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: September 30, 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 [13,687,220]
shares of the registrant's common stock, par value $.10 per share, outstanding
as of October 24, 2005.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
Walker Financial Corporation
Form 10-QSB
Quarter Ended September 30, 2005
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of September 30, 2005............... 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2005 and 2004..................... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2005 and 2004............................... 5
Notes to Condensed Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis or Plan of Operations........... 14
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
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2005
(Unaudited)
ASSETS
------
Current assets -
Cash $ 98,294
Accounts receivable, net 28,426
Prepaid expenses and other current assets 1,499
-----------
Total current assets 128,219
-----------
Deferred financing costs, net 35,540
Property and equipment, net 190,856
-----------
Total assets $ 354,615
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities -
Line of credit, bank $ 147,704
Accounts payable and accrued expenses 472,531
Convertible bridge notes payable,
net of debt discount of $46,825 703,175
Notes payable 205,000
10% Senior subordinated secured convertible promissory notes 50,000
Due to officer-stockholder 36,450
Accrued interest 66,991
Discontinued liabilities 15,440
-----------
Total current liabilities 1,697,291
-----------
Stockholders' deficiency -
Common stock, par value $.10 per share, 100,000,000
authorized, 13,687,220 shares issued and outstanding 1,368,722
Additional paid-in capital 6,298,476
Deferred offering and compensation costs (494,321)
Accumulated deficit (8,515,553)
-----------
Total stockholders' deficiency (1,342,676)
-----------
Total liabilities and stockholders' deficiency $ 354,615
===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net revenues $ 85,490 $ 55,586 $ 242,583 $ 156,377
------------ ------------ ------------ ------------
Operating expenses
Compensation 155,485 191,913 483,184 567,399
Professional fees 26,102 16,813 175,285 63,007
Consulting fees 54,000 15,000 396,100 45,000
Depreciation 17,850 61,474 67,617 87,039
General and administrative 99,924 152,510 278,012 526,472
------------ ------------ ------------ ------------
Total Operating Expenses 353,361 437,710 1,400,198 1,288,917
------------ ------------ ------------ ------------
Operating loss (267,871) (382,124) (1,157,615) (1,132,540)
Debt conversion expense -- -- (933,793) --
Interest expense (48,617) (71,827) (311,569) (123,743)
------------ ------------ ------------ ------------
Loss from continuing operations (316,488) (453,951) (2,402,977) (1,256,283)
Loss from discontinued operations -- (508) -- (61,995)
------------ ------------ ------------ ------------
Net loss $ (316,488) $ (454,459) $ (2,402,977) $ (1,318,278)
============ ============ ============ ============
Net Loss per basic and diluted
common shares
Continuing operations ($0.02) ($0.06) ($0.18) ($0.16)
Discontinued operations -- ($0.00) -- ($0.01)
------------ ------------ ------------ ------------
Net loss per basic
and diluted common share $ ($0.02) ($0.06) ($0.18) ($0.17)
============ ============ ============ ============
Weighted average number of
common shares outstanding
basic and diluted 13,687,220 7,733,032 13,476,483 7,612,860
============ ============ ============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine
Months
Ended September 30,
---------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $(2,402,977) $(1,256,283)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 67,617 87,039
Compensatory element of stock issuances 105,000 106,200
Amortization of deferred compensation 262,500 --
Debt conversion expense 933,793 --
Write-down of assets 20,806 --
Amortization of deferred financing cost 214,461 55,918
Accretion of debt discount 31,375 51,793
Changes in operating assets and liabilities:
Accounts receivable, net (7,914) 3,123
Prepaid expenses and other current assets 4,201 3,496
Other assets 9,949 --
Accounts payable and accrued expenses 244,685 (14,916)
Accrued interest 65,744 66,618
----------- -----------
Net cash used in operating activities (450,760) (897,012)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (61,995)
----------- -----------
Change in -
Assets from discontinued operations -- 39,233
Liabilities from discontinued operations -- 5,970
----------- -----------
Net cash used in operating activities
of discontinued operations -- (16,792)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (803) (14,806)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit, bank 6,829 10,863
Advances from officer-stockholder 13,450 50,000
Repayment of advances from stockholder (27,000) --
Proceeds from sale of bridge notes 326,000 250,000
Fees paid in connection with debt acquisition (48,750) --
Proceeds from notes payable 100,000 --
Principal repayment of notes payable -- (19,652)
Proceeds from sale of common stock 100,000 150,000
----------- -----------
Net cash provided by financing activities 470,529 441,211
----------- -----------
Net increase (decrease) in cash and cash
equivalents 18,966 (487,399)
Cash and cash equivalents - beginning of period 79,328 587,626
----------- -----------
Cash and cash equivalents - end of period $ 98,294 $ 100,227
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ -- $ 2,257
=========== ===========
Income taxes $ -- $ --
=========== ===========
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 granted in connection
with sale of $375,000 bridge notes $ 28,500 $ --
=========== ===========
187,500 warrants granted to agent in connection
with sale of $375,000 bridge notes $ 57,600 $ --
=========== ===========
175,000 warrants granted in connection with
the sale of $125,000 of bridge notes $ 36,100 $ --
=========== ===========
17,500 warrants granted in connection with
the extension of $250,000 of bridge notes $ 3,600 $ --
=========== ===========
105,000 warrants granted in connection with
the sale of $125,000 of bridge notes $ -- $ 31,250
=========== ===========
70,000 warrants granted in connection with
the sale of $125,000 of bridge notes $ -- $ 35,000
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 2005 and
for all periods presented. The results of operations for the nine months ended
September 30, 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/A for the year ended
December 31, 2004 as amended on October 21, 2005.
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 nine months ended September 30, 2005, the Company incurred a
net loss of $2,402,977 and, at September 30, 2005, had a working capital
deficiency of $1,569,072, an accumulated deficit of $8,515,553 and a
stockholders' deficiency of $1,342,676.
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. Our ability to raise
capital may be affected by several factors including but not limited to our
default under a $ 50,000 10% Convertible Promissory Note and a lack of liquidity
of our common stock.
As discussed further in Note 8 to the financial statements, the Company has
entered into an agreement with Fusion Capital Fund II, LLC ("Fusion Capital")
that provides for the sale to Fusion Capital of $6,000,000 of common stock of
the Company. The agreement provides limitations on the percentage of stock
Fusion will hold at particular times and in no event may Fusion hold greater
than 9.9% of the outstanding common stock of the Company. Consequently, if
Fusion cannot sell the shares of the Company due to the lack of liquidity in the
common stock of the Company, the Company's ability to be able to obtain money
from Fusion Capital for acquisitions or to pay down the Company's current debt
may be hindered or limited. Additionally, the Company's ability to raise capital
outside of the Fusion transaction may be affected by minimal revenues, the
losses that we incur and stockholders deficiency. There can be no assurance that
the Company will be successful in any of its plans as discussed. 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 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
September 30, 2005
(Unaudited)
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.
Net Loss Per Share of Common Stock
Basic net loss 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 reflects the potential dilution that could occur if
securities or other instruments to issue common stock were exercised or
converted into common stock. Potentially dilutive securities of 2,294,418 and
2,506,045 at September 30, 2005 and 2004 are excluded from the computation of
diluted net loss per share as their inclusion would be anti-dilutive. A summary
of these potentially diluted securities are as follows:
September 30,
---------------------------
2005 2004
--------- ---------
Options 52,170 52,170
Warrants 1,643,656 1,169,906
Convertible debt 598,592 1,283,969
--------- ---------
2,294,418 2,506,045
========= =========
7
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Stock Based Compensation
Stock Options and Similar Equity Instruments
At September 30, 2005, the Company had an 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 the net loss, 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. No table has been disclosed to
illustrate the effect on the net loss and loss 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. The Company has granted
no employee options during the three and nine months ended September 30, 2005
and 2004.
New Accounting Pronouncements
On September 28, 2005, the FASB ratified the following consensus reached in EITF
Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with a
Beneficial Conversion Feature"): a) The issuance of convertible debt with a
beneficial conversion feature results in a basis difference in applying FASB
Statement of Financial Accounting Standards SFAS No. 109, Accounting for Income
Taxes. Recognition of such a feature effectively creates a debt instrument and a
separate equity instrument for book purposes, whereas the convertible debt is
treated entirely as a debt instrument for income tax purposes. b) The resulting
basis difference should be deemed a temporary difference because it will result
in a taxable amount when the recorded amount of the liability is recovered or
settled. c) Recognition of deferred taxes for the temporary difference should be
reported as an adjustment to additional paid-in capital. This consensus is
effective in the first interim or annual reporting period commencing after
December 15, 2005, with early application permitted. The effect of applying the
consensus should be accounted for retroactively to all debt instruments
containing a beneficial conversion feature that are subject to EITF Issue 00-27
, "Application of Issue No. 98-5 to Certain Convertible Debt Instruments" (and
thus is applicable to debt instruments converted or extinguished in prior
periods but which are still presented in the financial statements). The adoption
of this pronouncement is not expected to have a material impact on the Company's
financial statements.
In October 2004, the FASB ratified the consensus reached in EITF Issue No. 04-8,
"The Effect of Contingently Convertible Instruments on Diluted Earnings per
Share." The EITF reached a consensus that contingently convertible instruments,
such as contingently convertible debt, contingently convertible preferred stock,
and other such securities should be included in diluted earnings per share (if
dilutive) regardless of whether the market price trigger has been met. The
consensus became effective for reporting periods ending after December 15, 2004.
The adoption of this pronouncement did not have a material effect on the
Company's 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
September 30, 2005
(Unaudited)
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 2005 and,
as modified, requires monthly payments of $1,510 and a final payment of the
outstanding balance and all accrued interest due on July 3, 2006. There was
$147,700 outstanding under the Line of Credit as of September 30, 2005. The Line
of Credit is collateralized by a building located in North Carolina, which as of
September 30, 2005, has been fully depreciated.
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 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 (See Note 6). 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). On July 11, 2005, the Company sold and issued, without approval a 10%
note for $100,000 (see Note 6). On September 20, 2005, the Company sold and
issued, without approval a 10% bridge note for $125,000 (see Note 6)
9
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
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, 2005, the Company issued a total of 2,936,890 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 unamortized
deferred financing costs. The charge was included as interest expense in the
statement of operations. The Company has a remaining principal balance of
$50,000 due to the holders. Upon the effectiveness of the debt settlement, the
Company recorded a conversion charge of $933,793, 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 March 15, 2000, the Company issued a 6% promissory note for $150,000 In
August 2004, the note 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.
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 nine months ended September 30, 2005, the Company did
not make any payments under this note. As of September 30, 2005, the principal
balance due under this note was $105,000. The principal balance and accrued
interest is presented on the accompanying balance sheet as a current liability.
On July 11, 2005, the Company sold and issued a note payable in the aggregate
principal amount of $100,000. The maturity date of the note is November 30, 2005
and has a stated interest rate of 10% per annum. As of September 30, 2005, the
principal balance and accrued interest has been included on the accompanying
balance sheet as current liabilities.
Bridge Notes
On May 22, 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.
On August 4, 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.
On September 20, 2005 the Company entered into a Modification Agreement which
modified certain terms of the 6% Promissory Notes outstanding. Pursuant to this
Modification Agreement the maturity dates of the Promissory Notes dated May 22,
2004 and August 4, 2004 were extended to a maturity date of May 15, 2006.
Additionally 175,000 warrants that were previously issued carrying an exercise
price of $ .45 received a reduced exercise price of $ .30. Using the
Black-Scholes option pricing model an additional charge was not required for the
modification of the 175,000 previously issued warrants. The bridge notes have a
stated repayment plan as follows:
--------------------------------------------
Maturity Date Payment
--------------------------------------------
January 15, 2006 $ 30,000
February 15, 2006 40,000
March 15, 2006 50,000
April 15, 2006 60,000
May 15, 2006 70,000
--------
$250,000
========
--------------------------------------------
On September 20, 2005, the Company also granted to the note holder 17,500
warrants to purchase common stock at an exercise price of $0.30 per share as
consideration for the receipt of $125,000 (bridge note dated September 20,
2005), and the extension of the due date for $250,000 of bridge notes dated May
22, 2004 and August 4, 2004. The estimated fair value of the warrants using the
Black-Scholes option pricing model has nominal value.
In December 2004 and February 2005, the Company issued 10% convertible
promissory notes in the aggregate principal amount of $375,000 (the "Notes") and
granted 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.
10
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
In connection with the sale and issuance of the $375,000 of notes due November
5, 2005, the Company incurred fees of $48,750 and granted 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. The notes are convertible into common stock
of the Company at $0.71 per share.
On September 20, 2005, the Company sold a note payable for proceeds of $125,000;
the bridge notes have a stated interest rate of 10% per annum. In addition the
Company granted to the note holder 175,000 warrants to purchase common stock at
an exercise price of $0.30 per share The estimated fair value of the warrants is
$36,100 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
the debt, which is nine months. The bridge notes have a stated repayment plan as
follows:
--------------------------------------------
Maturity Date Payment
--------------------------------------------
January 15, 2006 $15,000
February 15, 2006 20,000
March 15, 2006 25,000
April 15, 2006 30,000
May 15, 2006 35,000
--------
$125,000
========
--------------------------------------------
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. During the nine
months ended September 30, 2005, the Company repaid $27,000 of the advances and
borrowed an additional $13,450. As of September 30, 2005, the total amount due
the officer-stockholder was $36,450.
NOTE 8 - Stockholders' Deficiency
In November 2004, the Company entered into a common stock purchase agreement
with 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 and compensation costs. The deferred offering costs will be amortized
to additional paid in capital over a 24-month period and the net cash proceeds
commencing on the effectiveness of the registration of such shares under the
Securities Act. As of November 7, 2005, the Company has not filed a registration
statement with respect to the shares of Company common stock issuable under the
Stock Purchase Agreement.
As discussed in Note 5, in January 2005, 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.
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 granted 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 (Note 6). 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.
On February 10, 2005, the Company granted 187,500 warrants to the private
placement agent (Note 6). 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.
On May 18, 2005, the Company issued 294,118 shares of common stock to an
institutional investor at $0.34 per share for consideration of $100,000.
On September 20, 2005, the Company granted 175,000 warrants to purchase common
stock at an exercise price of $0.30 per share in connection with the issuance of
$125,000 of bridge notes. The estimated fair value of the warrants is $36,100
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 the debt, which
is nine months.
On September 20, 2005, the Company granted to the note holder 17,500 warrants to
purchase common stock at an exercise price of $0.30 per share for the additional
consideration of $125,000 (bridge note dated September 20, 2005), and the
extension of the due date for $250,000 of bridge notes dated May 22, 2004 and
August 4, 2004, the estimated fair value of the warrants is $3,600 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 the extension, which is
nine months.
11
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
NOTE 9 - Consulting Agreements
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 30, 2004, the Company issued 500,000 and
300,000 shares of Company common stock to Phoenix and Vantage, respectively. As
such, the Company recorded deferred compensation of $336,000, which deferred
compensation will be amortized over the life of the agreements. The unamortized
portion of deferred compensation as of September 30, 2005, is $17,500.
On January 15, 2005, Company issued an additional 150,000 shares of Company's
common stock to Vantage as settlement for terminating its agreement with the
consultant. The shares were valued at $105,000 and the charge is included in the
accompanying statement of operations as consulting fees.
For the nine months ended September 30, 2005, the Company has taken a charge of
$262,500 for the amortization of the agreements which have been included in the
accompanying statement of operations as part of consulting fees.
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.
12
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September, 2005
(Unaudited)
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
September 30, 2005, the discontinued liabilities of Kelly Color are:
Liabilities -
Accounts payable and accrued expenses $ 15,440
========
The results of discontinued operations for the three and nine months ended
September 30, 2005 and 2004 are:
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
Revenues $ -- $ -- $ -- 47,269
Cost of revenues -- -- -- (80,847)
Operating expenses -- (508) -- (28,417)
-------- -------- -------- --------
Net loss $ -- $ (508) $ -- $(61,995)
======== ======== ======== ========
NOTE 12 - Economic Dependency
Major Customer
During each of the three months ended September 30, 2005 and 2004, the Company
had sales to three customers totaling $80,567, or 94%, and $47,870, or 86%, of
the Company's net revenues, respectively.
During each of the nine months ended September 30, 2005 and 2004, the Company
had sales to customers totaling $225,503, or 93%, and $133,091, or 85%, of the
Company's net revenues, respectively.
At September 30, 2005, $23,750, or 84%, of the Company's total accounts
receivable was due from two customers.
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 consolidated operating results.
13
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". 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 industry 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 competitive environments within the insurance, employee benefit,
mortgage services areas.
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 industry in which we
operate,
o the market acceptance, revenues and profitability of our current and
future products and services,
o the extent that our sales network and marketing programs achieve
satisfactory response rates,
o our ability to acquire additional companies operating the insurance and
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/A for the year ended December 31, 2004 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.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of those financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities at the date
of our financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments or
uncertainties, and potentially result in materially different results under
different assumptions and conditions. The Company believes that are our most
critical accounting policies includes: recognition of revenue transactions and
accounting for stock options and warrants.
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 predetermined percentage of the total assets included in the respective
pre-need funeral master trust fund.
Accounting for Stock-Based Compensation
We account for options granted to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and comply with the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense
is recognized based on the difference, if any, on the date of grant between the
estimated market value of the Company's stock and the amount an employee must
pay to acquire the stock. Compensation expense is recognized immediately for
past services and ratably for future services over the option-vesting period.
14
We account for the fair value of options and warrants for non-employees in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation," which
requires that compensation cost be measured after the grant date based on the
value of the award and is recognized over the service period, which is also the
vesting period. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. We will be required to
account for options and warrants for employees during the annual reporting
period beginning after December 15, 2005 as a result of the FASB's issuance of
SFAS No. 123R "Accounting For Stock Based Compensation."
The Black-Scholes option-pricing model is used to estimate the fair value of a
stock option. The model calculates the theoretical fair value based on a number
of assumptions utilizing, the stock price, strike price, expiration date,
risk-free rate of return, and the standard deviation (volatility) of the stock's
return. Stock based compensation valuations may differ significantly if the
Company used a different option model, based on the before mentioned assumptions
and the alternative model's formula driven calculations. The Company has not
relied on any other option pricing models for the issuance of its options or
warrants as the Black-Scholes option-pricing model is currently the model most
widely used for reporting companies. The uncertain assumptions estimating the
valuation of these equity transactions may have a material effect on our
financial performance during the reported periods.
Results of Operations
Three Months Ended September 30, 2005 compared to the same period in 2004
Net sales for the three months ended September 30, 2005 were $ 85,490 as
compared to $ 55,586 for the three months ended September 30, 2004, almost all
of which was which was generated by ADS. Although National Preplanning has
entered into several strategic relationships which allows for the marketing of
its products by third parties, the marketing of NPI's products has not resulted
in any material revenues being achieved. ADS seeks to increase its sales lost as
a result of losing the business from its largest client during the 3rd quarter
of 2003, Service Corporation International, which brought all of its trust
assets that were administered by third parties in-house and is close to
achieving net income. Although ADS has achieved positive cash flow it still is
incurring a net loss and seeks to increase its revenues to halt this loss.
Operating expenses for the three months ended September 30, 2005 were $ 353,361
of which $ 235,636 was generated by NPI, $ 29,166 was generated by Walker, and $
88,559 was generated by ADS. Operating expenses were composed of $ 155,485 of
compensation expense, $26,102 of professional fees, consulting fees of $ 54,000,
general and administrative expense of $ 99,924 and depreciation of $17,850.
Operating expenses for the three months ended September 30, 2004 were $ 437,710
of which $ 284,368 was incurred by NPI, and $ 134,175 was incurred by ADS and
19,167 was incured by Walker.
The loss from continuing operations for the three months ended September 30,
2005 was $ 316,488 as compared to $ 453,951 for the three months ended September
30, 2004. The loss from continuing operation for the three months ended
September 30, 2005 was composed of a loss of $ 3,069 from ADS, a loss of $
284,253 from NPI, and a loss of $ 29,166 from Walker International Industries.
This compares with the loss incurred for the three months ended September 30,
2004 of $ 453,951 of which $ 134,000 was incurred by ADS and $279,492 was
incurred by NPI and $ 40,459 was attributable to Walker. Although NPI has yet to
generate any meaningful revenues the Company continues to incur losses relating
to its infrastructure costs, administrative costs and costs incurred related to
potential acquisitions.
Interest expense for the three months ended September 30, 2005 was $48,617 as
compared to interest expense for the three months ended September 30, 2004 of $
71,827. Interest expense is derived by the costs of borrowing funds. The
decrease is due to the savings of interest expense due to the conversion of $
795,000 10% Convertible Promissory Notes to equity.
As a result of the foregoing, we incurred a net loss of $316,488 for the three
months ended September 30, 2005 or $.02 per share, compared to a net loss of
$454,459 for the three months ended September 30, 2004 or $.06 per share.
Nine Months Ended September 30, 2005 compared to the same period in 2004
Net sales for the nine months ended September 30, 2005 were $ 242,583 all of
which was generated by ADS. Net sales for the nine months ended September 30,
2004 were $ 156,377, almost all of which was generated by ADS. Although National
Preplanning has entered into several strategic relationships which allows for
the marketing of its products by third parties, the marketing of NPI's products
has not resulted in any material revenues being achieved. ADS seeks to increase
its sales lost as a result of losing the business from its largest client,
Service Corporation International, which brought all of its trust assets that
were administered by third parties in-house and is close to achieving net
income. Although ADS has achieved positive cash flow it still is still incurring
a net loss and seeks to increase its revenues to halt this loss.
Operating expenses for the nine months ended September 30, 2005 were $ 1,400,198
of which $ 1,016,558 was generated by NPI, $ 296,474 was generated by ADS and $
87,166 was generated by Walker International Industries. Operating expenses for
the nine months ended September 30, 2004 were $ 1,288,917 of which $ 789,000 was
generated by NPI, $ 81,917 was generated by Walker and $ 418,000 was generated
by ADS. Of the expenses that were incurred for the nine months ended September
30, 2005, $ 483,184 was compensation expense, $175,285 were professional fees, $
396,100 were related to consulting expenses, $ 278,012 were general and
administrative expenses and $67,617 was depreciation expense.
15
Interest expense for the nine months ended September 30, 2005 was $ 311,569 as
compared to interest expense for the nine months ended September 30, 2004 of $
123,743. The increase from the prior year relates to our interest expense
related to the equity conversion of our convertible debt and interest related to
equity.
As a result of the foregoing, we incurred a net loss of $ 2,402,977 for the nine
months ended September 30, 2005 or $ (.18 )per share as compared to a net loss
of $ 1,318,278 for the nine months ended September 30, 2004 or $ (.17) per
share. Of the loss for the nine months ended September 30, 2005, a loss of $
2,261,931 can be attributed to NPI (of which $933,793 debt conversion charge), a
loss of $ 53,891 can be attributed to ADS and a loss of $ 87,155 can be
attributable to Walker International Industries as compared to the nine months
ended September 30, 2004 loss of $1,318,278 where a $849,430 loss can be
attributable to NPI, a loss of $ 143,484 can be attributable to Walker and a
loss of $ 263,369 can be attributable to ADS and $61,995 is attributable for the
discontinuance of Kelly Color. Of the loss attributable to NPI for the nine
months ended September 30, 2005 $ 933,793 is attributable the debt conversion
expense related to the conversion of $ 745,000 10% Convertible Promissory Notes
and $ 311,569 is attributable to interest expense related to other borrowings.
Liquidity and Financial Resources
We have negative working capital of $1,569,072 at September 30, 2005 compared
to negative working capital of $1,858,265 at December 31, 2004. A working
capital deficiency or negative working capital results when the Company's
current liabilities exceeds its current assets. Our working capital deficiency
is principally the result of borrowings which are currently due or will become
due within the next 12 months.
Net cash used in operating activities was $ 450,760 for the nine months ended
September 30, 2005 compared to net cash used in operating activities of $
897,012 for the nine months ended September 30, 2004. The decrease is primarily
a result of our closing of the Kelly Color operations in addition to less
expenses incurred at our American DataSource unit due to decreased payroll and
operational expense, including lower rental costs and decreased payroll and
marketing expense in our National Preplanning subsidiary.
Net cash used in investing activities for the nine months ended September 30,
2005 was $ 803 as compared with $ 14,806 for the nine months ended September 30,
2004. During both nine month periods ending September 30, 2005 and September 30,
2004 respectively investing activities were limited to the purchase of property
and equipment.
Net cash provided by financing activities was $ 470,529 for the nine months
ended September 30, 2005 as compared with $441,211 for the nine months ended
September 30, 2004. During the nine months ended September 30, 2005 the Company
sold common stock of $ 100,000, bridge notes in the amount of $ 326,000 and a
note payable in the amount of $ 100,000. As a result of these activities, our
cash and cash equivalents positions were $ 98,294 at September 30, 2005 as
compared to $ 79,329 as of December 31, 2004.
In September 20, 2005, the Company entered into a Modification Agreement which
modified certain terms of Promissory Notes outstanding between the Company and a
lender ("Lender"). Pursuant to this Modification Agreement the maturity dates of
certain Promissory Notes dated May 22, 2004 and August 5, 2004 were extended to
a maturity date of May 15, 2006 with certain principal payments required to be
made by the 15th of the months of January-May, 2006. Additionally 175,000
warrants that were previously issued carrying an exercise price of $ .45
received a reduced exercise price of $ .30. In addition, another 17,500 warrants
to acquire the Company's common stock carrying an exercise price of $ .30 were
issued to the Lender.
The Company additionally entered into another 10% Promissory Note for $125,000,
with the Lender having a maturity date of May 15, 2006. Lender was issued
175,000 warrants carrying an exercise price of $ .30.
16
The Company has filed a registration statement registering the shares issued
upon the debt conversion in addition to certain warrants and options previously
issued by the Company. Upon its effectiveness, the Company plans on filing
another registration statement covering the Fusion Capital transaction (See Note
8 to the Financial Statements). The Company plans on using the Fusion Capital
equity line to repay outstanding indebtedness and for working capital of the
Company. The Company will additionally seek to raise capital for future
acquisitions. We intend to use the Fusion Capital equity line to repay
outstanding indebtedness and for working capital. Under the agreement, Fusion
Capital agreed to purchase up to $6.0 million of newly issued Walker Financial
common stock over a period of time up to twenty-four months commencing after the
date a registration statement with respect to the shares to be sold to Fusion
Capital is declared effective. The Fusion Transaction documents state that in no
event may Fusion hold greater than 9.9% of the outstanding common stock of the
Company. Consequently, if Fusion cannot sell our shares due to the lack of
liquidity in our common stock, our ability to be able to obtain money from
Fusion Capital for acquisitions or to pay down our current debt may be hindered
or limited. Additionally our ability to raise capital outside of the Fusion
transaction may be affected by our minimal revenues, the losses that we incur,
our stockholders equity. and our financial picture including our working capital
deficit. Potential capital sources may require us to pay off existing
indebtedness before providing any capital to the Company and the Company may be
unable to do so. Failure to have our current registration statement or the next
registration statement to be declared effective will prevent us from drawing on
the full amount of equity outlined in the agreement and at this point it is
impossible to quantify how much if any capital will be available to us. We are
currently in default with respect to approximately $ 155,000 in promissory
notes.
There can be no assurance that the Company will be successful in any of its
plans as discussed. 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 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.
Plan of Operations
We create, provide and market death care financial service products, currently
focusing on prearrangement or pre-need products. Prearrangement and preneed
products allow an individual to secure the funding for and in some instances the
goods and services for their future funerals prior to their death. For preneed
funding products we sell, as an agent for various life insurance companies which
underwrite the policies, life insurance policies in amounts from $ 3,000 to $
15,000 which upon an individual's death would be used for the payment of his or
her funeral costs.
We have established a worksite and affinity marketing strategy by positioning
the prearrangement of death care and other pre-need products 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 preneed funding
products and the ability of individuals to take this funding and use it to
purchase a prearrangement at 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 preneed or final
expense insurance policies. This insurance policy is similar to a fixed pay
whole life insurance policy with an inflation rider which acts to increase
annually the amount of the benefit that is paid to an individual. 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
prearrangement 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 descendants beneficiaries to
cover the costs of the descendants funeral.
Our subsidiary, National Preplanning has entered into various third party
marketing agreements which allow it to market the above mentioned funding
products to employees in the workplace, individuals belonging to unions and to
individuals belonging to various associations. These marketing agreements with
larger and more established insurance agencies which sell a variety of other
insurance products (i.e. health insurance. group life insurance, long term care
insurance, etc.) to their clients allow National Preplanning to market its
products to their clients in return for the sharing of commissions upon the sale
of these products. These agreements additionally allow National Preplanning to
keep its sales costs low until we start to generate more substantial revenues.
Our other subsidiary, American Datasource, Inc. is involved in the
administration of monies in trust that are used for the payment of prearranged
funerals upon the death of an individual. These trust accounts are created by an
individual entering into a prearrangement contract with a funeral director.
Instead of funding a prearrangement with a preneed insurance policy as discussed
above some funeral directors suggest that an individual place monies 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 preneed
insurance policy, and used by the funeral director to cover the funeral costs of
that individuals funeral upon their death. American DataSouce provides
accounting and administrative functions in reporting annually on the monies in
each trust account in addition to the administration of the monies upon an
individuals death.
In addition to the funeral related products we are currently marketing, the
Company is desirous of adding other employee benefit and insurance products and
services to market within as well as outside 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, reverse
mortgages and other voluntary benefits. The Company may seek to acquire agencies
and companies that currently market these other products.
The Company entered the marketing of funeral funding products through its merger
in March, 2002 with National Preplanning, Inc. and American DataSource, Inc. The
Company was previously engaged in non-digital photographic development
NPI has earned minimal insurance commissions from the sale of preneed and final
expense insurance policies to date. The insurance commissions are paid by the
insurance companies which create, underwrite and issue these policies. The
Company's other subsidiary, American DataSource, Inc., earns administrative fees
on the administration of preneed funds in trust which are paid by the trust.
17
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, the amount of marketing that occurs and the
communication that is delivered to these potential clients are all subject to
the decisions and control of both our strategic partners and the ultimate client
groups. As a result, NPI's has yet to generate minimal revenues from its
worksite marketing strategy and has only generated minimal revenue selling
pre-need policies out of funeral homes located in New Jersey.
Most of the marketing that is currently planned for National Preplanning's
products are marketing that directs potential consumers to the company's
enrollment website as well as its partner's web enrollment site. Although the
internet has seen a lot of growth in its use for the sale of various products on
various websites, the use of the internet and websites for the sale of voluntary
benefit products is relatively new. The Company will closely monitor the success
or lack thereof of its enrollment and marketing philosophy.
NPI has only generated minimal revenues from its worksite marketing efforts and
there can be no assurance that it will ever generate any substantial revenues
from its worksite marketing efforts. The Company may decide to revert its
National Preplanning marketing strategy to a more common approach such as print,
radio and television advertising directed at individuals outside of worksite and
affinity marketing
Whereas, NPI originally sought to acquire direct third party marketers of
pre-arranged death care which market pre-arranged death care services primarily
by direct mail, as well as run the pre-arrangement office in many funeral home
locations the Company has changed its focus on developing NPI's existing funeral
advisory and funding business and focusing on potential acquisitions in the
employee benefit, insurance, mortgage and worksite marketing areas which allow
for the cross selling of its products in addition to other businesses which
market products and services which benefit the baby boomer and senior population
segments. Our ability to accomplish any acquisitions is dependent upon our
ability to raise capital for said acquisitions. Our ability to raise capital may
be affected by several factors including but not limited to our default under a
$ 50,000 10% Convertible Promissory Note and a lack of liquidity of our common
stock. The Fusion Capital transaction, which provides the Company with a means
of potentially raising capital, may not be sufficient for the Company to
accomplish these potential acquisitions. The Fusion documents provide
limitations on the percentage of stock Fusion can hold at particular times and
in no event may Fusion hold greater than 9.9% of the outstanding common stock of
the Company. Consequently, if Fusion cannot sell our shares due to the lack of
liquidity in our common stock, our ability to be able to obtain money from
Fusion Capital for acquisitions or to pay down our current debt may be hindered
or limited. Additionally our ability to raise capital outside of the Fusion
transaction may be affected by our minimal revenues, the losses that we incur,
and our financial picture including our working capital deficit. Potential
capital sources may require us to pay off existing indebtedness before providing
any capital to the Company and the Company may be unable to do so.
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 amount of revenues from
its business when its largest client, Service Corporation International, the
largest funeral home and cemetery operator in the country removed approximately
$ 70,000,000 of trust assets that ADS administrated and placed said
administration 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.
ADS has entered into a marketing agreement with Parkway Advisors, L.P., whereby
Parkway will advisors will market ADS trust services to their existing and
potential clients. Parkway would share in fees generated by ADS's services. It
is the hope that this agreement will generate additional revenue for ADS
although to date no revenues have been generated from this relationship.
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 worksite 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 both in and outside of the death care services industry.
18
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 September 30, 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.
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.
19
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 $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 outstanding 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 4(2) 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 4(2) of the Securities Act.
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.
On May 18, 2005, the Company issued 294,118 shares of common stock to an
institutional investor at $0.34 per share for consideration of $100,000.
20
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
- ------- -----------
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.
21
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: November 14, 2005
Walker Financial Corporation
By: /s/ Mitchell S. Segal
----------------------------
Mitchell S. Segal, President
22
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
31.2 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.
32.2 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.
23