UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2003
[ ] 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.)
370 Old Country Road
Garden City, New York 11530
(Address of principal executive offices)
(516) 746-4141
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 7,501,510
shares of the registrant's common stock, par value $.10 per share, outstanding
as of August 11, 2003.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Walker Financial Corporation
Quarterly Report on Form 10-QSB
Quarter Ended June 30, 2003
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet (Unaudited) as of June 30, 2003.......................... 3
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months
Ended June 30, 2003 and 2002................................................................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months
Ended June 30, 2003 and 2002................................................................ 5
Notes to Condensed Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation............................... 12
Item 3. Controls and Procedures.................................................................. 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 17
Item 2. Changes in Securities................................................................... 17
Item 3. Defaults Upon Senior Securities......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders..................................... 17
Item 5. Other Information....................................................................... 17
Item 6. Exhibits and Reports on Form 8-K........................................................ 17
Signatures....................................................................................... 19
Exhibit Index.................................................................................... 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30,
2003
ASSETS -----------------
Current assets -
Cash and cash equivalents................................................................... $ 176,693
Accounts receivable, net ................................................................... 158,486
Inventories................................................................................. 29,488
Prepaid expenses and other current assets................................................... 38,552
------------------
Total current assets...................................................................... 403,219
------------------
Property and equipment, net.................................................................... 432,370
Other assets -
Intangibles - customer list, net............................................................ 205,748
Other assets................................................................................ 2,460
------------------
Total assets............................................................................ $ 1,043,797
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities -
Accounts payable and accrued expenses....................................................... $ 143,441
Customer deposits........................................................................... 5,905
Line of credit, bank........................................................................ 143,429
Note payable and accrued interest........................................................... 179,625
------------------
Total current liabilities................................................................. 472,400
------------------
Stockholders' equity -
Common stock, par value $.10 per share; 100,000,000 authorized; 7,501,510 shares issued
and outstanding........................................................................... 750,151
Additional paid-in capital.................................................................. 3,178,084
Accumulated deficit......................................................................... (3,356,838)
------------------
Total stockholders' equity................................................................ 571,397
------------------
Total liabilities and stockholders' equity.............................................. $ 1,043,797
==================
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,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
Net sales.......................................... $ 500,045 $ 630,483 $ 981,295 $ 828,752
Costs of sales..................................... 145,164 153,652 276,924 195,903
------------- ------------- ------------- --------------
Gross profit.................................... 354,881 476,831 704,371 632,849
Operating expenses................................. 498,494 579,688 1,062,853 849,092
------------- ------------- ------------- --------------
Operating loss.................................. (143,613) (102,857) (358,482) (216,243)
Interest income (expense), net..................... (2,187) 927 (4,300) (10,320)
------------- ------------- ------------- --------------
(Loss) before extraordinary item and
income taxes.................................. (145,800) (101,930) (362,782) (226,563)
Extraordinary item................................. -- -- -- 158,690
------------- ------------- ------------- --------------
Net loss before income taxes.................... (145,800) (101,930) (362,782) (67,873)
Income tax expense................................. -- -- 15,160 --
------------- ------------- ------------- --------------
Net loss........................................ $ (145,800) $ (101,930) $ (377,942) $ (67,873)
============= ============= ============= ==============
Per share data - basic and diluted:
Loss before extraordinary item and
income taxes.................................. $ (0.02) $ (0.03) $ (0.05) $ (0.06)
Extraordinary item.............................. -- -- -- 0.04
------------- ------------- ------------- --------------
Net loss before income taxes.................. (0.02) (0.03) (0.05) (0.02)
Income tax expense.............................. -- -- --
------------- ------------- ------------- --------------
Net loss per common share..................... $ (0.02) $ (0.03) $ (0.05) $ (0.02)
============= ============= ============= ==============
Weighted average number of common shares
outstanding................................... 7,501,510 3,707,100 7,501,510 3,544,350
============= ============= ============= ==============
See notes to condensed consolidated financial statements
4
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2003 2002
--------------- ----------------
Cash Flows From Operating Activities:
Net loss..................................................................... $ (377,942) $ (67,873)
--------------- ----------------
Adjustments to reconcile net loss to net cash used in operating activities -
Extraordinary item........................................................ -- (158,690)
Depreciation and amortization............................................. 116,697 52,642
Accrued interest.......................................................... 4,500 9,450
Changes in operating assets and liabilities:
Accounts receivable, net................................................ (33,433) (56,491)
Inventories............................................................. 3,837 9,673
Prepaid expense and other current assets................................ 10,536 80,498
Customer deposits....................................................... (791) 5,214
Other assets............................................................ -- 14,055
Accounts payable and accrued expenses................................... (21,830) 14,121
--------------- ----------------
Total adjustments..................................................... 79,516 (29,528)
--------------- ----------------
Net cash used in operating activities................................. (298,426) (97,401)
--------------- ----------------
Cash Flows From Investing Activities -
Net cash received in merger transaction, net of $380,000 cash paid........... -- 472,209
Purchase of property and equipment........................................... (35,235) (46,843)
--------------- ----------------
Net cash provided by investing activities............................... (35,235) 425,366
--------------- ----------------
Cash Flows From Financing Activities -
Principal repayment of notes payable......................................... -- (175,000)
Net proceeds from line of credit, bank....................................... 143,429
Proceeds from notes payable.................................................. -- 80,000
Proceeds from sale of common stock........................................... -- 85,000
Repayment of due to stockholder.............................................. -- (17,100)
--------------- ----------------
Net cash (used in) provided by financing activities..................... 143,429 (27,100)
--------------- ----------------
Net increase in cash and cash equivalents.................................... (190,232) 300,865
Cash and cash equivalents - beginning........................................ 366,925 --
--------------- ----------------
Cash and cash equivalents - ending........................................... $ 176,693 $ 300,865
=============== ================
See notes to condensed consolidated financial statements
5
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 1 - Merger and Organization of Entities
On March 19, 2002, effective as of March 1, 2002, Walker Financial Corporation
(formerly known as Walker International Industries, Inc.) and subsidiaries (the
"Company" and or "Walker") (which operates in the film processing industry
through its wholly-owned subsidiary, Kelly Color, Inc. ("Kelly")), 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.
In the merger with ADS, the Company, issued to James N. Lucas, Sr., the sole
stockholder of ADS, 1,839,840 shares of the common stock, par value $0.10 per
share (the "Common Stock"), of the Company and $325,000 in cash. In addition,
the Company issued 18% subordinated promissory notes to the sole stockholder of
ADS and his assignees in the aggregate principal amount of $500,000 due November
30, 2002. These subordinated notes were subsequently canceled as a condition to
their repayment failed to occur by a stated date. ADS provides trust
administrative services to independent funeral homes, state master trusts and
companies that own funeral homes or cemeteries for pre-need funeral and cemetery
trust accounts.
In the merger with NPI, the Company issued to the stockholders of NPI a total of
2,725,730 shares of Common Stock. In addition, the Company issued 18%
subordinated promissory notes in the aggregate principal amount of $750,000, due
November 30, 2002. These subordinated notes were subsequently canceled as a
condition to their repayment failed to occur by a stated date. Mitchell Segal,
the president, chief executive officer, and the owner of approximately 67.5% of
the outstanding shares of NPI, received 1,839,670 of the shares of Common Stock
and $506,221 principal amount of the notes. Mr. Segal also agreed to forego
$304,000 of unpaid salary. NPI, which was a development stage company through
February 28, 2002, is a managing general insurance agency and third party
marketer of prearranged death care services to corporations, unions and affinity
groups.
The Company has agreed to register a total of 913,080 shares of Common Stock
that was issued in the ADS and NPI acquisitions for resale by the former
stockholders of ADS and NPI. Such 913,080 shares represent approximately 20% of
the shares of Common Stock that were issued in the two acquisitions.
The mergers were accounted for as purchase transactions, pursuant to the
guidance of Staff Accounting Bulletin Topic 2a issued by the Securities and
Exchange Commission (the "SEC"), whereby NPI not Walker was the accounting
acquirer. The historical financial statements prior to March 1, 2002 are those
of NPI. NPI has established a new basis for Walker and ADS assets and
liabilities based upon an allocation of the fair value of the merger. The
subordinated promissory notes were considered, at the time of their issuance,
contingent consideration and were to be recorded when the contingency was
resolved. These subordinated notes were subsequently canceled as a condition to
their repayment failed to occur by a stated date. The condensed consolidated
financial statements reflect the Company's best estimate at the date of the
mergers. The adjustments to reflect the fair values of the assets and
liabilities of ADS and Walker acquired by NPI in the merger transactions are as
follows:
American DataSource, Inc.
Number of shares of common stock issued................................................. 1,839,840
Per share fair value of stock issued.................................................... $ 0.269
----------------
Fair value of common stock ............................................................. $ 494,917
Cash ................................................................................... 325,000
---------------
Total purchase price............................................................... $ 819,917
================
6
Fair value of net assets acquired -
Current assets............................................. $ 293,446
Property and equipment..................................... 401,933
Intangibles - customer list................................ 371,597
Liabilities assumed........................................ (247,059)
---------------
Fair value of net assets acquired.......................................... $ 819,917
================
Walker Financial Corporation
Number of shares of common stock outstanding [i]........................................ 2,282,710
Per share fair value of stock outstanding............................................... $ 0.269
----------------
Fair value of common stock.............................................................. $ 614,049
Merger costs ........................................................................... 55,000
----------------
Total purchase price............................................................... $ 669,049
================
Fair value of net assets acquired -
Current assets............................................. $ 866,110
Property and equipment [ii]................................ --
Other assets [ii].......................................... --
Liabilities assumed........................................ (38,371)
---------------
Fair value of net identifiable assets acquired............................. $ 827,739
Negative goodwill [iii].................................................... (158,690)
----------------
$ 669,049
[i] The number of shares of common stock outstanding is net of 2,495,390
shares of treasury stock which were retired as part of the merger
transactions.
[ii] The excess of fair value of net assets acquired over the purchase price
was allocated first to reduce property and equipment and other assets
to zero, then to negative goodwill.
[iii] Negative goodwill was immediately reflected as an extraordinary gain in
the condensed consolidated financial statements for the three months
ended March 31, 2002.
The pro forma unaudited condensed consolidated results of operations for the six
months ended June 30, 2002, as if the mergers occurred on January 1, 2002, are
as follows:
Pro forma
Net sales...................................................................................... $ 1,189,299
Cost of sales.................................................................................. 317,195
------------------
Gross profit................................................................................ 872,104
Operating expenses............................................................................. 1,125,300
-----------------
Operating loss.............................................................................. (253,196)
Extraordinary item............................................................................. 297,068
------------------
Net income.................................................................................. $ 43,872
==================
Basic and diluted net income per common share.................................................. $ 0.01
==================
Weighted average number of common shares outstanding........................................... 6,845,780
==================
This pro forma information does purport to be indicative of what would have
occurred had the mergers been completed as of January 1, 2002 or results which
may occur in the future.
7
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
(Continued)
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 December 2002, the Company effectuated a stock dividend, pursuant to
which the holder of each one outstanding share of common stock received an
additional nine shares as a dividend. The dividend has been deemed to be a
significant stock dividend, and pursuant to applicable to Delaware General
Corporation Law the stock dividend was accounted for as in a manner similar to a
stock split. As a result of the stock dividend, the Company has issued
approximately 6.7 million shares of common stock. All share information for the
three and six months ended June 30, 2003 have been retroactively restated to
January 1, 2002.
NOTE 2 - Basis of Presentation
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the SEC.
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 summarize fairly the Company's financial position and results of
operations. The results of operations for the three and six months ended June
30, 2003 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
31,2002.
NOTE 3 - Selected Significant Accounting Policies
Earnings Per Share
- ------------------
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 EPS is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
includes the potential dilution that could occur if options or other contracts
to issue common stock were exercised or converted. The effect of the shares
issued in the NPI merger transaction on the Company has been given retroactive
application in the earnings per share calculation. The Company's outstanding
warrants are not reflected in diluted earnings per share because their effects
would be anti-dilutive. Accordingly, basic and diluted earnings per share are
identical.
New Accounting Pronouncements
- -----------------------------
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), provides guidance on
the recognition and measurement of liabilities for costs associated with exit or
disposal activities. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company
implemented this standard effective January 1, 2003 with no material impact to
the Company's financial statements.
On December 31, 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition
and Disclosure." SFAS 148 amends SFAS No. 123 ("SFAS 123"), "Accounting for
Stock -Based Compensation," to provide an alternative method of transition to
8
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
(Continued)
SFAS 123's fair value method of accounting for stock-based employee
compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and
Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
polices of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While the statement does not amend
SFAS 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions of SFAS are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS 123, or the
intrinsic value method of APB Opinion No. 25. The Company will continue to
account for stock based compensation according to APB Opinion No. 25. The
adoption of SFAS 148 did not have an impact on net income or preformed net
income applying the fair value method, as the Company did not have stock based
compensation for the six months ended June 30, 2003 or 2002.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which is effective for contracts
entered into or modified after June 30, 2003. This Statement amends FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to clarify financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts. The effect of the adoption of this new accounting pronouncement on
Company's financial statements has not been significant.
In May, 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability. The
Company is still evaluating the effect of this pronouncement on its financial
statements.
Intangibles
- -----------
Intangibles consist of a customer list obtained in the merger with ADS. The
customer list was recorded at its estimated fair value at the merger date and is
being amortized using the greater of the income forecast method or straight-line
method over its estimated useful life of three years.
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, 2004. During the six months ended June 30, 2003, the Company began drawing on
the Line of Credit, and there was $143,429 outstanding under the Line of Credit
as of June 30, 2003. The Line of Credit is collateralized by a building owned by
the Company that is located in North Carolina.
NOTE 5 - 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.
9
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
(Continued)
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 will 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 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 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.
NOTE 6 - Segment Reporting
Commencing March 1, 2002, the Company began classifying its operations into two
business segments: (a) the administrative services to independent funeral homes,
state master trusts and companies that own funeral homes or cemeteries for
pre-need funeral and cemetery accounts and (b) film processing. Information
concerning the Company's business segments for the three and six months ended
June 30, 2003 and 2002 are as follows:
Three Months Ended June 30, 2003 Three Months Ended June 30, 2002
------------------------------------------ ------------------------------------------
Segment Segment
--------------------------- ---------------------------
(a) (b) Total (a) (b) Total
------------- ------------- ------------- ------------- ------------- --------------
Revenue $ 307,802 $ 192,243 $ 500,045 $ 368,743 $ 261,740 $ 630,483
============= ============= ============= ============= ============= ==============
Loss before extraordinary
item and income taxes $ (121,428) $ (24,372) $ (145,800) $ (95,048) $ (6,882) $ (101,930)
============= ============= ============= ============= ============= ==============
Six Months Ended June 30, 2003 Six Months Ended June 30, 2002
------------------------------------------ ------------------------------------------
Segment Segment
--------------------------- ---------------------------
(a) (b) Total (a) (b) Total
------------- ------------- ------------- ------------- ------------- --------------
Revenue $ 640,406 $ 340,889 $ 981,295 $ 505,053 $ 323,699 $ 828,752
============= ============= ============= ============= ============= ==============
Loss before extraordinary
item and income taxes $ (263,712) $ (99,070) $ (362,782) $ (208,221) $ (18,342) $ (226,563)
============= ============= ============= ============= ============= ==============
Total identifiable assets
at June 30 $ 874,545 $ 169,252 $ 1,043,797 $ 1,008,890 $ 347,509 $ 1,356,399
============= ============= ============= ============= ============= ==============
10
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
(Continued)
NOTE 7 - Letter of Intent
The Company has entered into a non-binding letter of intent, dated March 17,
2003, to acquire Ensure Agency, LLC, a licenced insurance brokerage providing
pre-need funeral services. A member of Ensure Agency, LLC is a significant
stockholder of the Company. The acquisition contemplated by the letter of intent
is subject to, among other matters, satisfaction of customary due diligence
reviews and the execution of a definitive acquisition agreement. No assurance
can be given that a definitive acquisition agreement will be entered into by the
parties or that the acquisition will be consummated.
NOTE 8 - Subsequent Events
On July 25, 2003, the Company issued to one individual a 11% Secured
Subordinated Promissory Note in the principal amount of $165,000.00 (the "Note")
and five year warrants (the "Warrants") to purchase 25,000 shares of Common
Stock at an exercise price of $0.28 per share. The Note has a maturity date of
January 2, 2005 and is secured by all of the assets of the Company, senior to
all other debt of the Company other than the mortgage collateralizing the Line
of Credit. The Company received gross proceeds of $165,000 in connection with
the issuance of the Note and paid a finder's fee to a registered broker-dealer
of $21,450 and the issuance of an additional 35,000 Warrants. The Company
incurred other costs related to the issuance of the Note and Warrants
aggregating approximately $11,000.
11
Item 2. Management's Discussion and Analysis or Plan of Operation.
Throughout the remainder of this Current Report on Form 10-QSB, the terms "we,"
"us," "our" and "our company" refers to Walker Financial Corporation (formerly
known as Walker International Industries, Inc.) ("Walker") and, unless the
context indicates otherwise, includes Walker's wholly-owned subsidiaries,
National Preplanning, Inc. ("NPI"), American DataSource, Inc. ("ADS") and Kelly
Color, Inc. ("Kelly").
Introductory Comment - Forward-Looking Statements.
Statements contained in this report 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:
- -- the results our business strategies and future plans of operations,
- -- our ability to integrate our recent mergers of ADS and NPI into our
business and administrative operations,
- -- general economic conditions in the United States and elsewhere, as well as
the economic conditions affecting the industries in which we operate,
- -- our historical losses,
- -- the decline in sales by our Kelly subsidiary due to the rising use of
digital cameras,
- -- the competitive environments within the funeral home administrative
services, pre-arranged death care services and photographic development
industries,
- -- our ability to raise additional capital, if and as needed,
- -- the cost-effectiveness of our product and service development activities,
- -- political and regulatory matters affecting the industries in which we
operate,
- -- our ability to combine our various operations so that they may work
together and grow successfully,
- -- the market acceptance, revenues and profitability of our current and future
products and services,
- -- the extent that our sales network and marketing programs achieve
satisfactory response rates, and
- -- 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 Form 10-QSB, our Annual Report on Form 10-KSB for the year ended
December 31, 2002 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 the 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.
Financial Condition and Liquidity
We had negative working capital of $69,181 at June 30, 2003, compared to working
capital of $227,298 at December 31, 2002. The decline in our working capital
primarily is a result of our cash used to fund operations for the current
six-month period.
Net cash used in operating activities was approximately $298,000 for the six
months ended June 30, 2003, compared to $97,000 for the six months ended June
30, 2002. NPI has begun to enter into marketing agreements with independent
agents to sell its products, and we expect NPI to start generating revenues
during the third quarter of 2003.
12
In addition, Kelly is experiencing a decline in revenues as a direct result of
an industry-wide transition to digital photography. We are closely monitoring
Kelly, and we are looking to cut costs and may curtail some or all of Kelly's
operations. For the six months ended June 30, 2003, we incurred a net loss of
$378,000, compared to $68,000 in the six months ended June 30, 2002. We incurred
$117,000 in depreciation and amortization charges in the current six-month
period, compared to $53,000 in the prior year's comparable period, primarily due
to placing our internally-developed software into service, resulting in $65,000
of depreciation expense for the six months ended June 30, 2003. Further, in the
prior year's comparable period, we received an extraordinary benefit of $159,000
and reduced our prepaid expenses and other current assets by $80,000; while, in
the current six-month period, we did not have any extraordinary item adjustments
and our prepaid expenses and other current assets was reduced by $11,000.
Net cash used in investing activities was approximately $35,000 for the six
months ended June 30, 2003, resulting from the purchase of equipment of $35,000,
as compared to net cash provided by investing activities of $425,000 for the six
months ended June 30, 2002, primarily resulting from the receipt of $472,000 as
a result of the acquisition transactions in March 2002 and offset by the
purchase of equipment of $47,000.
Net cash provided by financing activities was approximately $143,000 for the six
months ended June 30, 2003, resulting from the borrowings under the $150,000
secured line of credit we established in July 2002 that expires in July 2004. We
used the monies borrowed under the line of credit to fund operations. Net cash
used in financing activities was $27,000 in the six months ended June 30, 2002,
resulting from the issuance of a promissory note in the principal amount of
$80,000, sales of common stock for gross proceeds of $85,000, offset by the
repayment of outstanding notes totaling $175,000 of ADS and repayment of debt
due a stockholder of $17,000.
On July 25, 2003, we issued to one individual a 11% Secured Subordinated
Promissory Note in the principal amount of $165,000.00 and five year warrants to
purchase 25,000 shares of our common stock at an exercise price of $0.28 per
share. The note has a maturity date of January 2, 2005 and is secured by all of
our assets, senior to all of our other debt other than the mortgage
collateralizing the $150,000 line of credit we established with a North Carolina
bank. We received gross proceeds of $165,000 in connection with the issuance of
the note and warrants and paid a finder's fee to a registered broker-dealer of
$21,450 and the issuance of an additional 35,000 warrants. We also incurred
other costs related to the issuance of the note and warrants aggregating
approximately $11,000.
We have entered into a term sheet with a registered broker-dealer that
contemplates a private placement of senior subordinated convertible promissory
notes with gross proceeds of between $500,000 and $1,600,000. We anticipate that
the net proceeds of such a private placement will be used to fund our
operations, our acquisition of Ensure Agency, LLC and to retire the note payable
and accrued interest of $177,375. We cannot assure you that we will be
successful in raising additional capital on terms that are favorable to us, or
at all. If we cannot raise additional capital, we may have to curtail some or
all or our operations.
As a result of these activities, our cash and cash equivalents decreased to
$176,693 as of June 30, 2003 compared to $300,865 as of June 30, 2002.
Business Strategy
We intend to become a leading financial services company operating in the death
care industry. Through NPI, we anticipate seeking to market and sell
pre-arrangements of death care as a voluntary benefit to corporations, unions,
affinity groups and individuals. Through ADS, we intend to seek to increase the
amount of pre-need trust dollars currently under our administration. We
anticipate continuing to operate our Kelly subsidiary as a non-digital
photographic development laboratory to the photographic profession. However we
are monitoring Kelly's operations closely as sales continue to drop.
NPI is currently developing relationships with various distribution channels in
which to sell pre-arranged death care plans. NPI will seek to earn insurance
commissions and channel trust administration fees to ADS upon the sale of
pre-arrangements. Additionally, NPI may seek 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
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many funeral home locations. In March 2003, we entered into a non-binding letter
of intent to acquire Ensure Agency, LLC, a third party marketer for the
prearrangement of death care.
ADS is currently seeking to increase the amount of pre-need trust monies it
currently administrates. Currently, ADS administers approximately $131 million
in trust funds. We anticipate that ADS will seek to administer trust funds held
by various state funeral association trusts, establish and market master trusts
to the independent funeral home community and to acquire existing trust
administration companies. ADS currently is forming a master trust which will be
marketed in New York. We have been advised by Service Corporation International
("SCI") that SCI will no longer outsource its trust administration functions to
third parties. ADS currently administers $70 million of pre-need funds for SCI.
We believe that SCI's actions will not affect ADS's operations until the fourth
quarter of 2003. We further believe that ADS's trust administration for SCI was
not materially profitable for ADS and that, following SCI's withdrawal of its
business from ADS, ADS will be able to focus its marketing and performance on
more profitable accounts.
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
the acquisition of Ensure Agency, LLC or any other third party marketer segment
of the death care services industry.
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.
Results of Operations
Three Months Ended June 30, 2003
Net sales for the three months ended June 30, 2003 were approximately $500,000,
of which $192,000 was generated by Walker and $308,000 was generated by ADS. In
the three months ended June 30, 2002, net sales were $630,000, of which Walker
generated $262,000 in revenues and ADS generated $368,000 in revenues. Walker
continues to see a deterioration in its revenues as the professional photography
industry migrates to the use of digital imagery from film. We believe that the
reduction in ADS's revenues can be attributed primarily to SCI's disposition of
a number of funeral homes resulting in a lower amount of pre-need funds
available for administration by ADS. Through June 30, 2003, NPI had not
generated any revenues. As of August 12, 2003, NPI has caused to be licensed
nine insurance agents to sell pre-need insurance policies underwritten by a
nationally recognized insurance company with whom NPI acts as a managing general
insurance agency and has an additional eighteen agents seeking to become
licensed. NPI has earned approximately $20,000 in gross insurance commissions in
the third quarter of 2003 through the efforts of the nine licensed agents. NPI
expects to cause additional agents to be licenced and additional revenues to be
recognized in the near term.
Cost of sales for the three months ended June 30, 2003 was approximately
$145,000, all of which was incurred by Walker. In the three months ended June
30, 2002, cost of sales was approximately $154,000, all of which was incurred by
Walker. Costs of sales as a percentage of Walker's net sales was 75.5% in the
current three month period, compared to 58.8% in the prior year's comparable
period. A substantial portion of Walker's cost of sales relate to fixed charges
for labor and overhead. This results in cost of sales representing a higher
percentage of sales as sales are reduced. We intend to continue to monitor
Walker's fixed costs and seek means to further reduce these fixed charges.
14
Operating expenses for the three months ended June 30, 2003 were approximately
$498,000, of which $119,000 was generated by NPI, $71,000 was generated by
Walker and $308,000 was generated by ADS. The operating expenses for the three
months ended June 30, 2002 was $580,000, of which $125,000 was generated by NPI,
$116,000 was generated by Walker and $339,000 was generated by ADS. We have
endeavored to reduce operating expenses, through the reduction in compensation
paid at Walker as its operations are requiring less general and administrative
oversight and expenses and through careful monitoring of expenses at ADS.
However, we have expanded the marketing and personnel costs at NPI in efforts to
begin generating revenues beginning in the third quarter of 2003.
Interest expense for the three months ended June 30, 2003 was approximately
$2,000, as a result of our draw down of a line of credit and the accrual of
interest related to a promissory note of the company. We had interest income for
the three months ended June 30, 2002 of less than $1,000, as a result of having
cash balances earning interest in excess of interest expense on borrowed funds.
As a result of the foregoing, we incurred a net loss of approximately $146,000
for the three months ended June 30, 2003 or $0.02 per share, compared to a net
loss of $102,000 or $0.03 per share for the three months ended June 30, 2002. Of
the loss for the three months ended June 30, 2003, a loss of $24,000 can be
attributable to Walker, a loss of less than $1,000 can be attributable to ADS
and a loss of $121,000 can be attributable to NPI. Of the loss for the three
months ended June 30, 2002, a loss of $7,000 can be attributable to Walker,
income of $29,000 can be deemed attributable to ADS and a loss of $124,000 can
be attributable to NPI.
Six Months Ended June 30, 2003
Net sales for the six months ended June 30, 2003 were approximately $981,000, of
which $341,000 was generated by Walker and $640,000 was generated by ADS. In the
six months ended June 30, 2002, net sales were $829,000, of which Walker
generated $324,000 in revenues and ADS generated $505,000 in revenues. For the
2002 fiscal period, Walker's and ADS's operations were included for only four
months, as compared to the full six month period in the 2003 fiscal period.
Walker continues to see a deterioration in its revenues as the professional
photography industry migrates to the use of digital imagery from film. Through
June 30, 2003, NPI had not generated any revenues. As of August 12, 2003, NPI
has caused to be licensed nine insurance agents to sell pre-need insurance
policies underwritten by a nationally recognized insurance company with whom NPI
acts as a managing general insurance agency and has an additional eighteen
agents seeking to become licensed. NPI has earned approximately $20,000 in gross
insurance commissions in the third quarter of 2003 through the efforts of the
nine licensed agents. NPI expects to cause additional agents to be licenced and
additional revenues to be recognized in the near term.
Cost of sales for the six months ended June 30, 2003 was approximately $277,000,
all of which was incurred by Walker. In the six months ended June 30, 2002, cost
of sales was approximately $195,000, all of which was incurred by Walker. Costs
of sales as a percentage of Walker's net sales was 81.2% in the current six
month period compared to 60.2% in the prior year's comparable period. A
substantial portion of Walker's cost of sales relate to fixed charges for labor
and overhead. This results in cost of sales representing a higher percentage of
sales as sales are reduced. We intend to continue to monitor Walker's fixed
costs and seek means to further reduce these fixed charges.
Operating expenses for the six months ended June 30, 2003 were approximately
$1,063,000, of which $235,000 was generated by NPI, $163,000 was generated by
Walker and $665,000 was generated by ADS. The operating expenses for the six
months ended June 30, 2002 was $849,000, of which $230,000 was generated by NPI,
$147,000 was generated by Walker and $484,000 was generated by ADS. For the 2002
fiscal period, Walker's and ADS's operations were included for only four months,
as compared to the full six month period in the 2003 fiscal period. We have
endeavored to reduce operating expenses, through the reduction in compensation
paid at Walker as its operations are requiring less general and administrative
oversight and expenses. However, we have expanded the marketing and personnel
costs at NPI in efforts to begin generating revenues beginning in the third
quarter of 2003.
15
During the six months ended June 30, 2002, the Company recorded an extraordinary
gain of $158,690 as a result of the March 2002 mergers. (See Note 1 to the
Condensed Consolidated Financial Statements.)
Interest expense for the six months ended June 30, 2003 was approximately
$4,000, as a result of our draw down of a line of credit and the accrual of
interest related to a promissory note of the company. We had an interest expense
for the six months ended June 30, 2002 of $10,000, as a result of NPI having
incurred interest charges of $11,000 and Walker having interest income of
$1,000.
As a result of the foregoing, we incurred a net loss of approximately $378,000
for the six months ended June 30, 2003 or $0.05 per share, compared to a net
loss of $68,000 or $0.02 per share for the six months ended June 30, 2002. Of
the loss for the six months ended June 30, 2003, a loss of $99,000 can be
attributable to Walker, a loss of $29,000 can be attributable to ADS and a loss
of $250,000 can be attributable to NPI. Of the loss for the six months ended
June 30, 2002, net income of $140,000 can be attributable to Walker, income of
$21,000 can be deemed attributable to ADS and a net loss of $230,000 can be
attributable to NPI.
Item 3. Controls and Procedures.
An evaluation was performed, as of June 30, 2003, under the supervision and with
the participation of our management, including our President, Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on such evaluation,
our management has concluded that our disclosure controls and procedures were
effective as of June 30, 2003. There have been no significant changes in our
internal controls or in other factors that could significantly affect our
internal controls subsequent to June 30, 2003.
16
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, 2002, filed with the Securities and Exchange
Commission on March 31, 2003 (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. Changes in Securities.
None.
Item 3. Defaults on Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Set forth below is a list of the exhibits to this Quarterly Report on Form
10-QSB.
Exhibit
Number Description
------- -----------
10.1 Loan Agreement, dated as of July 24, 2003, between Walker
Financial Corporation and Dr. David Cohen.
10.2 11% Secured Subordinated Promissory Note, dated July 25, 2003, in
the principal amount of $165,000 and payable to Dr. David Cohen.
10.3 Warrant certificate, dated July 25, 2003, evidencing 25,000
warrants issued to Dr. David Cohen.
10.4 Security Agreement, dated July 25, 2003, between Walker Financial
Corporation and Dr. David Cohen.
10.5 Warrant certificate, dated July 25, 2003, evidencing 35,000
warrants issued to Strasbourger Pearson Tulcin Wolff Incorporated.
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.
17
(b) Reports on Form 8-K.
None.
18
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 14, 2003 Walker Financial Corporation
By: /s/ Mitchell S. Segal
---------------------------------------------
Mitchell S. Segal, President
(Principal Executive and Accounting Officer)
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Walker Financial Corporation
Quarterly Report on Form 10-QSB
Quarter Ended June 30, 2003
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 Loan Agreement, dated as of July 24, 2003, between Walker
Financial Corporation and Dr. David Cohen.
10.2 11% Secured Subordinated Promissory Note, dated July 25, 2003, in
the principal amount of $165,000 and payable to Dr. David Cohen.
10.3 Warrant certificate, dated July 25, 2003, evidencing 25,000
warrants issued to Dr. David Cohen.
10.4 Security Agreement, dated July 25, 2003, between Walker Financial
Corporation and Dr. David Cohen.
10.5 Warrant certificate, dated July 25, 2003, evidencing 35,000
warrants issued to Strasbourger Pearson Tulcin Wolff Incorporated.
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.
20