UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB/A
(Mark One)
|X| QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 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 August 3, 2005.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
Walker Financial Corporation
Quarterly Report on Form 10-QSB
Quarter Ended June 30, 2005
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet (Unaudited) as of June 30, 2005. 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended June 30, 2005 and 2004................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 2005 and 2004........................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)...... 6
Item 2. Management's Discussion and Analysis or Plan of Operation....... 16
Item 3. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ... 22
Item 3. Defaults Upon Senior Securities ............................... 22
Item 4. Submission of Matters to a Vote of Security Holders ........... 22
Item 5. Other Information ............................................. 23
Item 6. Exhibits ...................................................... 23
Signatures ............................................................. 24
Exhibit Index .......................................................... 25
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2005
(Unaudited)
ASSETS
Current assets -
Cash $ 18,832
Accounts receivable 27,480
Deferred financing costs, net 62,037
Prepaid expenses and other current assets 8,448
-----------
Total current assets 116,797
-----------
Property and equipment, net 207,904
-----------
Total assets $ 324,701
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities -
Line of credit, bank $ 133,280
Accounts payable and accrued expenses 426,123
Bridge notes payable, net of debt discount of $23,750 610,750
Note payable 105,000
10% Senior Subordinated Secured Convertible Promissory Notes 50,000
Due to officer-stockholder 50,500
Accrued interest 51,996
Discontinued liabilities 15,440
-----------
Total current liabilities 1,443,089
-----------
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 6,258,776
Deferred compensation (546,821)
Accumulated deficit (8,199,065)
-----------
Total stockholders' deficiency (1,118,388)
-----------
Total liabilities and stockholders' deficiency $ 324,701
===========
See notes to condensed consolidated financial statements
3
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------
2005 2004 2005 2004
------------ ------------ ---------- -----------
Net revenues $ 88,099 $ 50,791 $ 157,093 $ 100,791
------------ ------------ ----------- ----------
Operating expenses
Compensation 143,349 214,150 327,699 413,509
Professional Fees 105,221 31,735 149,183 52,295
Consulting Fees 72,100 12,500 342,100 30,000
Depreciation 24,733 43,890 49,767 88,681
General and Administrative 61,687 100,162 157,282 266,722
------------ ------------ ----------- ----------
Total Operating Expenses 407,090 402,437 1,026,031 851,207
------------ ------------ ----------- ----------
Operating loss (318,991) (351,646) (868,938) (750,416)
Debt conversion expense -- -- (933,793) --
Write off of assets (20,806) -- (20,806) --
Interest expense (69,241) (22,012) (262,952) (51,916)
------------ ------------ ----------- ---------
Loss from continuing operations (409,038) (373,658) (2,086,489) (802,332)
Loss from discontinued operations -- (6,131) -- (61,487)
------------ ------------ ----------- ---------
Net loss $ (409,038) $ (379,789) $(2,086,489) $(863,819)
=========== ============ =========== =========
Per share data - basic and diluted
Loss from continuing operations ($0.03) ($0.05) ($0.15) ($0.11)
Loss from discontinued operations -- ($0.00) -- ($0.01)
----------- ------------ ----------- ---------
Net loss per common share $ ($0.15) ($0.05) ($0.15) ($0.12)
============ ============ =========== =========
Weighted average number of
common shares outstanding 13,532,081 7,565,796 13,668,773 7,533,653
============ ============ =========== ==========
See notes to condensed consolidated financial statements
4
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six
Months
Ended June 30,
--------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: $ (305,651) $ (589,351)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
OF DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (61,487)
Change in - ----------- -----------
Assets from discontinued operations -- 38,725
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 -- (12,479)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit, bank (7,595) 15,144
Repayment of advances from stockholder (10,000) --
Advances from shareholder 10,500 --
Proceeds from sale of bridge notes 201,000 125,000
Fees paid in connection with debt acquisition (48,750) --
Principal repayment of notes payable -- (25,000)
Proceeds from sale of common stock 100,000 --
----------- -----------
Net cash provided by financing activities 245,155 115,144
----------- -----------
Net decrease in cash (60,496) (503,478)
Cash - beginning of period 79,328 587,626
----------- -----------
Cash - end of period $ 18,832 $ 84,148
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION Cash paid during the period for:
Interest -- 2,257
========== ===========
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 bridge notes $ 28,500 $ --
=========== ===========
187,500 warrants granted 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
June 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 June 30, 2005 and for
all periods presented. The results of operations for the six months ended June
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 for the year ended December 31,
2004 filed on April 15, 2005, 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 six months ended June 30, 2005, the Company incurred a net loss
of $2,086,489 and, at June 30, 2005, had a working capital deficiency of
$1,326,292, an accumulated deficit of $8,199,065 and a stockholders' deficiency
of $1,118,388.
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. During the six months ended June 30, 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). The
Company also issued 294,118 shares of common stock raising $100,000. The Company
believes that the defaults discussed in Notes 5 & 6 will not have an adverse
effect on the Company's ability to raise additional capital. 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.
As discussed in Note 8 to the financial statements, Fusion Capital Fund II, LLC
("Fusion Capital"), 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
June 30, 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 inter-company 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 2,101,918 and
2,357,925 at June 30, 2005 are excluded from the computation of diluted net loss
per share as their inclusion would be anti-dilutive. A summary of these
potentially dilutive securities are as follows: .
June 30,
-----------------------------
2005 2004
--------- ---------
Options 52,170 25,000
Warrants 1,451,156 1,079,904
Convertible debt 598,592 1,253,021
--------- ---------
2,101,918 2,357,925
========= =========
Stock Options and Similar Equity Instruments
At June 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 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 ans loss per share if the Company had
applied the fair value recognition provisions of SFAS 123 to stock based
employee compensation since no otions 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 six months ended June 30, 2005 and 2004.
7
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
New Accounting Pronouncements
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 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.
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 May 2005, the FASB issued FASB 154 - Accounting Changes and Error Corrections
- - a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement
replaces APB Opinion 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes the requirements
for the accounting for and reporting of a change in accounting principle. This
Statement applies to all voluntary changes in accounting principle. It also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions
should be followed. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
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") 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 $133,280 outstanding under the Line of Credit as of June 30, 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 (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)..
8
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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, 2005, the Company issued a total of 2,938,890 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 an interest expense in the
statement of operations for the six months ended March 31, 2005. The Company has
a remaining principal balance of $50,000 due to the holders of the note, and
incurred approximately $26,000 and $3,950, respectively of interest and penalty
interest included in the statements of operations for the six and three months
ended June 30, 2005. 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 six months ended June 30, 2005, the Company did not
make any payments under this note. As of June 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.
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. 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.
For the above two notes, the Company incurred $10,000 of additional debt
accretion interest expense for the three months ended June 30, 2005 that is
related to the debt discount.
9
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
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..
In connection with the sale and issuance of the $ 375,000 notes notes due
February 15, 2006 , 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 $ .71.
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. In
June of 2005, the officer-stockholder advanced the Company an additional $10,500
and as of June 30, 2005, the total amount due the officer-stockholder was
$50,500.
NOTE 8 - Stockholders' Deficiency
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.
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,$6,000,000 of the 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 and provided that the Company remains listed on a
national exchange and other restrictions, as defined. 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 (Note 9).
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. 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 also granted 187,500 warrants to the private
placement agent of the notes. 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 for
consideration of $100,000 ($0.34 per share).
10
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
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 Pheonix and Vantage. As such, the
Company recorded deferred compensation $210,000 and $126,000, respectively,
which deferred compensation will be amortized over the life of the agreements.
The unamortized portion of deferred compensation as of June 30, 2005 is
$17,500.00.
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, and the charge is included in
the accompanying statement of operations as consulting fees.
For the six months ended June 30, 2005, the Company has taken a charge of
incurred $105,000 for the amortization of the agreements which have been
included in the statement of operations as consulting fees.
Note 10 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. In addition to the
marketing of funeral advisory services and final expense insurance.
For all periods presented in these condensed consolidated financial statements,
the operations of Kelly Color are reported as discontinued operations. At June
30, 2005, the discontinued liabilities of Kelly Color are:
Liabilities -
Accounts payable and accrued expenses $15,440
-------
Total liabilities $15,440
=======
The results of discontinued operations for the three and six months ended June
30, 2005 and 2004 are:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ---------------------
2005 2004 2005 2004
--------- -------- --------- --------
Revenues $ -- $ -- $ -- 47,269
Cost of revenues -- -- -- (80,847)
Operating expenses -- (6,131) -- (27,909)
--------- -------- --------- --------
Net loss $ -- $ (6,131) $ -- $(61,487)
========= ======== ========= ========
11
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
NOTE 11 - Economic Dependency
Major Customer
During each of the three months ended June 30, 2005 and 2004, the Company had
sales to three customers totaling $82,344, or 93%, and $42,506, or 84%, of the
Company's net revenues, respectively.
During each of the six months ended June 30, 2005 and 2004, the Company had
sales to three customers totaling $144,937, or 92%, and $84,220, or 84%, of the
Company's net revenues, respectively.
At June 30, 2005, $4,000, or 15%, of the Company's total accounts receivable was
due from one customer.
NOTE 12 - 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.
12
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 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 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 in 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 withaccounting 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 transactions revenues and
accounting for stock options and warrants.
13
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.
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.
New Accounting Pronouncements
In May 2005, the FASB issued FASB 154 - Accounting Changes and Error Corrections
- - a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement
replaces APB Opinion 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes the requirements
for the accounting for and reporting of a change in accounting principle. This
Statement applies to all voluntary changes in accounting principle. It also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions
should be followed. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Results of Operations
Three Months Ended June 30, 2005 compared to the same period in 2004
Net revenues for the three months ended June 30, 2005 was $ 88,099 which was
generated by ADS as compared to $50,791 for the three months ended June 30,
2004, almost all of which was which was generated by ADS. The increase of
$37,308 is attributable to a monthly fee increase of $14,000 commencing in April
1, 2005 for one client. 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 replace revenues lost as a result of
losing the business from its largest client, Service Corporation International.
Although ADS has generated positive cash flows it is still incurring a net loss
and seeks to increase its revenue to halt this loss.
Operating expenses for the three months ended June 30, 2005 were $ 407,090 of
which $ 279,209 was generated by NPI, $27,557 was generated by Walker, and $
100,324 was generated by ADS. Operating expenses were composed of $ 143,349 of
compensation expense, $ 105,221 of professional fees, consulting fees of $
72,100 General and administrative expense of $ 61,687 and depreciation of $
24,733. Operating expenses for the three months ended June 30, 2004 were $ $
402,000 of which $ 232,000 was incurred by NPI, and $ 139,000 was incurred by
ADS.
The loss from continuing operations for the three months ended June 30, 2005 was
$ 409,038 as compared to $ 373,658 for the three months ended June 30, 2004. The
loss from continuing operation for the three months ended June 30, 2005 was
composed of a loss of $ 12,225 from ADS, a loss of $369,267 from NPI, and a loss
of $ 27,546 from Walker. This compares with the loss incurred for the three
months ended June 30, 2004 of which $ 89,000 was incurred by ADS, $ 255,000 was
incurred by NPI, and $36,000 incurred by 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 June 30, 2005 were $69,241 as
compared to interest expense for the three months ended June 30, 2004 of
$22,012. Interest expense is derived by the costs of borrowing funds.
14
As a result of the foregoing, we incurred a net loss of approximately $409,038
for the three months ended June 30, 2005 or $ .03 per share, compared to a net
loss of $373,789 for the three months ended June 30, 2004 or $ .05 per share.
Results of Operations
Six Months Ended June 30, 2005 compared to the same period on 2004
Net revenue for the six months ended June 30, 2005 were $ 157,093 all of which
was generated by ADS. Net revenues for the six months ended June 30, 2004 were
$100,791, almost all of which was generated by ADS. The increase of $56,302 is
attributable to fees for special projects performed for one client as well as a
monthly fee increase of $14,000 commencing in April 1, 2005 for the same client.
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 replace revenues lost as a result of losing the business from its
largest client, Service Corporation International. Although ADS has generated
positive cash flows it still has a net loss.
Operating expenses for the six months ended June 30, 2005 were $ 1,026,031 of
which $ 760,117 was generated by NPI, $ 207,915 was generated by ADS and $57,999
was generated by Walker International Industries. Operating expenses for the six
months ended June 30, 2004 were $ 851,207 of which $ 504,808 was generated by
NPI, $ 62,338 was generated by Walker and $ 284,061 was generated by ADS. Of the
loss incurred for the six months ended June 30, 2005, $327,699 was compensation
expense, $ 149,183 were professional fees, $ 342,100 were related to consulting
expenses and $157,282 were general and administrative expenses and approximately
$49,767 was depreciation expense.
Interest expense for the six months ended June 30, 2005 was $262,952 as compared
to interest expense for the six months ended June 30, 2004 of $ 51,916. The
increase from the prior year relates to our interest expense related to the
write off of deferred financing costs as a result of the conversion of debt to
equity, and interest related to the company's other outstanding debt.
As a result of the foregoing, we incurred a net loss of approximately $
2,086,489 for the six months ended June 30, 2005 or $ .15 per share as compared
to a net loss for the $ 802,332 for the six months ended June 30, 2004 or $ .12
per share. Of the loss for the six months ended June 30, 2005, a loss of $
1,977,679 can be attributed to NPI, a loss of $ 50,822 can be attributed to ADS
and a loss of $ approximately $ 57,988 can be attributable to Walker
International Industries as compared to the six months ended June 30, 2004 where
a $ 478,038 loss can be attributable to NPI, a loss of $ 123,809 can be
attributable to Walker and a loss of 184,072 can be attributable to ADS. Of the
loss attributable to NPI for the six months ended June 30, 2005 $933,793 is
attributable to a debt conversion charge and $ 263,000 is attributable to
interest expense.
Liquidity and Financial Resources
We had working capital deficiency of $ 1,326,292 at June 30, 2005 compared to
working capital deficiency of $1,858,265 at December 31, 2004. A working capital
deficiency results when the company's current liabilities exceeds its current
assets. Our working capital deficiency is the result of borrowings which are
currently due or will become due within the next 12 months in addition to an
increase in our accounts payable as the result of the accrual of management
compensation not paid.
Net cash used in operating activities was approximately $305,651 for the six
months ended June 30, 2005, compared to net cash used in operating activities of
$589,351 for the six months ended June 30, 2004. The decrease is primarily a
result of an increase in our net loss for the current six month period offset by
an increase in our accounts payable, debt conversion expense, and interest
expense related to deferred financing charges.
There was no net cash used in investing activities for the six months ended June
30, 2005, as compared with $12,479 of net cash used in investing activities for
the six months ended June 30, 2004. During the six months ended June 30, 2004,
investing activities were limited to the purchase of property and equipment.
Net cash provided by financing activities was approximately $245,155 for the six
months ended June 30, 2005 as compared with $115,144 for the six months ended
June 30, 2004. The increase is a result of proceeds received of approximately $
200,000 from the sale of bridge notes in addition to $100,000 of gross proceeds
received from the sale of common stock.
As a result of these activities, our cash and cash equivalents decreased to $
18,832 as of June 30, 2005 compared to a decrease to $ 84,148 at June 30, 2004.
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.
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
6 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.
15
Our ability to accomplish any acquisitions is dependent upon our ability to
raise capital for said acquisitions. Additionally the Company will need to raise
working capital to fund operations of $ 1,000,000 over the next 12 months. 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.
Plan of Operations
We create, provide and market death care financial service products, currently
focusing on prearrangement or pre-need products. Prearrangement and pre-need
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 pre-need
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 pre-need 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 pre-need 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 prearrangement is
not made the policy proceeds can be used by the descendants' beneficiaries to
cover the costs of the descendant's 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 prearrangement with a pre-need 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 parties
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 individuals funeral upon their death. ADS 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 individual's
death.
In addition to the funeral related products we are currently marketing, the
Company is desirous of 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, 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.
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. In this instance,
insurance agents that work for funeral homes in New Jersey sold pre-need
insurance policies to individuals to cover the costs of their future funerals.
These insurance agents were licensed with certain insurance carriers who issued
said policies through NPI's licensed arrangements with these carriers.
Consequently, NPI shared commissions earned from the sale of these policies. NPI
is not actively marketing in conjunction with these New Jersey insurance agents
and does not expect to receive any additional commission revenues from this
relationship.
16
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. Although not
many trust administration companies have been offered for sale, the Company,
through its ADS subsidiary has been in preliminary discussions with an
acquisition candidate and will revisit these discussions in early 2006.
ADS has recently entered into a marketing agreement with Parkway Advisors, L.P.,
whereby Parkway will advise and 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 in the
third and 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 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. Additionally, the Company plans on repaying
$305,000 of notes during the next 12 months. If the 10% Convertible Note holders
choose not to convert their notes to equity, the Company will have to repay an
additional $375,000.
There also can be no assurance that we will be successful in consummating any of
our plans. 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.
17
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 June 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. 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.
18
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 2,936,890
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
January 21, 2006 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.
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
Item 3. Defaults on Senior Securities.
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.
19
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). On
July 11, 2005, the Company sold and issued, without approval a 10% note (see
Note 14).
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 2,938,036 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 $approximately $26,000 and $3,950,
respectively of interest and penalty interest included in the statements of
operations for the six and three months ended June 30, 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. The $ 50,000 10% Senior Secured
Note that is still outstanding is due January, 2006.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
20
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: August 22, 2005 Walker Financial Corporation
By: /s/ Mitchell S. Segal
-------------------------------------
Mitchell S. Segal, President
22
EXHIBIT INDEX
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.
23