UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2004
[ ] 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 [ ]
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 9,511,510
shares of the registrant's common stock, par value $.10 per share, outstanding
as of November 17, 2004.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Walker Financial Corporation
Quarterly Report on Form 10-QSB
Quarter Ended September 30, 2004
Table of Contents
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet (Unaudited) as of
September 30, 2004.................................................... 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Nine Months Ended September 30, 2004 and 2003....... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 2004 and 2003................. 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation........ 15
Item 3. Controls and Procedures.......................................... 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 24
Item 3. Defaults Upon Senior Securities.................................. 24
Item 4. Submission of Matters to a Vote of Security Holders.............. 25
Item 5. Other Information................................................ 25
Item 6. Exhibits......................................................... 25
SIGNATURES................................................................ 26
EXHIBIT INDEX............................................................. 27
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 2004
ASSETS
Current assets -
Cash and cash equivalents................................. $ 100,227
Accounts receivable....................................... 23,264
Assets of discontinued operations......................... 33,518
Prepaid expenses and other current assets................. 8,256
-----------------
Total current assets................................... 165,265
Property and equipment, net................................. 284,264
Deferred financing costs.................................... 162,017
-----------------
Total assets........................................ $ 611,546
=================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities -
Accounts payable and accrued expenses..................... $ 79,771
Liabilities of discontinued operations.................... 24,522
Line of credit, bank...................................... 143,423
Notes payable and accrued interest........................ 113,723
Bridge notes and accrued interest, net of deferred debt
discount of $18,750...................................... 235,543
Advance from officer/stockholder.......................... 50,000
10% Senior Subordinated Secured Convertible Promissory
Notes Due 2006 and accrued interest...................... 911,618
-----------------
Total current liabilities.............................. 1,558,600
Stockholders' deficiency -
Common stock, par value $.10 per share; 100,000,000
authorized; 8,461,510 shares issued and outstanding...... 846,151
Additional paid-in capital................................ 3,713,430
Accumulated deficit....................................... (5,506,635)
-----------------
Total stockholders' deficiency......................... (947,054)
-----------------
Total liabilities and stockholders' deficiency...... $ 611,546
=================
See notes to 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,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales............. $ 55,586 $ 340,889 $ 156,377 $ 981,295
Operating expenses.... 437,710 440,159 1,288,917 1,354,937
------------ ------------ ------------ ------------
Operating loss...... (382,124) (99,270) (1,132,540) (373,642)
Interest (expense).... (71,827) (51,519) (123,743) (55,819)
------------ ------------ ------------ ------------
(Loss) from continuing
operations........... (453,951) (150,789) (1,256,283) (429,461)
(Loss) income from
discontinued
operations........... (508) 27,513 (61,995) (71,557)
------------ ------------ ------------ ------------
Net loss......... $ (454,459) $ (123,276) $(1,318,278) $ (501,018)
============ ============ ============ ============
Per share data - basic
and diluted
(Loss) from continuing
operations........... $ (0.06) $ (0.02) $ (0.16) $ (0.06)
============ ============ ============ ============
(Loss) from
discontinuing
operations........... $ 0.00 $ 0.00 $ (0.01) $ (0.01)
============ ============ ============ ============
$ (0.06) $ (0.02) $ (0.17) $ (0.07)
============ ============ ============ ============
Weighted average
number of common
shares outstanding... 7,733,032 7,501,510 7,612,860 7,501,510
============ ============ ============ ============
See notes to condensed consolidated financial statements
4
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2004 2003
------------ ------------
Cash Flows From Operating Activities:
Net cash used in operating activities............ (913,804) (276,568)
------------ ------------
Cash Flows From Investing Activities:
Purchase of property and equipment.................. (14,806) (35,235)
------------ ------------
Net cash used in provided by investing activities (14,806) (35,235)
------------ ------------
Cash Flows From Financing Activities:
Principal repayment of notes payable................ (19,652) --
Net proceeds from line of credit, bank.............. 10,863 136,809
Proceeds from bridge notes.......................... 250,000 140,000
Advances from officer/stockholder................... 50,000 --
Proceeds from sale of common stock.................. 150,000 --
------------ ------------
Net cash provided by financing activities........ 441,211 276,809
------------ ------------
Net decrease in cash and cash equivalents........... (487,399) (34,994)
Cash and cash equivalents - beginning............... 587,626 366,925
------------ ------------
Cash and cash equivalents - ending.................. $ 100,227 $ 331,931
============ ============
Supplemental Disclosures of Cash Flow Information -
Cash paid during the periods for:
Interest......................................... $ 2,527 $ --
============ ============
See notes to condensed consolidated financial statements
5
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE 1 - Organization and Basis of Presentation
Organization
On March 19, 2002, effective as of March 1, 2002, Walker Financial Corporation
(formerly known as Walker International Industries, Inc.) and subsidiaries
("Walker") (which, until February 2004, through its wholly-owned subsidiary,
Kelly Color, Inc. ("Kelly Color"), operated in the film processing industry )
acquired all of the issued and outstanding common stock of American DataSource,
Inc. ("ADS") and National Preplanning, Inc. ("NPI") through a series of
simultaneous mergers. As discussed in Note 6, Kelly Color discontinued
operations in February 2004.
Subsequent to the mergers, the Company changed its fiscal year end from November
30th to December 31st to correspond with the fiscal year end of NPI.
In November 2002, Walker changed its name from Walker International Industries,
Inc to Walker Financial Corporation.
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, 2004 and
for all periods presented. The results of operations for the three and nine
months ended September 30, 2004 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, 2003.
NOTE 2 - Management's Liquidity Plan
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, 2004, the Company incurred a
net loss of $1,164,578 and had a working capital deficiency of $1,393,335.
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 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 the
sale of the Kelly property, the successful execution of its marketing plans
resulting in increased sales and any additional capital that the Company may
obtain through sales of its equity and debt securities will be sufficient to pay
that portion of its debt that is due within the next twelve months, as well as
to fund the Company's operations. During the nine months ended September 30,
2004, the Company sold 750,000 shares of Company common stock for an aggregate
6
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
(Continued)
purchase price of $150,000 (see Note 7) and issued bridge notes in the principal
amount of $250,000 (see Note 6). Additionally our ability to raise capital may
be affected by our minimal revenues, the losses that we incur and our
stockholders equity here can be no assurance that the Company will be successful
in any of its plans as discussed in this Note 2. To the extent that the Company
is unsuccessful in its plans to increase its cash position, the Company may find
it necessary to further curtail some of its operations and possible future
acquisitions. These matters raise substantial doubt about the Company's ability
to continue as a going concern. However, the accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of the liabilities in the normal course of
business. The financial statements do not include any adjustments relating to
the recovery of assets or the classification of liabilities that might be
necessary should the company be unable to continue as a going concern.
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
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 requires the
presentation of basic and diluted earnings per share ("EPS"). 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 2,493,873 and 178,021 at September 30,
2004 and 2003 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:
7
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
(Continued)
September 30,
---------------------------
2004 2003
------------ ------------
Options............................................. 52,170 --
Warrants............................................ 1,169,906 178,021
Convertible debt.................................... 1,283,969 --
------------ ------------
2,493,873 178,021
============ ============
Stock-Based Compensation
- ------------------------
Stock Based Compensation
Stock Options and Similar Equity Instruments
At September 30, 2004, the Company had a Equity Incentive Plan, which is
described more fully in Note 13. As permitted under Statement of Financial
Accounting Standard ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" ("SFAS 148"), which amended SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the Company has elected to continue
to follow the intrinsic value method in accounting for its stock-based employee
compensation arrangements as defined by Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations including "Financial Accounting Standards Board Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB No. 25. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation:
8
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
(Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss, as reported. $ (454,459) $ (123,076) $(1,318,278) $ (501,018)
Deduct: Total
stock-based employee
compensation expense
determined under fair
value-based method
for all awards, net
of related tax effect -- -- -- --
------------ ------------ ------------ ------------
Pro forma loss........ $ (454,459) $ (123,076) $(1,318,278) $ (501,018)
============ ============ ============ ============
Basic and diluted net
loss per share, as
reported............. $ (0.06) $ (0.02) $ (0.17) $ (0.07)
============ ============ ============ ============
Basic and diluted pro
forma net loss per
share................ $ (0.06) $ (0.02) $ (0.17) $ (0.07)
============ ============ ============ ============
New Accounting Pronouncements
In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), an interpretation of Accounting Research
Bulletin No. 51. FIN 46 expands upon and strengthens existing accounting
guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. A variable
interest entity is any legal structure used for business purposes that either
does not have equity investors with voting rights or has equity investors that
do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. However, on October 8, 2003,
FASB deferred the latest date by which all public entities which are small
business issuers must apply FIN 46 to the first reporting period ended after
December 15, 2004. The effect of the adoption of this new accounting
pronouncement on the Company's financial statements will not be significant.
NOTE 4 - Line of Credit, Bank
In July 2002, the Company entered into a new 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%, expiring on July
3,
9
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
(Continued)
2004. There was $143,423 outstanding under the Line of Credit as of September
30, 2004. The Line of Credit is collateralized by a building owned by the
Company that is located in North Carolina.
The Line of Credit was modified in June 2004 and, as modified, requires monthly
payments of $1,225, commencing on July 21, 2004, and a final payment of the
outstanding balance on June 21, 2005.
NOTE 5 - 10% Senior Subordinated Secured Convertible Promissory Notes
In December 2003, the Company sold and issued 10% Senior Subordinated Secured
Convertible Promissory Notes (the "10% Promissory Notes") in the aggregate
principal amount of $845,000 and due in December 2006. The proceeds raised from
sale and issuance of the 10% Promissory Notes have been used to fund the
Company's working capital and capital expenditure requirements. The 10%
Promissory Notes are convertible into shares of the Company's common stock at
$0.71 per share through December 5, 2005 and $1.25 thereafter.
The subscription agreements pursuant to which the Company sold the 10%
Promissory Notes required among other matters, the Company to register for
resale under the Securities Act the shares issuable upon conversion of the 10%
Promissory Notes by May 5, 2004. The Company is obligated, as a result of the
failure to register such conversion shares by May 5, 2004, to pay to the holders
of the 10% Promissory Notes a monthly fee equal to 1.5% of the principal amount
of the 10% Promissory Notes for each month, or portion thereof, that the Company
fails to cause such registration. The Company failed to cause such registration
by May 5, 2004 and has failed to pay the holders any monthly fee due such
holders as a result of the failure to register the conversion shares.
The 10% Promissory Notes required an interest payment on July 1, 2004 in the
aggregate amount of $49,057. The Company has failed to remit such interest
payment to the holders of the 10% Promissory Notes. The failure to pay such
interest payment is an "event of Default" under the 10% Promissory Notes,
although the holders of the 10% Promissory Notes have not given 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% Promissory 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 Company has not tendered such shares as of
September 30, 2004.
The 10% Promissory Notes also prohibited additional borrowings by the Company,
from any source, without the prior approval of the placement agent for the 10%
Promissory Notes or the holders of a majority of the aggregate principal amount
of the 10% Promissory Notes. In May and August, 2004 the Company borrowed,
without approval, an aggregate of $ 250,000.00. Futher in July, 2004, the
Company, without approval, borrowed an additional $ 50,000 from an
officer/stockholder. As discussed in Note 6 to these unaudited consolidated
condensed financial statements, in May and August 2004, the Company borrowed an
aggregate of $250,000. Further, as discussed in Note 7 to these unaudited
consolidated condensed financial statements, in July 2004, the Company borrowed
an additional $50,000 from an officer/stockholder.
In October 2004, the Company offered to the holders of the 10% Promissory Notes
one share of Company common stock for each $0.30 of principal evidenced by the
10% Promissory Notes and one share of Company common stock for each $0.23 of
accrued interest due under the 10% Promissory Notes through September 30, 2004
in exchange for the holders waiving substantially all of their rights under the
10% Promissory Notes. The Company did agree to (a) use its best efforts to
expeditiously register for resale the shares that the holders of the 10%
Promissory 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.
As of November 17, 2004, the holders of 10% Promissory Notes in the aggregate
principal amount of $795,000 had indicated their desire
10
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
(Continued)
to accept the Company's offer of exchange. Accordingly, the Company shall issue
a total of 2,938,043 shares of Company common stock upon consummating the offer
of exchange with such holders of the 10% Promissory Notes (or 3,122,845 shares
of Company common stock, if all of the holders of the 10% Promissory Notes
accept the Company's offer of exchange). The Company will record a debt
conversion expense based upon the value of the additional shares issued as a
result of reducing the conversion price upon consummating the offer of exchange.
NOTE 6 - Notes Payable and Bridge Notes
Notes Payable
In August 2004, the due date of a 6% promissory note originally issued by NPI
prior to March 19, 2002 was extended to the earlier of (a) the date which is 60
days following the effectiveness of a registration statement under the
Securities Act registering for resale the shares of our common stock issuable
upon exercise of the warrants sold and issued with the 6% promissory note or (b)
January 2, 2005. The consideration tendered by the Company in connection with
the extension of the due date of the 6% promissory note was a reduction in the
exercise price of the warrants sold and issued with the 6% Promissory Notes to
$0.45 per share. The reduction in the exercise price of these warrants has
resulted in a reduction in the conversion price of the 10% Promissory Notes to
$0.45.
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.
Bridge Notes
In May 2004, the Company sold and issued, for gross proceeds of $125,000, (a) a
6% promissory note in the principal amount of $125,000 and due on August 22,
2004 and (b) warrants to purchase 70,000 shares of the Company's common stock at
an exercise price of $0.71 per share. The fair value of the warrants is $35,000
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of this promissory
note. In August 2004, the due date of such promissory note was extended to no
later than January 2, 2005. The Company currently is not in compliance with the
repayment terms of this note.
In August 2004, the Company sold and issued, for gross proceeds of $125,000, (a)
a 6% promissory note in the principal amount of $125,000 and due January 2, 2005
and (b) warrants to purchase 105,000 shares of the Company's common stock at an
exercise price of $.45 per share. The fair value of the warrants is $31,250
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of this promissory
note. The Company currently is not in compliance with the repayment terms of
this note.
NOTE 7 - Advance from Officer/Stockholder
In July 2004, an officer and stockholder advanced the Company $50,000. The
advance is non-interest bearing and has no definitive repayment terms.
11
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
(Continued)
NOTE 8 - Stockholders' Deficiency
During the nine months ended September 30, 2004, the Company sold and issued an
aggregate of 750,000 shares of the Company's common stock for gross proceeds of
$150,000.
On July 26, 2004, the Company entered into a term sheet that contemplates the
sale to a limited liability company of up to $10 million of shares of Company
common stock. The sale of such shares is subject to the prior registration of
such shares for resale by the limited liability company/purchaser and the
Company complying with certain other conditions. The term sheet required the
Company to pay the limited liability company $10,000 in cash and issue the
limited liability company 60,000 shares of Company common stock to reimburse the
limited liability company for its expenses connected to the transaction. The
60,000 shares have been valued at $31,200. This reimbursement payment has been
recorded as an expense.
Subsequent to September 30, 2004, the Company sold 250,000 shares of Company
common stock for gross proceeds of $50,000.
NOTE 9 - Consulting Agreement
In April 2004, the Company entered into a consulting agreement pursuant to which
the Company agreed to issue to the consultant 150,000 shares of our common stock
and an option to purchase an additional 50,000 shares of the Company's common
stock, exercisable at $0.20 per share, in consideration for the consultant's
agreement to provide specified services. The Company issued the common stock to
the consultant in connection with the execution of the consulting agreement.
Subsequently, the Company terminated the consultant and refused to deliver the
option due to the Company's belief that the consultant was unable to perform the
agreed-upon services. The consultant retained such 150,000 shares, which were
issued pursuant to the Company's 2002 Equity Incentive Plan. Accordingly, the
Company recorded an expense of $75,000 which represents the fair value of the
common stock issued.
NOTE 10 - Commitment and Contingencies
Litigation
The Company is involved in litigation through the normal course of business. The
Company believes that the resolution of these matters will not have a material
adverse effect on the financial position of the Company.
Commitments
The Company has entered into an employment agreement with Mitchell Segal to
serve as the Company's president and chief executive officer through December
31, 2005. Under Mr. Segal's employment agreement, the Company was obligated to
pay Mr. Segal an annual base salary of $200,000 for 2002, with annual increases
of not less than $10,000, plus a bonus equal to a minimum of 3% to a maximum of
5% of the gross proceeds received from equity financings and a minimum of 3% to
a maximum of 7.5% of the Company's net income, provided the Company's net income
is at least $500,000. The bonus is payable through 2008, even if Mr. Segal's
employment with the Company is terminated by the Company except in the event the
termination is for cause. In no event may the bonuses due Mr. Segal exceed an
aggregate of $304,025. Mr. Segal also is entitled to discretionary bonuses, if
any, awarded by the Company's board of directors. The Company is paying Mr.
Segal an annual base salary of $220,000 for 2004.
The Company also has entered into an employment agreement with Peter Walker to
serve as president of the Company's Kelly Color Laboratories, Inc. subsidiary
through March 18, 2012. Under Mr. Walker's employment agreement, the Company
will pay Mr. Walker an annual base salary of $100,000, plus a monthly
non-accountable
12
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
(Continued)
expense allowance of $1,000. Mr. Walker's employment agreement does not require
Mr. Walker to devote a minimum number of hours to the business of Kelly Color.
Mr. Walker's employment agreement does require the Company to use the Company's
best efforts to cause Mr. Walker to be nominated for election to the Company's
board of directors during the term of Mr. Walker's employment agreement.
Mr. Walker's employment agreement provides for him to be paid his salary:
o for a two year period following his termination due to a disability and
o for the entire remaining employment term in the event his termination is
otherwise than for cause or disability;
provided that, if the termination is due to a failure to pay Mr. Walker his
compensation otherwise payable under the employment agreement, then the rate of
compensation shall be
o in the seventh year, 150% of his salary at the time of termination,
o in the eighth year, 200% of his salary at the time of termination,
o in the ninth year, 250% of his salary at the time of termination, and
o in the tenth year, 300% of his salary at the time of termination.
NOTE 11 - Segment Reporting and 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, 2004, the discontinued assets and liabilities of Kelly Color are:
Assets -
Prepaid expenses and other current assets.......... $ 12,712
Fixed assets....................................... 20,806
-------------
Total assets................................... $ 33,518
=============
Liabilities -
Accounts payable and accrued expenses.............. $ 24,522
-------------
Total liabilities.............................. $ 24,522
=============
The results of discontinued operations for the three and nine months ended
September 30, 2004 and 2003 are:
13
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
(Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues.............. $ -- $ 170,555 $ 47,269 $ 511,444
Cost of revenues...... -- (102,027) (80,847) (378,951)
Operating expenses.... (508) (41,015) (28,415) (204,050)
------------ ------------ ------------ ------------
Net (loss) income... $ (508) $ 27,513 $ (61,995) $ (71,557)
============ ============ ============ ============
NOTE 12 - Subsequent Events
In October 2004, the Company entered into two separate consulting agreements
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 Company had issued an aggregate of
800,000 shares to the consultants, as of November 17, 2004.
14
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 and
mortgage industries,
o our ability to raise additional capital, if and as needed,
o the cost-effectiveness of our product and service development activities,
o political and regulatory matters affecting the industries in which we
operate,
o our ability to combine our various operations so that they may work
together and grow successfully,
o the market acceptance, revenues and profitability of our current and
future products and services,
o the extent that our sales network and marketing programs achieve
satisfactory response rates,
o our ability to acquire additional companies operating 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
and our other filings with the SEC. These reports attempt to advise interested
parties of the risks and factors that may affect our business, financial
condition and results of operations and prospects. The forward-looking
statements made in this Form 10-QSB speak only as of the date hereof and we
disclaim any obligation to provide updates, revisions or amendments to any
forward-looking statements to reflect changes in our expectations or future
events.
15
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 transactions revenues 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.
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, 2004 and 2003
Net sales for the three months ended September 30, 2004 were approximately
$55,500, almost all of which was generated by ADS. NPI historically has not
generated any material revenues. As noted previously, NPI expects to start
recording revenues from its new affiliations during the latter part of the
fourth quarter of 2004 or in the first quarter of 2005. Although NPI had
previously anticipated that it would begin to generate revenues in the third
quarter of 2004, the commencement of the marketing of NPI products was delayed
due to open enrollment periods for the existing voluntary benefits products that
are already being sold to NPI target populations.
16
Operating expenses for the three months ended September 30, 2004 were
approximately $438,000, of which $283,000 was generated by NPI and $134,000 was
generated by ADS. Additionally, NPI issued 150,000 shares pursuant to a
consulting agreement and issued 60,000 shares as a commitment fee to a potential
investor resulting in an expense of approximately $106,000. Operating expenses
for the three months ended September 30, 2003 were approximately $440,000, of
which $132,000 was generated by NPI, $62,000 was generated by Walker and
$246,000 was generated by ADS. Although the operating expenses were similar for
the two comparable periods, in 2003 there were greater revenues offsetting ADS's
expenses. Although we have sought to reduce the amount of labor costs at ADS
after the loss of its largest client, we do not believe further reductions in
these costs is possible. Since we anticipate that NPI will become our growth
vehicle, we have expanded its infrastructure with the hiring of employees and
increased expenditures relating to marketing.
Interest expense for the three months ended September 30, 2004 was approximately
$72,000, compared to interest expense for the three months ended September 30,
2003 of $52,000. The increase in this expense was a result of an increase in the
outstanding balance under the Kelly line of credit, accrued interest on our 10%
Convertible Promissory Notes, and a deferred debt discount interest charge
related to our issuance of warrants and the repricing of warrants related to the
extension of the maturity date of the bridge notes.
As a result of the foregoing and our loss from discontinued operations, we
incurred a net loss of $454,459 for the three months ended September 30, 2004,
or $.06 per share, compared to a loss of 123,276, or $.02 per share, for the
quarter ended September 30, 2003. Of the loss for the three months ended
September 30, 2004, a loss of approximately $280,000 can be attributable to NPI,
and a loss of 134,000 can be attributable to ADS.
Nine Months Ended September 30, 2004 and 2003
Net sales for the nine months ended September 30, 2004 were approximately
$156,000, primarily all of which was generated by ADS. NPI expects to start
achieving more substantial revenues in the fourth quarter of 2004 and the first
quarter of 2005. Net Sales decreased greatly for the nine months ended September
30, 2004 as compared to the nine months ended September 30, 2003 as a result of
the fact that ADS lost its largest client, Service Corporation International in
September, 2003.
Operating expenses for the nine months ended September 30, 2004 were
approximately $1,289,000, of which $789,000 was generated by NPI and $418,000
was generated by ADS. The operating expenses for the nine months ended September
30, 2003 were $1,507,000, of which $ 363,000 was generated by NPI and $ 913,000
was generated by ADS. Operting expenses for the nine months ended September 30,
2004 were composed of compensation expense of approximately $ 567,000,
professional fees of approximately $ 63,000, consulting fees of approximately $
45,000, depreciation of approximately $ 87,000 and general and administrative
expenses of approximately 527,000. We reduced the amount of labor costs at ADS
after the loss of its largest client. However, since we anticipate that NPI will
become our growth vehicle, we have expanded our infrastructure with the hiring
of employees, development of a website and increase of expenditures relating to
marketing its products.
Interest expense for the nine months ended September 30, 2004 was approximately
$124,000, compared to interest expense for the nine months ended September 30,
2003 of $56,000. The increase from the prior year results from interest expenses
related to our convertible debt which was not outstanding for most of the nine
month period ended September 30, 2003, the interest expense related to the
deferred debt discount interest charge incurred on the issuance of warrants and
the repricing of exercise prices of warrants in connection with the extension of
the maturity date of the bridge notes.
As a result of the foregoing and our loss from discontinued operations of
approximately $62,000, we incurred a net loss of $1,318,278 for the nine months
ended September 30, 2004, or $0.17 per share, compared to a loss of $501,000, or
$0.07 per share, for the nine months ended September 30, 2003. Of the loss for
the nine months ended September 30, 2004, a loss of $758,000 can be attributable
to NPI and a loss of $263,000 can be attributable to ADS. Of the loss for the
nine months ended September 30, 2003, a loss of $415,000 can be attributable to
NPI and a profit of $ 46,000 can be attributable to ADS. We also had a loss from
discontinued operations of $72,000 in the nine months ended September 30, 2003.
The increase in the loss by NPI was a result of increased expenses of debt taken
on by the Company and the issuance of stock and warrants for the Company which
were expensed to NPI, consulting and investment banking fees as well as added
labor, and marketing costs by NPI.
17
Financial Condition and Liquidity
We had negative working capital of $ 1,343,335 at September 30, 2004, compared
to working capital of $308,284 at December 31, 2003. A company's working capital
is the amount by which its current assets exceeds the amount of its current
liabilities. A working capital deficiency results when the company's current
liabilities exceed its current assets. The decrease in our working capital was a
result of our net loss for the nine months ended September 30, 2004 which
resulted in a significant reduction in our cash and cash equivalents and the
reclassification of our outstanding 10% Senior Subordinated Secured Convertible
Promissory Notes from a long term liability to a current liability.
Net cash used in operating activities was approximately $914,000 for the nine
months ended September 30, 2004, compared to net cash used in operating
activities of $277,000 for the nine months ended September 30, 2003. The
increase primarily is attributable to our net loss during the current nine month
period of $1,318,278 compared to $501,018 in the comparable period.
During the nine months ended September 30, 2004, NPI increased its expenditures
on sales and marketing in preparation for its sales process and is continuing to
enter into strategic relationships that is believed will result in sales of its
products. Additionally, NPI's independent funeral home marketing division
continues its affiliation with eight funeral homes in the State of New Jersey in
connection with the sale of prearranged funerals and is hopeful that the
purchasers of such prearranged funerals will use the insurance products
underwritten by insurance companies who have licensed NPI to sell their products
through such funeral homes. NPI has increased the amount expended on the
creation, printing and distribution of marketing materials to penetrate the
affinity marketplace and has hired a consulting firm to help increase its
distribution partners. Additionally, NPI has spent monies on the development and
enhancement of its internet website to be used for the rollout and subsequent
marketing of its product lines. This new website also will be used for the
rollout of NPI's product line to members of the California Chamber of Commerce,
which is expected to occur in the last month of the fourth quarter or the first
quarter of 2005. Although NPI had anticipated that some of its affinity
marketing would commence within the third quarter of 2004 it appears that the
end of the fourth quarter and the beginning of the first quarter of 2005 is a
more realistic time frame.
ADS experienced diminishing sales for the nine months ended September 30, 2004,
compared with its revenues for the nine months ended September 30, 2004. ADS
experienced declining sales as a result of losing its largest client which
accounted for a large portion of its revenues. Additionally, we closed our Kelly
Color operations in February 2004.
Net cash used in investing activities was approximately $15,000 for the nine
months ended September 30, 2004, compared to $35,000 for the nine months ended
September 30, 2003. During both periods, investing activities were limited to
the purchase of property and equipment.
Net cash provided by financing activities was approximately $440,000 for the
nine months ended September 30, 2004, resulting from the net proceeds received
from our bank line of credit which is secured by the property at which Kelly
Color formerly used to conduct its operations, bridge loans in the amount of
$250,000, advances by our president of $ 50,000, proceeds from the sale of
common stock in the amount of $150,000, offset, in part, by a $20,00 reduction
in a note payable. A $125,000 loan was made on May 22, 2004, with an original
maturity date of August 22, 2004 and bearing interest at 6% per annum. We also
issued warrants in connection with this loan. In August 2004, the due date of
this note was extended to, in effect, January 2, 2005. In August 2004, we issued
a similar 6% promissory note and warrants for gross proceeds of $125,000 due
January 5, 2005. In July 2004, our president advanced us $50,000. The advance is
non-interest bearing and has no definitive repayment terms. In September 2004,
we sold 750,000 shares of our common stock for gross proceeds of $150,000. For
the nine months ended September 30, 2003, net cash provided by financing
activities was $277,000, resulting from borrowings under the Kelly Color line of
credit and the sale of bridge notes.
18
As a result of these activities, our cash and cash equivalents decreased to
$100,227 from $587,6726 at December 31, 2003.
In December 2003, we sold and issued 10% Senior Subordinated Secured Convertible
Promissory Notes in the aggregate principal amount of $845,000 and due in
December 2006. The proceeds raised from sale and issuance of the 10% Promissory
Notes have been used to fund our working capital and capital expenditure
requirements. The 10% Promissory Notes are convertible into shares of our common
stock at $0.71 per share through December 5, 2005 and $1.25 thereafter.
The subscription agreements pursuant to which we sold the 10% Promissory Notes
required us, among other matters, to register for resale under the Securities
Act the shares issuable upon conversion of the 10% Promissory Notes by May 5,
2004. We are obligated, as a result of the failure to register the conversion
shares by May 5, 2004, to pay to the holders of the 10% Promissory Notes a
monthly fee equal to 1.5% of the principal amount of the 10% Promissory Notes
for each month or portion, that we fail to cause such registration. We failed to
cause such registration by May 5, 2004 and have failed to pay the holders any
monthly fee due such holders as a result of the failure to register the
conversion shares.
The 10% Promissory Notes required an interest payment on July 1, 2004 in the
aggregate amount of $49,057. We failed to remit such interest payment to the
holders of the 10% Promissory Notes. The failure to pay such interest payment is
an "event of Default" under the 10% Promissory Notes, although the holders of
the 10 Promissory Notes have not given notice to us of such Event of Default.
The occurrence of an Event of Default would result in the interest rate on the
10% Promissory Notes to be increased to 12% per annum. We have 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 our
common stock at the per diem rate of .003125 shares for every $ 1.00 of
principal or an aggregate of $ 2,640.625 shares per day. We have not tendered
shares as of September 30, 2004.
The 10% Promissory Notes also prohibited additional borrowings by us, from any
source, without the prior approval of the placement agent for the 10% Promissory
Notes or the holders of a majority of the aggregate principal amount of the 10%
Promissory Notes. As discussed in Note 6 to the unaudited consolidated condensed
financial statements contained in this Quarterly Report on Form 10-QSB, in May
and August 2004, we borrowed an aggregate of $250,000. Further, as discussed in
Note 7 to such unaudited consolidated condensed financial statements, in July
2004, we borrowed an additional $50,000 from an officer/stockholder.
In October 2004, we offered to the holders of the 10% Promissory Notes one share
of our common stock for each $0.30 of principal evidenced by the 10% Promissory
Notes and one share of our common stock for each $0.23 of accrued interest due
under the 10% Promissory Notes through September 30, 2004 in exchange for the
holders waiving substantially all of their rights under the 10% Promissory
Notes. We did agree to (a) use our best efforts to expeditiously register for
resale the shares that the holders of the 10% Promissory Notes would receive in
such exchange and (b) issue additional shares to the holders in the event that
we issued shares to certain third parties for consideration less than $0.30 at
any time prior to December 4, 2006. As of November 17, 2004, the holders of 10%
Promissory Notes in the aggregate principal amount of $795,000 had indicated
their desire to accept our offer of exchange. Accordingly, we shall issue a
total of 2,938,043 shares of our common stock upon consummating the offer of
exchange with such holders of the 10% Promissory Notes (or 3,122,845 shares of
our common stock, if all of the holders of the 10% Promissory Notes accept our
offer of exchange). We will record a debt conversion expense based upon the
value of the additional shares issued as a result of reducing the conversion
price upon consummating the offer of exchange.
The Company plans on raising capital to repay outstanding indebtedness and for
working capital of the Company.. The Company will additionally seek to raise
capital for future acquisitions. Our ability to raise capital 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.
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.
19
Plan of Operations
We create, provide and market death care financial service products, currently
focusing on pre-arrangement and pre-need products. Pre-arrangement and pre-need
products allow individuals to secure the funding for their future funerals prior
to their death and, in some incidences, the goods, materials and services
required in connection with such funerals. For pre-need funding products, we act
as agent in the sale of life insurance policies in amounts ranging from $3,000
to $15,000. The proceeds of each of these insurance policies are used for the
payment of the policy holder's funeral costs. An individual additionally can
freeze or guarantee the price of their future funeral by pre-arranging their
funeral. This process entails an individual choosing, prior to their death, the
type of interment process they desire (burial or cremation), visitation and
religious services at the funeral parlor or elsewhere and the desired type of
caskets and other goods, materials and services to be utilized in connection
with the funeral of the policy holder.
We have established a work-site and affinity marketing strategy that
contemplates positioning the pre-arrangement of death care as a voluntary or
contributory benefit for corporations, unions, and affinity groups to offer
their employees or members. In this regard, we seek to market pre-need funding
products and the ability of individuals to take this funding and use it to
purchase a pre-arrangement at a funeral homes by introducing these products to
individuals as a benefit of their employment or union membership similar to the
way they are introduced to health insurance, life insurance, dental insurance
and legal plans. The funding products that we sell are called pre-need insurance
policies. These insurance policies are similar to a fixed-pay whole-life
insurance policy with an inflation rider. The policy value grows over time,
which acts as a hedge against inflation and rising funeral prices. The policy
can be assigned to a funeral home when a pre-arrangement contract is executed.
The funeral home uses the proceeds of the policy to cover the costs of the
funeral contracted for. If a prearrangement is not made, the policy proceeds can
be used by the descendant's beneficiaries to cover the costs of their own
funerals.
Our NPI subsidiary has entered into various third party marketing agreements
which allow NPI to market our pre-need funding products to employees in the
workplace, individuals belonging to unions and to individuals belonging to
various associations. These marketing agreements are with larger and more
established insurance agencies which sell a variety of other insurance products
(e.g., health insurance, group life insurance and long term care insurance) to
their clients and allows NPI to market our products to their clients in return
for the sharing of commissions upon the sale of our products. These agreements
additionally allow NPI to keep its sales costs low until such time, if ever,
when we are capable of supporting a full-time sales force.
Our ADS subsidiary is involved in the administration of monies in trust that are
used for the payment of pre-arranged funerals upon the death of an individual.
These trust accounts are created by an individual entering into a
pre-arrangement contract with a funeral director. Instead of funding a
pre-arrangement with a pre-need insurance policy, some funeral directors suggest
that an individual place funds into trust. That trust account is professionally
money managed by unaffiliated third party's and the account is assigned to the
funeral home, similar to the pre-need insurance policy, and used by the funeral
director to cover the funeral costs of that individual's funeral upon their
death. ADS provides accounting and administrative functions in reporting
annually on the funds in each trust account, in addition to the administration
of the funds upon an individual's death.
In addition to the funeral related products we are currently marketing, we are
seeking to enlarge our product line by adding other employee benefit products
and services to market within the workplace that benefit the baby boomer and
senior populations. Products may include other insurance-related products, such
as disability insurance, long term care legal plans and other voluntary
benefits. We may seek to acquire agencies and companies that currently market
these other products.
We entered the death care pre-arrangement business as a result of its
acquisitions of NPI and ADS in March 2002. Through our Kelly Color subsidiary,
we acted as a film processor for professional photographers, our historical
business since incorporation in 1967. We discontinued the operations of Kelly
Color in February 2004.
NPI 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, 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.
20
Most of the marketing that currently is planned for NPI's products are marketing
that directs potential consumers to our enrollment web-site, as well as our
partner's web enrollment site. Although the internet has seen a significant
level of growth in use for the sale of various products, the use of the internet
for the sale of voluntary benefit products is relatively new. We will closely
monitor the response rate to our enrollment and marketing strategy.
NPI only has generated minimal revenues from its worksite marketing efforts to
date and there can be no assurance that NPI will ever generate any substantial
revenues from such efforts. We may decide in the future to revise NPI's
marketing strategy to a more common approach, such as utilizing print, radio and
television advertising directed at individuals outside of the worksite and
affinity marketing arenas.
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
the $ 845,000 Convertible Promissory Note and a lack of liquidity of our common
stock. Additionally our ability to raise capital 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 source of revenues when
our biggest client, Service Corporation International, the largest funeral home
and cemetery operator in the country, removed approximately $70 million of trust
assets that ADS administrated and sought administration of such assets overseas.
SCI removed all trust assets under administration from a variety of outside
vendors such as ADS. As a result, ADS has increased its efforts to administer
trust funds held by various state funeral association trusts, establish and
market master trusts to the independent funeral home community and to acquire
existing trust administration companies. Although not many trust administration
companies have been offered for sale, through our ADS subsidiary, we have had
preliminary discussions with a possible acquisition candidate and will revisit
these discussions in early 2006.
There can be no assurance that we will achieve successful and profitable results
from our distribution and marketing efforts or that we will be able to complete
acquisitions within the work-site marketing and employee benefit sectors.
We intend any acquisitions to be accomplished through issuances of stock, debt
and cash, or a combination of such forms of consideration. Accordingly, any
future merger or acquisition may have a dilutive effect on our stockholders as
of the time of such mergers and acquisitions. Additionally, our ability to
accomplish any future acquisitions may depend on our cash position, our ability
to raise capital, the stock price of our common stock, and our ability to
service any debt we may incur.
We believe that our operating results may fluctuate greatly quarter to quarter
due to several factors, including the success of our merger and acquisition
strategy and the impact of any increases in our results of operations as we
pursue new business in the death care services industry.
On December 10, 2003, NPI entered into a Third Party Sales and Marketing
Agreement with Stewart Enterprises, Inc., the third largest funeral home
operator in the country. This agreement allows NPI to become Stewart's exclusive
affinity marketer in certain counties in the States of Florida and California.
21
On June 1, 2004, NPI entered into a strategic pre-need sales and marketing
agreement with Hilb Rogal & Hobbs Insurance Services of Northern California
which will allow NPI to begin marketing funeral pre-arrangements to the
employees and affiliates of businesses belonging to the California Chamber of
Commerce. The California Chamber of Commerce represents approximately 12,000
businesses having over 2.3 million employees. NPI expects the commence marketing
under this arrangement during the latter part of the fourth quarter of 2004 or
during the first quarter of 2005.
On June 15, 2004, NPI received the approval to market its product to the members
of the Benefits Marketing Association, an organization of over 2,000 corporate
and individual members engaged in the marketing of benefits that involve the
relationship between an employer and their employees, a business and their
customers and an organization and their members. NPI's marketing to the members
of Benefits Marketing Association commenced in the third quarter of 2004 and is
expected to continue for at least the next three fiscal quarters.
On October 6, 2004, NPI entered into a Supplier Agreement with Motivano, Inc.
Motivano is a technology-based seller of voluntary benefits to approximately 1
million employees of companies that offer Motivano's products. Under this
agreement, commencing in the first quarter of 2005, NPI's products will be
included in Motivano's offerings top such employees.
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 third party marketer segment of the death care services
industry or other trust administration companies.
We believe that our operating results may fluctuate greatly quarter to quarter
due to several factors, including the success of our merger and acquisition
strategy and the impact of any increases in our results of operations as we
pursue new business in the death care services industry. Additionally, it is
apparent that we will seek to raise capital in the near future to fund
operations and to execute our business model. In addition to potential capital
raising activities, we have sought to have some of our outstanding debt
converted to equity which we expect to consummate in the conversion in the
fourth quarter of 2004. Such conversion could have a dilutive effect on our
current stockholders.
There can be no assurance that we will be successful in any of its plans as
discussed in Note 2 to the unaudited condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-QSB. 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.
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, 2004, 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.
22
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 year ended December 31, 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.
23
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, 2003, filed with the Securities and Exchange
Commission on April 14, 2004 (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.
In August 2004, we issued, to a single individual, three-year warrants to
purchase 150,000 shares of our common stock, exercisable at $0.45 per share, in
connection with such individual's loan to us in the principal amount of
$125,000. We believe that the issuance of such warrants was exempt from the
registration requirements of the Securities Act pursuant to the provisions of
Section 4(2) of the Securities Act.
In September 2004, we issued, to three accredited investors, an aggregate of
750,000 shares of our common stock for the total consideration of $150,000. We
believe that the issuances of such warrants were exempt from the registration
requirements of the Securities Act pursuant to the provisions of Section 4(2) of
the Securities Act.
Item 3. Defaults on Senior Securities.
In December 2003, we sold and issued 10% Senior Subordinated Secured Convertible
Promissory Notes in the aggregate principal amount of $845,000 and due in
December 2006. The proceeds raised from sale and issuance of the 10% Promissory
Notes have been used to fund our working capital and capital expenditure
requirements. The 10% Promissory Notes are convertible into shares of our common
stock at $0.71 per share through December 5, 2005 and $1.25 thereafter.
The subscription agreements pursuant to which we sold the 10% Promissory Notes
required, among other matters, us to register for resale under the Securities
Act the shares issuable upon conversion of the 10% Promissory Notes by May 5,
2004. We are obligated, as a result of the failure to register such conversion
shares by May 5, 2004, to pay to the holders of the 10% Promissory Notes a
monthly fee equal to 1.5% of the principal amount of the 10% Promissory Notes
for each month or portion, that we fail to cause such registration. We failed to
cause such registration by May 5, 2004 and have failed to pay the holders any
monthly fee due such holders as a result of the failure to register the
conversion shares.
The 10% Promissory Notes required an interest payment on July 1, 2004 in the
aggregate amount of $49,057. We failed to remit such interest payment to the
holders of the 10% Promissory Notes. The failure to pay such interest payment is
an "event of Default" under the 10% Promissory Notes, although the holders of
the 10% Promissory Notes have not given notice to us of such event of Default.
The occurrence of an event of Default would result in the interest rate on the
10% Promissory Notes to be increased to 12% per annum. We have 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 our
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. We had not tendered such
shares as of September 30, 2004.
The 10% Promissory Notes also prohibited additional borrowings by us, from any
source, without the prior approval of the placement agent for the 10% Promissory
Notes or the holders of a majority of the aggregate principal amount of the 10%
Promissory Notes. As discussed in Note 6 to the unaudited consolidated condensed
financial statements contained elsewhere in this Quarterly Report on Form
10-QSB, in May and August 2004, we borrowed an aggregate of $250,000 and issued
warrants to purchase a total of 175,000 shares of our common stock. Further, as
discussed in Note 7 to the unaudited consolidated condensed financial statements
contained elsewhere in this Quarterly Report on Form 10-QSB, in July 2004, we
borrowed an additional $50,000 from an officer/stockholder.
24
The holders of the 10% Promissory Notes, the holders of the 10% Promissory Notes
could give us notice of a declaration of events of Default at any time. The
declaration of any events of Default would, among other penalties, result in the
acceleration of the due date of the 10% Promissory Notes. We currently do not
have sufficient funds to pay all of our obligations under the 10% Promissory
Notes if the due date of the 10% Promissory Notes was accelerated. Accordingly,
an acceleration of the due date of the 10% Promissory Notes could result in our
be forced to file an application for relief under the federal bankruptcy laws.
It is anticipated that any negotiated conversion of the 10% Promissory Notes and
waivers of breaches will result in our issuing a material amount of our common
stock, a consequence of which would be a significant dilution to our then
current stockholders.
In October 2004, we offered to the holders of the 10% Promissory Notes one share
of our common stock for each $0.30 of principal evidenced by the 10% Promissory
Notes and one share of our common stock for each $0.23 of accrued interest due
under the 10% Promissory Notes through September 30, 2004 in exchange for the
holders waiving substantially all of their rights under the 10% Promissory
Notes. We did agree to (a) use our best efforts to expeditiously register for
resale the shares that the holders of the 10% Promissory Notes would receive in
such exchange and (b) issue additional shares to the holders in the event that
we issued shares to certain third parties for consideration less than $0.30 at
any time prior to December 4, 2006. As of November 17, 2004, the holders of 10%
Promissory Notes in the aggregate principal amount of $795,000 had indicated
their desire to accept our offer of exchange. Accordingly, we shall issue a
total of 2,938,043 shares of our common stock upon consummating the offer of
exchange with such holders of the 10% Promissory Notes (or 3,122,845 shares of
our common stock, if all of the holders of the 10% Promissory Notes accept our
offer of exchange).
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Set forth below is a list of the exhibits to this Quarterly Report on Form
10-QSB.
Exhibit
Number Description
- ------- -----------
10.1 Promissory note, dated August 5, 2004, of Walker Financial
Corporation in the principal amount of $300,000 and payable to Cindy
Dolgin.
10.2 Warrant certificate, dated August 5, 2004, registered in the name of
Cindy Dolgin.
10.3 Investment Banking Consulting Agreement, dated as of October 5,
2004 between The Vantage Group Ltd. and Walker Financial
Corporation.
10.4 Consulting Agreement, dated as of October 5, 2004, between Phoenix
Holdings, LLC and Walker Financial Corporation.
31.1 Certification of Chief Executive and Chief Financial Officer
pursuant to Rule 13a-14(a) promulgated under the Securities Act of
1934, as amended.
32.1 Certification of Chief Executive and Chief Financial Officer
pursuant to Rule 13a-14(b) promulgated under the Securities Act of
1934, as amended.
25
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 23, 2005 Walker Financial Corporation
By: /s/ Mitchell S. Segal
------------------------------------
Mitchell S. Segal, President
(Principal Executive and Accounting Officer)
26
Walker Financial Corporation
Quarterly Report on Form 10-QSB
Quarter Ended September 30, 2004
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 Promissory note, dated August 5, 2004, of Walker Financial
Corporation in the principal amount of $300,000 and payable to Cindy
Dolgin.
10.2 Warrant certificate, dated August 5, 2004, registered in the name of
Cindy Dolgin.
10.3 Investment Banking Consulting Agreement, dated as of October 5,
2004 between The Vantage Group Ltd. and Walker Financial
Corporation.
10.4 Consulting Agreement, dated as of October 5, 2004, between Phoenix
Holdings, LLC and Walker Financial Corporation.
31.1 Certification of Chief Executive and Chief Financial Officer
pursuant to Rule 13a-14(a) promulgated under the Securities Act of
1934, as amended.
32.1 Certification of Chief Executive and Chief Financial Officer
pursuant to Rule 13a-14(b) promulgated under the Securities Act of
1934, as amended.
27