
"Consolidated Financial Statements," provides guidance for identifying a
controlling interest in a variable interest entity ("VIE") established by means
other than voting interest. FIN 46 also required consolidation of a VIE by an
enterprise that holds such controlling interest. In December 2003, the FASB
completed its deliberations regarding the proposed modifications to FIN 46 and
issued Interpretation Number 46R, "Consolidation of Variable Interest Entities -
An Interpretation of ARB 51" ("FIN 46R"). The decisions reached included a
deferral of the effective date and provisions for additional scope exceptions
for certain types of variable interests. Application of FIN 46R is required in
financial statements of public entities that have interests in VIEs or potential
VIEs commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public small business issuers' entities is
required in all interim and annual financial statements for periods ending after
December 15, 2004. The Company is currently in the process of evaluating the
effect that this pronouncement will have on its financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." This
statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. SFAS No. 123R addresses all
forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will
be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will result in a charge to
operations for stock-based compensation expense. SFAS No. 123R is effective for
public entities that file as small business issuers as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
The Company is currently in the process of evaluating the effect that this
pronouncement will have on its financial statements.
8
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after December 16, 2004. The provisions of SFAS No. 153
should be applied prospectively. The Company is currently in the process of
evaluating the effect that this pronouncement will have on its financial
statements.
NOTE 4 - Line of Credit, Bank
The Company has a credit facility with a bank consisting of a $150,000 secured
line of credit (the "Line of Credit"), with interest payable monthly at the
bank's prime rate plus 1.25%. The Line of Credit was modified in June 2004 and,
as modified, requires monthly payments of $1,225 and a final payment of the
outstanding balance on June 21, 2005. There was $134,504 outstanding under the
Line of Credit as of March 31, 2005. The Line of Credit is collateralized by the
Kelly Color property located in North Carolina.
NOTE 5 - 10% Senior Subordinated Secured Convertible Promissory Notes
In December 2003, the Company sold and issued 10% Senior Subordinated Secured
Convertible Promissory Notes (each, a "10% Note") in the aggregate principal
amount of $845,000 and due in December 2006. The 10% Notes were initially
convertible into shares of the Company's common stock at conversion prices of
$0.71 per share through December 5, 2005 and $1.25 thereafter.
The subscription agreements pursuant to which the Company sold the 10% Notes
required, among other matters, that the Company register for resale under the
Securities Act the shares issuable upon conversion of the 10% Notes by May 5,
2004. The Company was obligated, as a result of the failure to register such
conversion shares by May 5, 2004, to pay to the holders of the 10% Notes a
monthly fee equal to 1.5% of the principal amount of the 10% Notes for each
month, or portion thereof, that the Company failed to cause such registration.
The Company failed to cause such registration by May 5, 2004 and failed to pay
the holders any monthly fee due such holders as a result of the failure to
register the conversion shares.
The 10% Notes required an interest payment on July 1, 2004 in the aggregate
amount of $49,057. The Company failed to remit such interest payment to the
holders of the 10% Notes. The failure to pay such interest payment is an "event
of Default" under the 10% Notes, although the holders of the 10% Notes did not
give notice to the Company of such event of Default. The occurrence of an event
of Default would result in the interest rate on the 10% Notes to be increased to
12% per annum. The Company has the right to avoid the declaration of an event of
Default due to the failure to tender the July 1, 2004 interest payment by
issuing to the holders additional shares of the Company's common stock at the
per diem rate of 0.003125 shares for every $1.00 of principal, or an aggregate
of 2,640.625 shares per day.
The 10% Notes also prohibited additional borrowings by the Company, from any
source, without the prior approval of the placement agent for the 10% Notes or
the holders of a majority of the aggregate principal amount of the 10% Notes. In
May and August 2004, the Company borrowed, without approval, an aggregate of
$250,000. Further, in July 2004, the Company borrowed, without approval, an
additional $50,000 from an officer/stockholder (see Note 7) and, in December
2004 through February 2005, sold and issued, without approval, 10% convertible
promissory notes in the aggregate principal amount of $375,000 (see Note 6).
9
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
In October 2004, the Company offered to the holders of the 10% Notes one share
of Company common stock for each $0.30 of principal evidenced by the 10% Notes
and one share of Company common stock for each $0.23 of accrued interest due
under the 10% Notes through September 30, 2004 in exchange for the holders
waiving substantially all of their rights under the 10% Notes. The Company did
agree to (a) use its best efforts to expeditiously register for resale the
shares that the holders of the 10% Notes would receive in such exchange and (b)
issue additional shares to the holders in the event that the Company issued
shares to certain third parties for consideration less than $0.30 at any time
prior to December 4, 2006.
On January 5, the Company issued a total of 2,938,036 shares of Company common
stock to the holders of 10% Notes in the aggregate principal amount of $795,000
and accrued interest of $185,203 for settlement of such 10% Notes. As a result
of the debt settlement the Company wrote off $125,695 of deferred financing
costs previously amortized. The charge was included as an interest expense on
the statement of operations for the three months ended March 31, 2005. The
Company has a remaining principal balance of $50,000 due to the holders of the
note, and incurred $22,050 of interest and penalty interest included in the
statements of operations for the three months ended March 31, 2005. Upon the
effectiveness of the debt settlement, the Company recorded a conversion charge
of $993,793, which is the estimated fair value of the additional shares of
Company common stock issued in excess of the amount of shares that were issuable
at the original conversion prices for the debt.
NOTE 6 - Notes Payable and Bridge Notes
Notes Payable
In August 2004, the due date of a 6% promissory note originally issued by NPI
prior to March 19, 2002 was extended to the earlier of (a) the date which is 60
days following the effectiveness of a registration statement under the
Securities Act registering for resale the shares of the Company's common stock
issuable upon exercise of the warrants sold and issued with the 6% promissory
note or (b) January 2, 2005. The consideration tendered by the Company in
connection with the extension of the due date of the 6% promissory note was a
reduction in the exercise price of the warrants sold and issued with the 6%
Promissory Notes to $0.45 per share.
Beginning June 1, 2004, the Company began repayment of this note under a
repayment plan calling for payments requiring minimum monthly payments of
$10,000 until the entire note is repaid in full, which was scheduled to occur on
March 1, 2005. Due to insufficient operating capital, the Company has not been
able to meet this commitment and currently is not in compliance with the terms
of this note. During the three months ended March 31, 2005, the Company did not
make any payments under this note. As of March 31, 2005, the principal balance
due under this note was $105,000 and is presented on the accompanying balance
sheet as a current liability.
Bridge Notes
In May 2004, the Company sold and issued, for gross proceeds of $125,000, (a) a
6% promissory note in the principal amount of $125,000 and due on August 22,
2004 and (b) warrants to purchase 70,000 shares of the Company's common stock at
an exercise price of $0.71 per share. The fair value of the warrants is $35,000
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of this promissory
note. In August 2004, the due date of such promissory note was extended to no
later than January 2, 2005. The Company currently is not in compliance with the
repayment terms of this note.
In August 2004, the Company sold and issued, for gross proceeds of $125,000, (a)
a 6% promissory note in the principal amount of $125,000 and due January 2, 2005
and (b) warrants to purchase 105,000 shares of the Company's common stock at an
exercise price of $.45 per share. The fair value of the warrants is $31,250
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of this promissory
note. The Company currently is not in compliance with the repayment terms of
this note.
10
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
For the above two notes, the Company incurred $10,000 of additional debt
accretion interest expense for the three months ended March 31, 2005 that is
related to the debt discount.
In December 2004 and February 2005, the Company issued 10% convertible
promissory notes in the aggregate principal amount of $375,000 (the "Notes") and
committed to issuing 93,750 warrants to purchase common stock at an exercise
price of $0.71 per share. The estimated fair value of the warrants is $25,800
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of this promissory
note. The Company incurred additional debt accretion interest expense of $4,300.
In connection with the sale and issuance of the Notes, the Company incurred fees
of $48,750 and committed to issuing 187,500 warrants to the private placement
agent for services provided. The estimated fair value of the warrants is $57,600
using the Black-Scholes option pricing model. The cost of $106,350 has been
capitalized as deferred financing fees and will be amortized over the life of
the debt which is twelve months. Amortization expense for the three months ended
March 31, 2005 is $17,725.
The Notes are convertible at $0.71 per share or 30,211 shares for every $25,000
principal and interest converted. The note did not carry any beneficial
conversion features.
NOTE 7 - Advance from Officer/Stockholder
In July 2004, an officer-stockholder advanced the Company $50,000. The advance
is non-interest bearing and has no definitive repayment terms. The Company
repaid $10,000 of the advance during the three months ended March 31, 2005 and
as of March 31, 2005, the total amount due the officer-stockholder was $40,000.
NOTE 8 - Stockholders' Deficiency
As discussed in Note 5, the Company issued 2,936,890 shares of Company common
stock for the settlement of the 10% Senior Subordinated Secured Convertible
Promissory Notes in the aggregate principal amount of $795,000 and accrued
interest of $185,203.
In November 2004, the Company entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC ("Fusion Capital"), pursuant to which Fusion
Capital has agreed to purchase, subject to certain conditions, $6,000,000 of
Company common stock over a 24-month period commencing upon the effectiveness of
a registration statement with respect to the resale of the Company common stock
to be sold to Fusion Capital under the agreement.
On January 5, 2005, the Company issued to Fusion Capital 794,702 shares of
Company common stock as a commitment fee. The 794,702 shares were valued at
$476,821, or $0.60 per share, and is included in deferred offering costs. The
deferred offering costs charge will be amortized over a 24-month period
commencing on the effectiveness of the registration of such shares under the
Securities Act. As of May 19, 2005, the Company has not filed a registration
statement with respect to the shares of Company common stock issuable under the
Stock Purchase Agreement.
On January 15, 2005, Company issued 150,000 shares of Company's common stock to
a consultant as a settlement of terminating its agreement with the consultant.
The shares were valued at $105,000, or $0.70 per share.
On February 10, 2005, the Company committed to issuing 93,750 warrants to
purchase common stock at an exercise price of $0.71 per share in connection with
the $375,000 of 10% convertible promissory notes. The estimated fair value of
the warrants is $25,800 using the Black-Scholes option pricing model and was
recorded as a deferred debt discount which will accrete to interest expense over
the life of this promissory note, which is twelve months.
11
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
On February 10, 2005, the Company committed to issuing 187,500 warrants to the
private placement agent. The estimated fair value of the warrants is $57,600
using the Black-Scholes option pricing model. The cost has been capitalized as
deferred financing fees and will be amortized over the life of the debt which is
12 months.
NOTE 9 - Consulting Agreement
In October 2004, the Company entered into two separate consulting agreements
with Phoenix Holdings Ltd ("Phoenix") and Vantage Group LLC ("Vantage"),
pursuant to which the Company agreed to issue to the consultants an aggregate of
1.5 million shares of Company common stock in consideration for the consultants'
agreements to provide specified services. The terms of these agreements are each
for approximately one year. In November 31, 2004, the Company issued 500,000 and
300,000 shares of Company common stock to the consultants. As such, the Company
recorded deferred compensation of $336,000, which deferred compensation will be
amortized over the life of the agreements.
On January 15, 2005, Company issued an additional 150,000 shares of Company's
common stock to Vantage as settlement of terminating its agreement with the
consultant. The shares were valued at $105,000, or $0.70 per share. In addition,
the Company expensed $105,000 of deferred compensation for the termination both
charges are included in the accompanying statement of operations as part of
operating expense for the three months ended March 31, 2005.
For the three months ended March 31, 2004, the Company incurred $52,500 of
amortization expense for the Phoenix consulting agreement and the charge is
included in the accompanying statement of operations as part of operating
expense.
NOTE 10 - Commitment and Contingencies
Litigation
The Company is involved in litigation through the normal course of business. The
Company believes that the resolution of these matters will not have a material
adverse effect on the financial position of the Company.
Commitments
The Company has entered into an employment agreement with Mitchell Segal to
serve as the Company's president and chief executive officer through December
31, 2005. Under Mr. Segal's employment agreement, the Company was obligated to
pay Mr. Segal an annual base salary of $200,000 for 2002, with annual increases
of not less than $10,000, plus a bonus equal to a minimum of 3% to a maximum of
5% of the gross proceeds received from equity financings and a minimum of 3% to
a maximum of 7.5% of the Company's net income, provided the Company's net income
is at least $500,000. The bonus is payable through 2008, even if Mr. Segal's
employment with the Company is terminated by the Company except in the event the
termination is for cause. In no event may the bonuses due Mr. Segal exceed an
aggregate of $304,025. Mr. Segal also is entitled to discretionary bonuses, if
any, awarded by the Company's board of directors. The Company is paying Mr.
Segal an annual base salary of $220,000 for 2005. As of March 31, 2005, Mr.
Segal is owed approximately $50,000 of unpaid salary and is included as part of
accounts payable and accrued expenses on the balance sheet.
12
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
The Company also has entered into an employment agreement with Peter Walker
through March 18, 2012. Under Mr. Walker's employment agreement, the Company
will pay Mr. Walker an annual base salary of $100,000, plus a monthly
non-accountable expense allowance of $1,000. Mr. Walker's employment agreement
does not require Mr. Walker to devote a minimum number of hours to the business.
Mr. Walker's employment agreement does require the Company to use the Company's
best efforts to cause Mr. Walker to be nominated for election to the Company's
board of directors during the term of Mr. Walker's employment agreement.
Mr. Walker's employment agreement provides for him to be paid his salary:
o for a two year period following his termination due to a disability and
o for the entire remaining employment term in the event his termination is
otherwise than for cause or disability; provided that, if the termination
is due to a failure to pay Mr. Walker his compensation otherwise payable
under the employment agreement, then the rate of compensation shall be
o in the seventh year, 150% of his salary at the time of termination,
o in the eighth year, 200% of his salary at the time of termination,
o in the ninth year, 250% of his salary at the time of termination, and
o in the tenth year, 300% of his salary at the time of termination.
As of March 31, 2005, Mr. Walker is owed approximately $56,000 of unpaid salary
and is included as part of accounts payable and accrued expenses on the balance
sheet.
NOTE 11 - Discontinued Operations
On February 4, 2004, the Company sold certain assets of Kelly Color and
discontinued operating in the film processing segment. Accordingly, the Company
currently operates in one segment, the administrative services to independent
funeral homes, state master trusts and companies that own funeral homes or
cemeteries for pre-arrangement funeral and cemetery accounts.
For all periods presented in these condensed consolidated financial statements,
the operations of Kelly Color are reported as discontinued operations. At March
31, 2005, the discontinued assets and liabilities of Kelly Color are:
Assets -
Prepaid expenses and other current assets $ 1,631
Fixed assets 20,806
-------
Total assets $22,437
=======
Liabilities -
Accounts payable and accrued expenses $15,440
-------
Total liabilities $15,440
=======
The results of discontinued operations for the three months ended March 31, 2005
and 2004 are:
Three Months Ended
March 31,
-----------------------------
2005 2004
--------- --------
Revenues $ -- $ 47,267
Cost of revenues -- (80,847)
Operating expenses -- (21,776)
--------- --------
Net loss $ -- $(55,356)
========= ========
13
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
NOTE 12 - Economic Dependency
Major Customer
During each of the three months ended March 31, 2005 and 2004, the Company had
sales to three customers totaling $65,313, or 94%, and $45,851, or 91%, of the
Company's net revenues, respectively.
At March 31, 2005, $5,535, or 19%, of the Company's total accounts receivable
was due from one customer.
NOTE 13 - Reclassifications
Certain accounts in the prior period's financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year's financial statements. These reclassifications have no effect on
previously reported income.
NOTE 14 - Subsequent Events
On April 7, 2005, the Company entered into a purchase agreement to acquire 90%
of the issued and outstanding stock of Disability Access Consultants, Inc. a
California corporation ("DAC"), from its sole shareholder. The consideration for
the purchase is $2 million, consisting of $1 million in cash and a secured
promissory note in the amount of $1 million. The promissory note is to be
secured by a lien on substantially all of the Company's and DAC's assets. The
conditionas for closing on this acquisition have not yet been met and there can
be no assurance that the acquisition will be completed.
14
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
Item 2. Management's Discussion and Analysis or Plan of Operation.
Introductory Comment - Terminology
Throughout this Quarterly Report on Form 10-QSB, the terms the "we," "us," "our"
and "our company" refers to Walker Financial Corporation ("Walker") and, unless
the context indicates otherwise, includes, on a consolidated basis, Walker's
wholly-owned subsidiaries, National Preplanning, Inc. ("NPI"), American
DataSource, Inc. ("ADS") and Kelly Color, Inc. ("Kelly Color").
Introductory Comment - Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-QSB include
"forward-looking statements" within the meaning of such term in Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements involve known and unknown risks, uncertainties
and other factors which could cause actual financial or operating results,
performances or achievements expressed or implied by such forward-looking
statements not to occur or be realized. Such forward-looking statements
generally are based on our best estimates of future results, performances or
achievements, predicated upon current conditions and the most recent results of
the companies involved and their respective industries. Forward-looking
statements may be identified by the use of forward-looking terminology such as
"may," "will," "could," "should," "project," "expect," "believe," "estimate,"
"anticipate," "intend," "continue," "potential," "opportunity" or similar terms,
variations of those terms or the negative of those terms or other variations of
those terms or comparable words or expressions. Potential risks and
uncertainties include, among other things, such factors as:
o the success of our business strategies and future plans of operations,
o general economic conditions in the United States and elsewhere, as well as
the economic conditions affecting the industries in which we operate,
o changes in the nature and enforcement of laws and regulations affecting
our products, services, customers, suppliers and sales agents,
o the rate of decline in sales by our Kelly Color subsidiary due to the
rising use of digital cameras,
o the competitive environments within the funeral home administrative
services, pre-arranged death care services and photographic development
industries,
o our ability to raise additional capital, if and as needed,
o the cost-effectiveness of our product and service development activities,
o political and regulatory matters affecting the industries in which we
operate,
o our ability to combine our various operations so that they may work
together and grow successfully,
o the market acceptance, revenues and profitability of our current and
future products and services,
o the extent that our sales network and marketing programs achieve
satisfactory response rates,
o our ability to acquire additional companies operating the death care
financial services industry and ability to successfully integrate such
acquirees, if any, into our operations, and
o the other risks detailed in this Quarterly Report on Form 10-QSB and, from
time to time, in our other filings with the Securities and Exchange
Commission.
Readers are urged to carefully review and consider the various disclosures made
by us in this Quarterly Report on Form 10-QSB, our Annual Report on Form 10-KSB
and our other filings with the SEC. These reports attempt to advise interested
parties of the risks and factors that may affect our business, financial
condition and results of operations and prospects. The forward-looking
statements made in this Form 10-QSB speak only as of the date hereof and we
disclaim any obligation to provide updates, revisions or amendments to any
forward-looking statements to reflect changes in our expectations or future
events.
15
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
Financial Condition and Liquidity
We had negative working capital of $1,104,435 at March 31, 2005, compared to
working capital of $8,760 at March 31, 2004. A company's working capital is the
amount by which its current assets exceed its current liabilities. A working
capital deficiency or negative working capital results when the company's
current liabilities exceed its current assets. The decrease in our working
capital was a result of our net loss for the three months ended March 31, 2005,
which has resulted in a significant reduction in our cash and cash equivalents
in addition to the line of credit secured by our Kelly Color building which
becomes due in June of this year and increased accrued salary expenses and
related benefits.
Net cash used in operating activities was $209,348 for the three months ended
March 31, 2005, compared to net cash used in operating activities of $307,114
for the three months ended March 31, 2004. The decrease is primarily attributed
to the cost cutting programs and downsizing we initiated during our year ended
December 31, 2004. ADS lost its significant customer during the quarter ended
September 30, 2003.
There was no net cash used in investing activities for each of the three months
ended March 31, 2005 and 2004.
Net cash provided by financing activities was $135,880 for the three months
ended March 31, 2005, as compared with $5,030 for the three months ended March
31, 2004. This resulted from proceeds of $201,000 from a sale of convertible
bridge notes, reduced by fees paid in connection with the sale of such bridge
notes and a partial repayment of $10,000 owed to an officer-stockholder. As of
March 31, 2005, $40,000 was owed to this officer-stockholder. Net financing used
by the line of credit for the three months ended March 31, 2005 was $6,370
compared to net cash provided by $15,029 for the three months ended March 31,
2004.
As a result of these activities, our cash and cash equivalents decreased to
$5,860 as of March 31, 2005, compared to cash and cash equivalents of $ 277,731
at March 31, 2004.
We have filed a registration statement under the Securities Act of 1933 with
respect to the resale by the holders of certain of our outstanding common stock
and warrants. The shares of our common stock subject to the pending registration
statement include (a) 4,436,890 shares issued in settlement of 10% Notes in the
principal amount of $795,000 and accrued interest totaling $185,203, (b) one
million shares sold for cash consideration of $200,000, (c) 200,000 shares
issuable upon exercise of warrants we issued in connection with a $150,000 loan
we assumed in connection with our acqusition of NPI 200_, at an exercise price
of $0.15 per share, (d) 724,063 shares issuable upon exercise of warrants we
issued to a consultants in 2003 and 2004, at an exercise price of $0.28 per
share, (e) 31,463 shares issuable upon exercise of warrants issued to a
consultant in we assumed in connection with our acqusition of NPI 200_, at an
exercise price of $0.35 per share, and (f) 39,380 shares issuable upon exercise
of warrants we assumed in connection with our acquisition of NPI in March 2002,
at exercise prices ranging from $4.20 to $7.23 per share. We anticipate filing
another registration statement with respect to the 20 million shares of our
common stock issuable to Fusion Capital under our common stock purchase
agreement with Fusion Capital. We intend to utilize the proceeds from the sale
to Fusion Capital of shares of our common stock to satisfy a portion of our
outstanding debt and for working capital purposes. No assurance can be given
that either of such registration statements will be declared effective. We also
intend to seek to raise additional capital to fund any future acquisitions. .
Plan of Operations
We create, provide and market death care financial service products, currently
focusing on pre-arrangement and pre-need products. Pre-arrangement and pre-need
products allow individuals to secure the funding for their future funerals prior
to their death and, in some incidences, the goods, materials and services
required in connection with such funerals. For pre-need funding products, we act
as agent in the sale of life insurance policies in amounts ranging from $3,000
to $15,000. The proceeds of each of these insurance policies are used for the
payment of the policy holder's funeral costs. An individual additionally can
freeze or guarantee the price of their future funeral by pre-arranging their
funeral. This process entails an individual choosing, prior to their death, the
type of interment process they desire (burial or cremation), visitation and
religious services at the funeral parlor or elsewhere and the desired type of
caskets and other goods, materials and services to be utilized in connection
with the funeral of the policy holder.
16
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
We have established a work-site and affinity marketing strategy that
contemplates positioning the pre-arrangement of death care as a voluntary or
contributory benefit for corporations, unions, and affinity groups to offer
their employees or members. In this regard, we seek to market pre-need funding
products and the ability of individuals to take this funding and use it to
purchase a pre-arrangement at a funeral homes by introducing these products to
individuals as a benefit of their employment or union membership similar to the
way they are introduced to health insurance, life insurance, dental insurance
and legal plans. The funding products that we sell are called pre-need insurance
policies. These insurance policies are similar to a fixed-pay whole-life
insurance policy with an inflation rider. The policy value grows over time,
which acts as a hedge against inflation and rising funeral prices. The policy
can be assigned to a funeral home when a pre-arrangement contract is executed.
The funeral home uses the proceeds of the policy to cover the costs of the
funeral contracted for. If a prearrangement is not made, the policy proceeds can
be used by the descendant's beneficiaries to cover the costs of their own
funerals.
Our NPI subsidiary has entered into various third party marketing agreements
which allow NPI to market our pre-need funding products to employees in the
workplace, individuals belonging to unions and to individuals belonging to
various associations. These marketing agreements are with larger and more
established insurance agencies which sell a variety of other insurance products
(e.g., health insurance, group life insurance and long term care insurance) to
their clients and allows NPI to market our products to their clients in return
for the sharing of commissions upon the sale of our products. These agreements
additionally allow NPI to keep its sales costs low until such time, if ever,
when we are capable of supporting a full-time sales force.
Our ADS subsidiary is involved in the administration of monies in trust that are
used for the payment of pre-arranged funerals upon the death of an individual.
These trust accounts are created by an individual entering into a
pre-arrangement contract with a funeral director. Instead of funding a
pre-arrangement with a pre-need insurance policy, some funeral directors suggest
that an individual place funds into trust. That trust account is professionally
money managed by unaffiliated third party's and the account is assigned to the
funeral home, similar to the pre-need insurance policy, and used by the funeral
director to cover the funeral costs of that individual's funeral upon their
death. ADS provides accounting and administrative functions in reporting
annually on the funds in each trust account, in addition to the administration
of the funds upon an individual's death.
In addition to the funeral related products we are currently marketing, we are
seeking to enlarge our product line by adding other employee benefit products
and services to market within the workplace that benefit the baby boomer and
senior populations. Products may include other insurance-related products, such
as disability insurance, long term care legal plans and other voluntary
benefits. We may seek to acquire agencies and companies that currently market
these other products.
We entered the death care pre-arrangement business as a result of its
acquisitions of NPI and ADS in March 2002. Through our Kelly Color subsidiary,
we acted as a film processor for professional photographers, our historical
business since incorporation in 1967. We discontinued the operations of Kelly
Color in February 2004.
NPI anticipates generating revenues from the sale of pre-need and final expense
insurance policies and earning insurance commissions from the sale of such
insurance products. The insurance commissions are to be paid by the insurance
companies which create and issue these policies. ADS earns administrative fees
on the administration of pre-need funds in trust which are paid by the trust.
NPI is the subsidiary from which we plan on achieving much of our growth. NPI
has entered into various strategic relationships and selling agreements which
will allow it to market its products to a number of individuals. Although NPI's
agreements allow it to market its products to over 3 million individuals, the
timing of when the marketing occurs is subject to the decisions of both our
strategic partners and the ultimate client groups. As a result, NPI's marketing
efforts have not commenced even though agreements have been executed as
discussed. NPI has recently been advised that one of its strategic partners will
commence marketing its products to a 15,000 member union in May 2005.
Additionally, NPI has been informed that another partner will commence the
marketing of NPI's products in May 2005.
Most of the marketing that currently is planned for NPI's products are marketing
that directs potential consumers to our enrollment web-site, as well as our
partner's web enrollment site. Although the internet has seen a significant
level of growth in use for the sale of various products, the use of the internet
for the sale of voluntary benefit products is relatively new. We will closely
monitor the response rate to our enrollment and marketing strategy.
NPI only has generated minimal revenues from its worksite marketing efforts to
date and there can be no assurance that NPI will ever generate any substantial
revenues from such efforts. We may decide in the future to revise NPI's
marketing strategy to a more common approach, such as utilizing print, radio and
television advertising directed at individuals outside of the worksite and
affinity marketing arenas.
17
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
NPI originally sought to acquire direct third party marketers of pre-arranged
death care that marketed pre-arranged death care services primarily by direct
mail, as well as operating the pre-arrangement office in many funeral home
locations. We have altered our strategic plans to focus on potential
acquisitions in the employee benefit and work-site marketing areas which allow
for the cross-selling of our products, in addition to other businesses which
market products and services which benefit the baby boomer and senior population
segments.
ADS is currently seeking to increase the amount of pre-need trust monies it
currently administrates. Currently, ADS administers approximately $40 million in
trust funds. In September 2003, ADS lost a significant source of revenues when
our biggest client, Service Corporation International, the largest funeral home
and cemetery operator in the country, removed approximately $70 million of trust
assets that ADS administrated and sought administration of such assets overseas.
SCI removed all trust assets under administration from a variety of outside
vendors such as ADS. As a result, ADS has increased its efforts to administer
trust funds held by various state funeral association trusts, establish and
market master trusts to the independent funeral home community and to acquire
existing trust administration companies. Although not many trust administration
companies have been offered for sale, through our ADS subsidiary, we have had
preliminary discussions with a possible acquisition candidate and will revisit
these discussions in early 2006.
ADS recently entered into a marketing agreement with Parkway Advisors, L.P.,
pursuant to which Parkway has agreed to market ADS's trust services to their
existing and potential clients. Parkway would share in fees generated by ADS to
clients that were identified to us by Parkway. We do not anticipate generating
any revenue from our agreement with Parkway, if ever, prior to the third or
fourth quarters of 2005.
There can be no assurance that we will achieve successful and profitable results
from our distribution and marketing efforts or that we will be able to complete
acquisitions within the work-site marketing and employee benefit sectors.
We intend any acquisitions to be accomplished through issuances of stock, debt
and cash, or a combination of such forms of consideration. Accordingly, any
future merger or acquisition may have a dilutive effect on our stockholders as
of the time of such mergers and acquisitions. Additionally, our ability to
accomplish any future acquisitions may depend on our cash position, our ability
to raise capital, the stock price of our common stock, and our ability to
service any debt we may incur.
We believe that our operating results may fluctuate greatly quarter to quarter
due to several factors, including the success of our merger and acquisition
strategy and the impact of any increases in our results of operations as we
pursue new business in the death care services industry.
There also can be no assurance that we will be successful in consummating any of
our plans as discussed in Note 2 to the unaudited consolidated financial
statements included elsewhere in this Annual Report on Form 10-KSB. To the
extent that we are unsuccessful in our plans to increase our cash position, we
may find it necessary to further curtail some of our operations and possible
future acquisitions. These matters raise substantial doubt about our ability to
continue as a going concern. However, such financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of the liabilities in the normal course of business. Such
financial statements do not include any adjustments relating to the recovery of
assets or the classification of liabilities that might be necessary should we be
unable to continue as a going concern.
Results of Operations
Net revenues for the three months ended March 31, 2005 were approximately
$69,000, all of which was generated by ADS, as compared to $50,000 for the three
months ended March 31, 2004, which also was generated by ADS. Although NPI has
entered into several strategic relationships which allows for the marketing of
its products, the marketing of NPI's products will not commence until the third
and fourth quarters of 2005. No assurance can be given that such marketing
arrangements will generate any revenue to the Company. ADS has begun to recover
from the lost of its former largest client, which had brought all of its trust
assets that were administered by third parties in-house.
18
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
(continued)
Operating expenses for the three months ended March 31, 2005 were approximately
$619,000, of which $219,000 was generated by NPI, $29,000 was generated by
Walker, and $108,000 was generated by ADS. Additionally, there were expenses
related to the issuance of shares to consultants in the amount of $105,000 and
the amortization of deferred compensation of $158,000. Operating expenses for
the three months ended March 31, 2004 were $374,000, of which $198,000 was
generated by NPI, $31,000 was generated by Walker and $145,000 was generated by
ADS. The operating loss from continuing operations for the three months ended
March 31, 2005 was $1,677,000, of which $272,000 was incurred by NPI, $29,000
was incurred by Walker and $39,000 was incurred by ADS, with the remainder
related to expenses incurred in connection with the issuance of shares of our
common stock to consultants in the amount of $105,000, expense relating to the
write-down of deferred financing costs of $126,000 on the settlement of our 10%
Senior Subordinated Secured Promissory Notes in the aggregate principal amount
of $795,000 and accrued interest of $185,000 in exchange for 2,936,890 shares of
our common stock and a debt conversion charge of $933,000, the amortization of
deferred compensation of $158,000 and the accretion of the debt discount of
$15,000. The loss from continuing operations for the three months ended March
31, 2004 was $351,000, of which $116,000 was incurred by NPI, $92,000 was
incurred by Walker and $143,000 was incurred by ADS. Although NPI has yet to
generate any meaningful revenues the Company continues to incur losses relating
to increased marketing, sales and infrastructure technology development in
anticipation of potential sales to commence in the third and fourth quarters of
2005, as well as costs incurred related to potential acquisitions.
Interest expense for the three months ended March 31, 2005 was approximately
$194,000, as compared to interest expense for the three months ended March 31,
2004 of $27,000. Interest expense is derived by the costs of borrowing funds and
the amortization of debt discounts. Included in interest expense for the three
months ended March 31, 2005, is $126,000 relating to the write-down of deferred
offering costs relating to the settlement of 10% Notes in the aggregate
principal amount of $795,000 and $15,000 relating to the accretion of debt
discount.
As a result of the foregoing, we incurred a net loss of $1,677,451 for the three
months ended March 31, 2005, or $0.13 per share, as compared to a net loss of
$406,130 for the three months ended March 31, 2004, or $0.05 per share.
Item 3. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive and financial
officer, to allow timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
as ours are designed to do, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As of March 31, 2005, an evaluation was performed under the supervision and with
the participation of our management, including our chief executive and financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon that evaluation, our chief executive and
financial officer concluded that our disclosure controls and procedures were
effective. Except as discussed in the following paragraph, subsequent to the
date of this evaluation, there have been no significant changes in our internal
controls or in other factors that could significantly affect these controls.
19
During November 2004, our independent auditors, Marcum & Kliegman LLP, advised
us that the auditors had identified a deficiency in internal controls, which was
designated a "material weakness." The material weakness indicated that there is
inadequate structure within our accounting operations. We have no central
corporate accounting department. Each subsidiary independently maintains its own
books and records and all disbursements are done at the subsidiary level. This
decentralizes the accounting function and limits the effectiveness of the
internal control procedures to detect potential misstatements and fraudulent
accounting and financial reporting. The subsidiary accounting departments do not
have the sophistication to critically evaluate and implement new accounting
pronouncements, such stock based transactions for options, warrants and common
stock at times are recorded improperly and require additional procedures and
review and audit adjustments to be made by our auditors. We believe this
material weakness resulted from continued cost cutting efforts and a failure to
generate cash flows from operations, which resulted in the termination of
employees during our fiscal years ended December 31, 2004 and 2003. We have
implemented some procedures to help minimize the risks associated with this
material weakness, including using an independent accountant/bookkeeper to
review, compile and consolidate our financial statements on a quarterly and
annual basis. Additionally, we expect to hire a chief financial officer with
public company experience within the next twelve months and relieve our chief
executive officer of his current chief financial officer duties.
Changes in Internal Controls
Our certifying officer confirms that we are currently developing procedures to
help minimize the risks associated with the material weakness identified by our
independent auditors and discussed in the immediately preceding section of this
Item 3. We began using an independent accountant to review, compile and
consolidate our financial statements on a quarterly and annual basis. We will
additionally be hiring an independent accountant, on a going forward basis, to
evaluate and implement new accounting pronouncements, evaluate and properly
record equity issuance related transactions for options, warrants and common
stock. In addition, we expect to hire a chief financial officer with public
company experience within the next twelve months and relieve our chief executive
officer of his current chief financial officer duties.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is hereby made to Item 3 of our Annual Report on Form 10-KSB, for the
fiscal year ended December 31, 2004, filed with the Securities and Exchange
Commission on April 15 2005 (Commission File No.: 0-5418), and to the references
made in such Item, for a discussion of all material pending legal proceedings to
which we or any of our subsidiaries are parties.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 5, 2005, we issued a total of 2,936,890 shares of our common stock to
the holders of our outstanding 10% Senior Secured Convertible Promissory Notes
in the aggregate principal amount of $795,000 in exchange for such holders
waiving substantially all of their rights under their respective 10% Promissory
Notes, including their right to payment of principal and interest due under
their 10% Promissory Notes. The accrued interest due under such 10% notes
totaled approximately $65,985. The 10% Promissory Notes were exchanged for
shares of our common stock at the rates of one share for each (a) $.30 of
principal so exchanged, and (b) $ .23 of accrued interest so exchanged. In
connection with the issuance of these 2,936,890 shares, we agreed to (x) use our
best efforts to expeditiously register for resale the shares that such holders
received and (y) issue additional shares to such holders in the event that we
issue shares to certain third parties for consideration less than $.30 at any
time prior to December 4, 2006. We believe that the issuance of said 2,936,891
shares was exempt from the registration requirements of the Securities Act
pursuant to the provisions of Sections 3(a)(9) and 4(2) of the Securities Act.
On February 10, 2005, we sold and issued an aggregate of $375,000 of 10%
Convertible Promissory Notes and three-year warrants to purchase 93,750 shares
of our common stock to a total of twelve accredited investors in a transaction
complying with the requirements of Regulation D. Each of these notes are due on
November 5, 2005 and bear interest at the rate of 10% per annum, payable at
maturity. The notes may be prepaid, at our sole discretion, in whole or in part,
at any time upon notice to the holders of the notes. The notes are further
subject to mandatory re-payment upon the occurrence of specified events and
after the giving of appropriate notice to the holders. Each holder of a note has
the right, exercisable in the holders' sole discretion, to convert all or any
portion of the principal amount standing under the holder's note and all accrued
and unpaid interest on such principal amount being converted into shares of our
common stock at a conversion price of $0.71 per share. The exercise price of the
warrants is $0.71 per share. We believe that the issuance of such common stock
and warrants was exempt from the registration requirements of the Securities Act
pursuant to the provisions of Section 4(2) of the Securities Act.
On January 5, 2005, we issued 794,702 shares of our common stock to Fusion
Capital as a commitment fee for entering into our common stock purchase
agreement with Fusion Capital. We have valued these shares at $476,821, or $0.60
per share, and has been recorded as deferred compensation. The deferred charges
will be amortized over the life of the agreement. We believe that the issuance
of such common stock was exempt from the registration requirements of the
Securities Act pursuant to the provisions of Section ___ of the Securities Act.
On January 15, 2005, we issued 150,000 shares of our common stock to a
consultant as a settlement in connection with the terminating of our agreement
with the consultant. We have valued these shares at $105,000, or $0.70 per
share. We believe that the issuance of such common stock was exempt from the
registration requirements of the Securities Act pursuant to the provisions of
Section ___ of the Securities Act.
21
Effective February 10, 2005, in connection with the November 2004 and February
2005 sale and issuance of 10% convertible promissory notes in the aggregate
principal amount of $375,000, we issued to the purchasers of such notes a total
of 93,750 warrants to purchase shares of our common stock at an exercise price
of $0.71 per share. The warrants will expire on February 10, 2008. We have
estimated the fair value of these warrants at $25,800 using the Black-Scholes
option pricing model and has been recorded as a deferred debt discount which
will accrete to interest expense over the life of the promissory notes. We
believe that the issuance of such warrants was exempt from the registration
requirements of the Securities Act.
On February 10, 2005, we committed to issuing to J.P Turner & Co. a total of
187,500 warrants to purchase shares of our common stock at an exercise price of
$0.15 per share as a finder's fee in connection with the offer and sale of our
10% convertible promissory notes in the aggregate principal amount of $375,000.
The warrants will expire on February 10, 2008. We have estimated the fair value
of the warrants at $57,600 using the Black-Scholes option pricing model. The
cost has been capitalized as deferred financing fees and will be amortized over
the life of the debt, which is twelve months. We believe that the issuance of
such warrants will be exempt from the registration requirements of the
Securities Act.
Item 3. Defaults on Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Set forth below is a list of the exhibits to this Quarterly Report on Form
10-QSB.
Exhibit
Number Description
- ------ -----------
10.1 Form of 10% Convertible Senior Subordinated Promissory Notes
10.2 Form of warrant certificate evidencing warrants issued to purchasers of
the 10% Convertible Senior Subordinated Promissory Notes
10.3 Warrant certificate evidencing 187,500 warrants registered in the
name of J.P Turner & Co. issued in connection with the sale of the
10% Convertible Senior Subordinated Promissory Notes
31.1 Certification pursuant to Exchange Act Rule 13a-14(a) of Mitchell S.
Segal in his capacity as chief executive officer and chief financial
officer of the registrant.
32.1 Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of
2002 of Mitchell S. Segal in his capacity as chief executive officer
and chief financial officer of the registrant.
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 25, 2005 Walker Financial Corporation
By: /s/ Mitchell S. Segal
-------------------------------------
Mitchell S. Segal, President
22
Walker Financial Corporation
Quarterly Report on Form 10-QSB
Quarter Ended March 31, 2005
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.1 Form of 10% Convertible Senior Subordinated Promissory Notes
10.2 Form of warrant certificate evidencing warrants issued to purchasers of
the 10% Convertible Senior Subordinated Promissory Notes
10.3 Warrant certificate evidencing 187,500 warrants registered in the
name of J.P Turner & Co. issued in connection with the sale of the
10% Convertible Senior Subordinated Promissory Notes
31.1 Certification pursuant to Exchange Act Rule 13a-14(a) of Mitchell S.
Segal in his capacity as chief executive officer and chief financial
officer of the registrant.
32.1 Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of
2002 of Mitchell S. Segal in his capacity as chief executive officer
and chief financial officer of the registrant.