UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2006
|_| 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 650 Garden City, New York 11530
(Address of principal executive offices)
(516) 832-7000
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were a total of 13,837,220
shares of the registrant's common stock, par value $.10 per share, outstanding
as of May 1, 2006.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
1
WALKER FINANCIAL CORPORATION
Form 10-QSB
Quarter Ended March 31, 2006
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of March 31,2006 (unaudited) 2
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2006 and 2005(unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2006 and 2005 (unaudited) 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis or Plan of Operation 14
Item 3. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
Signatures 21
Exhibit Index 22
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2006
(Unaudited)
ASSETS
Current assets -
Cash $ 133,441
Accounts receivable, net 26,878
-----------
Total current assets 160,319
-----------
Property and equipment, net 145,006
Deferred financing costs, net 64,223
-----------
Total assets $ 369,548
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities -
Line of credit, bank $ 144,502
Accounts payable and accrued expenses 608,242
Bridge notes payable, net of debt discount of $13,220 361,780
Convertible bridge notes payable 375,000
Notes payable 157,000
10% Senior subordinated secured convertible promissory notes 50,000
Due to officers-stockholders 76,847
Accrued interest 113,602
Fair value of detachable warrants 77,500
Fair value of embedded conversion option 355,000
Discontinued liabilities 15,440
-----------
Total current liabilities 2,334,913
-----------
Long term liabilities -
12% Convertible debentures, net of debt discount of $213,889 6,111
10% Convertible debentures, net of debt discount of $214,861 6,139
-----------
Total liabilities 2,347,163
Commitments
Stockholders' deficiency -
Common stock, par value $.10 per share, 100,000,000
authorized, 13,837,220 shares issued and outstanding 1,383,722
Additional paid-in capital 6,328,476
Accumulated deficit (9,689,813)
----------
Total stockholders' deficiency (1,977,615)
-----------
Total liabilities and stockholders' deficiency $ 369,548
===========
<FN>
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
2006 2005
------------ ------------
Net revenues $ 88,195 $ 68,994
------------ ------------
Operating expenses
Compensation 132,861 184,350
Professional fees 58,338 43,692
Consulting fees -- 270,000
Depreciation and amortization 23,153 25,034
General and administrative 98,520 95,865
----------- -----------
Total operating expenses 312,872 618,941
----------- -----------
Operating loss (224,677) (549,947)
Other (expenses) income:
Debt conversion charge -- (933,793)
Change in fair value of detachable
warrants and embedded conversion option 7,700 --
Gain on extinguishment of debt 4,450 --
Interest expense, net (68,392) (193,711)
----------- -----------
Total other expenses (56,242) (1,127,504)
----------- -----------
Net loss $( 280,919) $(1,677,451)
=========== ===========
Per Share Information:
Weighted average number of
common shares outstanding 13,879,242 13,201,794
=========== ===========
Basic and diluted net loss
per common share $ (0.02) $ (0.13)
=========== ===========
<FN>
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three
Months
Ended March 31,
--------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (280,919) $(1,677,451)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 23,153 25,034
Compensatory element of stock issuances -- 105,000
Amortization of deferred compensation -- 157,500
Debt conversion charge -- 933,793
Amortization of deferred financing cost 6,002 161,376
Accretion of debt discount 29,150 14,750
Gain recognized in extinguishment of debt ( 4,450) --
Change in fair value of detachable warrants ( 1,700) --
Change in fair value of embedded conversion
option ( 6,000) --
Changes in operating assets and liabilities:
Accounts receivable, net 154 (8,950)
Prepaid expenses and other current assets 1,499 5,393
Accounts payable and accrued expenses 87,031 38,666
Accrued interest 21,005 35,541
----------- -----------
Net cash used in operating activities (125,075) (209,348)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,300) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment under line of credit, bank (3,202) (6,370)
Repayments of advances from officers-stockholders (51,524) (10,000)
Proceeds from sale of bridge notes -- 201,000
Proceeds from convertible debentures 346,000 --
Fees paid in connection with debt acquisition (20,150) (48,750)
Repayment of notes payable (48,000) --
----------- -----------
Net cash provided by financing activities 223,124 135,880
----------- -----------
Net increase(decrease)in cash 96,749 (73,468)
Cash - beginning of period 36,692 79,328
----------- -----------
Cash - end of period $ 133,441 $ 5,860
=========== ===========
<FN>
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three
Months
Ended March 31,
--------------------------
2006 2005
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 13,974 $ --
=========== ===========
Income taxes $ 1,074 $ --
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Return and rescission of 85,000 shares of common
stock for the return of a finance fee deposit $ 30,000 $ --
=========== ===========
Issuance of 12% convertible debentures
from advances at December 31, 2005 $ 95,000 $ --
=========== ===========
Issuance of 2,936,890 shares of common stock
for the settlement of 10% senior subordinated
secured convertible promissory notes and
accrued interest $ $ 980,203
=========== ===========
93,750 warrants granted in connection
with sale of $375,000 bridge notes $ $ 28,500
=========== ===========
187,500 warrants granted to agent in connection
with sale of $375,000 bridge notes $ $ 57,600
=========== ===========
<FN>
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Walker Financial Corporation (collectively with its subsidiaries, the "Company")
markets various insurance and trust administration services products through
two of its wholly-owned subsidiaries, National Preplanning, Inc. ("NPI") and
American DataSource ("ADS"). NPI is a managing general insurance agency and
third party marketer of insurance products, primarily final expense insurance,
to corporations, unions and affinity groups. ADS provides trust administration
services to independent funeral homes, state master trusts and companies that
own funeral homes or cemetery for pre-need funeral and cemetery trust accounts.
Through its wholly owned subsidiary, Kelly Color, Inc. ("Kelly Color"), the
Company operated in the film processing business through February 2004.
BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying condensed
consolidated financial statements include all adjustments (consisting of normal,
recurring adjustments) necessary to make the Company's financial position,
results of operations and cash flows not misleading as of March 31, 2006 and for
the three months ended March 31, 2006 and 2005. The results of operations for
the three months ended March 31, 2006, 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, 2005.
NOTE 2 - GOING CONCERN UNCERTAINTY
The accompanying 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 period ended March 31, 2006, the Company incurred a net loss of
$280,919, and had a working capital deficiency at March 31, 2006 of $2,174,594.
The Company has begun implementing various marketing plans to increase revenues
for both NPI and ADS. The Company has entered into a contract to sell the real
estate, building and improvements for $ 171,000 at which Kelly Color formerly
conducted its operations and is also seeking to make strategic acquisitions. In
addition, the Company will attempt to raise additional capital to assist in the
further execution of its marketing plans and to fund any possible future
acquisitions. The Company believes that the cash flows from a combination of any
future sale of the Kelly Color property, the successful execution of its
marketing plans resulting in increased sales and any additional capital that the
Company may obtain through sales of its equity and debt securities will be
sufficient to pay that portion of its debt that is due within the next twelve
months, as well as to fund the Company's operations. The Company's ability to
raise capital may be affected by several factors including but not limited to
default of its outstanding debt and a lack of liquidity of the Company's common
stock.
As discussed further in Note 8 to the financial statements, the Company has
entered into an agreement with Dutchess Private Equities Fund
("Dutchess" and "Dutchess Transaction") that provides for the sale to Dutchess
of up to $10,000,000 of the common stock of the Company. The agreement limits
the percentage of stock Dutchess will hold at any particular times to 4.99% of
the Company's outstanding shares. Consequently, if Dutchess cannot sell the
shares of the Company due to the lack of liquidity in the common stock of the
Company, the Company's ability to be able to obtain money from Dutchess for
acquisitions or to pay down the Company's current debt may be hindered or
limited. Additionally, the Company's ability to raise capital outside of the
Dutchess transaction may be affected by minimal revenues, the losses that we
incur and our stockholders deficiency as of March 31, 2006. As of March 31,
2006 we have not received any proceeds from the Investment Agreement.
7
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
There can be no assurance that the Company will be successful in any of its
plans as discussed in this Note 2. To the extent that the Company is
unsuccessful in its plans to increase its cash position, the Company may find it
necessary to further curtail 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 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Walker and its
wholly-owned subsidiaries NPI, Kelly Color and ADS collectively referred to as
the "Company". All significant inter-company transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION
Revenue is recognized at the time the administrative services are performed and
provided, or made available to its customers. Services are billed monthly based
upon predetermined percentage of the total assets included in the respective
pre-need funeral master trust fund.
STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS
Prior to January 1, 2006, the Company accounted for employee stock transactions
in accordance with Accounting Principle Board, APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company had adopted the pro forma disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
For Stock-Based Compensation."
Effective January 1, 2006, the Company adopted SFAS No. 123R "Share Based
Payment". This statement is a revision of SFAS Statement No. 123, and supersedes
APB Opinion No. 25, and its related implementation guidance. SFAS 123R addresses
all forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS 123R, SBP awards will result in a charge to
operations that will be measured at fair value on the awards grant date, based
on the estimated number of awards expected to vest over the service period.
Prior to the Company's adoption to SFAS No. 123R, SFAS No. 123 required that the
Company provide pro-forma information regarding net earnings and net earnings
per share as if the Company's stock based awards had been determined in
accordance with the fair value method described therein. The Company had
previously adopted the disclosure portion of SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure," requiring quarterly SFAS
No. 123 pro-forma disclosure. The pro-forma change for compensation cost related
to stock-based awards granted was recognized over the service period. For stock
options, the service period represents the period of time between the date of
grant and the date each option becomes exercisable without consideration of
acceleration provisions (e.g., retirement change of control. etc.)
No dislosure has been presented for the three months ended March 31, 2005, due
to the fact that all of the employee stock options were fully vested as of
December 31,2004 and the Company did not grant any options during the three
months ended March 31, 2005.
8
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NET LOSS PER SHARE
SFAS No. 128, "Earnings per Share." requires the presentation of basic and
diluted earnings per share ("EPS"). Basic EPS is computed by dividing loss
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS includes the potential dilution that
could occur if options or other contracts to issue common stock were exercised
or converted. The Company's outstanding options, warrants and convertible
securities, as set forth below, are not reflected in diluted earnings per share
because their effects would be anti-dilutive. Accordingly, basic and diluted
earnings per share are identical.
March 31,
-----------------------------------
2006 2005
------------------ ---------------
Options -- 52,170
Warrants 2,606,156 1,169,906
Convertible debt 4,978,169 2,936,890
------------------ ---------------
7,584,325 4,158,966
================== ===============
NEW ACCOUNTING PRONOUNCEMENTS
- - In February 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 155, which is an amendment of SFAS No. 133 and 140. This Statement; a)
permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation, b)
clarifies which interest-only strip and principal-only strip are not subject to
the requirements of SFAS 133, c) establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, e) amends SFAS
140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. This Statement is effective
for financial statements for fiscal years beginning after September 15, 2006.
Earlier adoption of this Statement is permitted as of the beginning of an
entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. Management is evaluating if this Statement will
have an impact on the financial statements of the Company.
- - In March 2006, the FASB issued SFAS No. 156, which amends FASB Statement
No. 140. This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. This Statement
amends SFAS 140 to require that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes this Statement will not have an impact on the financial
statements of the Company once adopted.
9
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(Unaudited)
RECLASSIFICATIONS
Certain accounts in the prior year's financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year's
financial statements. These reclassifications have no effect on previously
reported earnings.
NOTE 4 - LINE OF CREDIT, BANK
In July 2002, the Company entered into a credit facility with a bank consisting
of a $150,000 secured line of credit (the "Line of Credit"), with interest
payable monthly at the bank's prime rate plus 1.25%, originally expiring on July
3, 2004. The Line of Credit was modified in June 2004. The Line of Credit was
again modified in June 2005 and, as modified, requires monthly payments of
$1,510 and a final payment of the outstanding balance and all accrued interest
due on July 3, 2006. There was approximately $144,500 outstanding under the Line
of Credit as of March 31, 2006. The Line of Credit is collateralized by a
building located in North Carolina, which as of March 31, 2006, has been fully
depreciated. On March 29, 2006, the Company entered into a sales contract for
the sale of this property for $ 171,000 which is expected to close in June,
2006, at which time the Company will repay the outstanding balance of the credit
line.
NOTE 5 - NOTES PAYABLE
On March 15, 2000, the Company issued a 6% promissory note for $150,000. Due to
insufficient operating capital, the Company has not been able to meet this
commitment and currently is not in compliance with the terms of this note.
During the three months ended March 31, 2006, the Company did not make any
payments under this note. As of March 31, 2006, the principal balance due under
this note is $105,000.
On July 11, 2005, the Company sold and issued a note payable in the aggregate
principal amount of $100,000. The maturity date of the note was November 30,
2005 and has a stated interest rate of 10% per annum. 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. As of March 31,
2006, the principal balance due under this note is $ 52,000.
NOTE 6 - BRIDGE NOTES
In May 22, 2004 and August 4, 2004, The Company issued 6% Bridge Notes for
$125,000 and $150,000, respectively. As of March 31, 2006, the Company has
outstanding 6% Bridge Notes of $375,000. The bridge notes mature on January 15,
2006 through May 15, 2006. 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 these notes.
NOTE 7 - CONVERTIBLE BRIDGE NOTES
In December 2004 and February 2005, the Company issued 10% convertible
promissory notes in the aggregate principal amount of $375,000. The convertible
promissory notes matured in January 2006. 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. The notes are convertible into common
stock of the Company at $0.71 per share.
NOTE 8- DUTCHESS TRANSACTION
On December 23, 2005, the Company entered into two definitive agreements with
Dutchess Private Equities Fund, L.P. ["Dutchess"]. The agreements were
subsequently amended on February 20, 2006. Both agreements require the Company
to file a registration statement to register the shares of common stock
underlying such agreements. The Company filed the registration statement on
March 31, 2006. As of March 31, 2006 we have not received any proceeds from the
Investment Agreement.
10
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
12 % CONVERTIBLE DEBENTURES:
On January 11, 2006, the Company closed its agreement providing for the sale of
$220,000 in principal amount of five-year convertible debentures. The
convertible debentures bear interest at 12% per annum and mature in December
2010. The gross proceeds of $220,000 were recorded net of a discount of
$219,200. The debt discount was calculated using the Black Scholes option
valuation model of approximately $175,600 for the embedded conversion option and
approximately $43,600 for the 423,077 warrants granted.
On February 20, 2006, the Company modified the December 23, 2005 12% Debenture
Agreement that provided for the sale of $220,000 of five-year convertible
debentures to Dutchess. The Company reduced the conversion price from $0.13 to
$0.10 and increased the number of warrants from 423,077 to 550,000. The warrants
may be exercised for a period of five years at an exercise price of $0.10. Under
accounting guidance enumerated in EITF Issue No. 96-19 "Debtor's Accounting for
a Modification or Exchange of Debt Instruments." EITF 96-19 provides that a
substantial modification of terms in an existing debt instrument should be
accounted for like, and reported in the same manner as, an extinguishment of
debt. Further, EITF 96-19 indicates that the modification of a debt instrument
by a debtor and a creditor in a non-troubled debt situation is deemed to have
been accomplished with debt instruments that are substantially different if the
present value of the cash flows under the terms of the new debt instrument is at
least 10 percent different from the present value of the remaining cash flows
under the terms of the original instrument at the date of the modification. Upon
the effective debt modification date of February 20, 2006, the Company recorded
a debt extinguishment gain of approximately $4,500.
The modified convertible debenture was recorded net of a discount of $220,000.
The debt discount was calculated using the Black Scholes option valuation model
of approximately $219,700 for the embedded conversion option, approximately
$35,700 for the 550,000 warrants granted and a charge to the statement of
operations for $35,400 for the fair value of the remaining fair value not
attributable to the debt discount.
10% CONVERTIBLE DEBENTURE:
On February 20, 2006, the Company entered into an agreement providing for the
sale of and issuance of $221,000 in principal amount of its five-year
convertible debenture to Dutchess. The convertible debentures bear interest at
10% per annum. The convertible debenture is convertible into shares of the
Company's common stock, at any time, at a conversion price of $0.10 per share
The Company's obligation to repay the amounts outstanding under the Convertible
Debentures is secured by substantially all of the Company's assets. In
connection with the Convertible Debentures, the Company also granted warrants to
purchase 412,500 shares of common stock. The warrants may be exercised for a
period of five years at an exercise price of $0.10.
The gross proceeds of $221,000 have been recorded net of a debt discount of
$221,000. The debt discount was calculated using the Black Scholes option
valuation model of approximately $190,800 for the embedded conversion option,
approximately $35,600 for the 412,500 warrants granted for and a charge to the
statement of operations for $5,400 for the fair value of the remaining fair
value not attributable to the debt discount.
The warrants and the embedded conversion option were accounted for under EITF
issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" and EITF 05-4, view A "The effect
of a Liquidated Damages Clause on a Freestanding Financial Instrument." Due to
certain factors and the liquidated damage provision in the registration rights
agreement, the Company determined that the embedded conversion option and the
warrants are derivative liabilities. Accordingly, the warrants and the embedded
conversion option will be marked to market through earnings at the end of each
reporting period. The warrants and the conversion option are valued using the
Black-Scholes valuation model. For the period ended March 31, 2006, the Company
reflected a gain of approximately $48,500 representing the change in the value
of the warrants and conversion option.
11
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
INVESTMENT AGREEMENT:
On December 23, 2005, the Company entered into an investment agreement with
Dutchess, such agreement was subsequently amended on February 20, 2006. The
amended investment agreement provides for the sale and issuance from time to
time of up to $10,000,000 in shares of Common Stock for a period of up to 36
months from the date the registration statement is declared effective. The
maximum number of shares that the Company may put to Dutchess at any one time
shall be equal to, at the Company's election, either:
(a) 200% of the average daily volume in the U.S. market of the Common Stock for
the ten trading days prior to the date the Company notifies its intent to sell
shares, multiplied by the average of the three daily closing bid prices
immediately preceding the date a put notice is delivered, or
(b) a number of shares having a value of $200,000. The Company may not submit a
new put notice until after the completion of a previous sale under the
investment agreement. The purchase price for the common stock to be sold shall
be equal to 93% of the lowest closing best bid price of the common stock during
the five-day period following the date the Company delivers a put notice.
The Company is obligated to file a registration statement within 10 days after
filing the Company's annual report under Form 10-KSB for the year ended December
31, 2005, but in no event later than March 31, 2006 for the registration of the
shares of common stock issuable upon conversion of the convertible debentures,
exercise of the warrants and upon a sale under the investment agreement.
- - If the Company does not file the Registration Statement with the SEC by March
31, 2006, it is obligated to pay liquidated damages to the Investor in an amount
equal to 2% of the principal amount of the debenture outstanding, pro rata, for
every 15 days which such registration statement has not been filed.
- - In addition, if the registration statement is not filed by the filing date,
the conversion price of the Convertible Debenture will decrease by 10% of and
continue to decrease by 10% for each 15 day calendar period the registration
statement goes without filing.
- - If the registration statement is not declared effective within 90 days of the
filing date, the Company is obligated to pay liquidated damages in an amount
equal to 2% of the principal amount of the debenture outstanding, pro rata, for
every 30 days which such registration statement has not been declared effective
by the SEC.
- - The Company is further obligated to use its best efforts to cause the SEC to
declare the registration statement effective within 90 days after the filing
date of the registration statement. If the Company does not file the
registration statement with the SEC by the filing date, it is obligated to pay
liquidated damages to the Investor in an amount equal to 2% of the principal
amount of the debenture outstanding, pro rata, for every month which such
registration statement has not been filed.
The Company filed the registration statement on March 31, 2006.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2006, the Company repaid $51,524 of the
advances previously advanced for working capital purposes. As of March 31, 2006,
the total amount due to the officers-stockholders was $76,847.
The Company had an employment agreement with Mitchell Segal to serve as the
Company's president and chief executive officer through December 31, 2005. The
Company has indicated it expects to renew the employment agreement with Mr.
Segal to serve as the Company's president and chief executive officer through
2010. As of March 31, 2006, the Company was in arrears in payment of Mr. Segal's
salary in the amount of approximately $109,000 which is included on the
consolidated balance sheet as part of accounts payable and accrued expenses.
The Company has an employment agreement with Peter Walker through March 18,
2012. As of December 31, 2005, the Company was in arrears under Mr. Walker's
employment agreement in the amount of approximately $129,000 which is included
on the consolidated balance sheet as part of accounts payable and accrued
expenses.
12
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE 10 - 10% SENIOR SUBORDINATED SECURED CONVERTIBLE PROMISSORY NOTES
In December 2003, the Company sold and issued 10% senior subordinated secured
convertible promissory notes. The notes were initially convertible into shares
of the Company's common stock at conversion prices of $0.71 per share through
December 5, 2005 and $1.25 thereafter. The notes carried a penalty and default
interest provision at a stated monthly rate of 1.5% of the principal balance. As
of March 31, 2006, the Company has a remaining principal balance of $50,000 due
to the holders and is in default with the terms of the note.
NOTE 11 - CAPITAL STOCK/STOCKHOLDERS' DEFICIENCY
On December 20, 2005, in connection with the Dutchess Transaction, the Company
was required to remit payment of $15,000 for due diligence fees. The Company
opted to issue 85,000 shares of its common stock valued at approximately $30,000
as a deposit. In February 2006 the shares have been returned to the Company and
the $15,000 fee was settled with the proceeds received from the convertible
debentures.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
INTRODUCTORY COMMENT - TERMINOLOGY
Throughout this Quarterly Report on Form 10-QSB, the terms the "we," "us," "our"
and "our company" refers to Walker Financial Corporation ("Walker") and, unless
the context indicates otherwise, includes, on a consolidated basis, Walker's
wholly-owned subsidiaries, National Preplanning, Inc. ("NPI"), American
DataSource, Inc. ("ADS") and Kelly Color, Inc. ("Kelly Color").
INTRODUCTORY COMMENT - FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-QSB include
"forward-looking statements". Forward-looking statements involve known and
unknown risks, uncertainties and other factors which could cause actual
financial or operating results, performances or achievements expressed or
implied by such forward-looking statements not to occur or be realized. Such
forward-looking statements generally are based on our best estimates of future
results, performances or achievements, predicated upon current conditions and
the most recent results of the companies involved and their respective
industries. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "could," "should," "project,"
"expect," "believe," "estimate," "anticipate," "intend," "continue,"
"potential," "opportunity" or similar terms, variations of those terms or the
negative of those terms or other variations of those terms or comparable words
or expressions. Potential risks and uncertainties include, among other things,
such factors as:
o the success of our business strategies and future plans of operations,
o general economic conditions in the United States and elsewhere, as well as the
economic conditions affecting the industry in which we operate,
o changes in the nature and enforcement of laws and regulations affecting our
products, services, customers, suppliers and sales agents,
o the competitive environments within the insurance, employee benefit, mortgage
services areas.
o our ability to raise additional capital, if and as needed,
o the cost-effectiveness of our product and service development activities,
o political and regulatory matters affecting the industry in which we operate,
o the market acceptance, revenues and profitability of our current and future
products and services,
o the extent that our sales network and marketing programs achieve satisfactory
response rates,
o our ability to acquire additional companies operating the insurance and
financial services industry and ability to successfully integrate such
acquirees, if any, into our operations, and
o the other risks detailed in this Quarterly Report on Form 10-QSB and, from
time to time, in our other filings with the Securities and Exchange Commission.
Readers are urged to carefully review and consider the various disclosures made
by us in this Quarterly Report on Form 10-QSB, our Annual Report on Form 10-KSB
for the year ended December 31, 2005 and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this Form 10-QSB speak only as
of the date hereof and we disclaim any obligation to provide updates, revisions
or amendments to any forward-looking statements to reflect changes in our
expectations or future events.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of those financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities at the date
of our financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments or
uncertainties, and potentially result in materially different results under
different assumptions and conditions. The Company believes that are our most
critical accounting policies includes: recognition of transactions revenues and
accounting for the granting of 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.
14
ACCOUNTING FOR STOCK-BASED COMPENSATION
Prior to January 1, 2006, the Company accounted for employee stock transactions
in accordance with Accounting Principle Board, APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company had adopted the pro forma disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
For Stock-Based Compensation."
Effective January 1, 2006, the Company adopted SFAS No. 123R "Share Based
Payment". This statement is a revision of SFAS Statement No. 123, and supersedes
APB Opinion No. 25, and its related implementation guidance. SFAS 123R addresses
all forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS 123R, SBP awards will result in a charge to
operations that will be measured at fair value on the awards grant date, based
on the estimated number of awards expected to vest over the service period.
We account for the fair value of options and warrants for non-employees in
accordance with SFAS No. 123R, 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.
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 March 31, 2006 compared to the same period in 2005
Net sales for the three months ended March 31, 2006 were $ 88,195 as compared to
$ 68,994 for the three months ended March 31, 2005. Almost all of the sales
under both periods was generated by ADS. Although National Preplanning has
entered into several strategic relationships which allows for the marketing of
its products by third parties, the marketing of NPI's products has not resulted
in any material revenues being achieved. ADS seeks to increase its sales lost
as a result of losing the business from its largest client, Service Corporation
International, which brought all of its trust assets that were administered by
third parties in-house and is close to achieving net income. Although ADS has
achieved positive cash flow it still is incurring a net loss and seeks to
increase its revenues to halt this loss.
Operating expenses for the three months ended March 31, 2006 were $ 312,872 of
which $ 191,776 was generated by NPI, $ 25,915 was generated by Walker, and $
95,181 was generated by ADS. The operating expenses were composed of $ 132,861
of compensation expense, $58,338 of professional fees, general and
administrative expense of $ 98,520 and depreciation of $23,153. Operating
expenses for the three months ended March 31, 2005 were $ 618,941 of which $
219,000 was incurred by NPI, $ 29,000 was generated by Walker and $108,000 was
incurred by ADS. Additionally, there were expenses related to the issuance of
shares to consultants in the amount of $ 105,000 and the amortization of
deferred compensation of $ 157,500 incurred by NPI.
The net loss for the three months ended March 31, 2006 was $ 280,919 as compared
to $ 1,677,451 for the three months ended March 31, 2005. The loss from
continuing operation for the three months ended March 31, 2006 was composed of a
loss of $ 9,845 from ADS, a loss of $ 188,917 from NPI, and a loss of $ 25,915
from Walker International Industries. This compares with the loss incurred for
the three months ended March 31, 2005 of which $ 39,000 was incurred by ADS and
$272,000 was incurred by NPI and $ 29,000 was attributable to Walker.
Interest expense for the three months ended March 31, 2006 was $68,392 as
compared to interest expense for the three months ended March 31, 2005 of $
193,711. Interest expense is derived by the costs of borrowing funds. The
decrease is due to the fact that for the period ended
March 31, 2005, $126,000 of the interest expense was related to the write-down
of deferred offering costs related to the settlement of our 10 % Notes in the
amount of $ 795,000.
As a result of the foregoing, we incurred a net loss of $ 280,919 for the three
months ended March 31, 2006 or $ .02 per share, compared to a net loss of $ $
1,677,451 for the three months ended March 31, 2005 or $ .13 per share.
15
LIQUIDITY AND FINANCIAL RESOURCES
We have negative working capital of $ 2,174,594 at March 31, 2006 compared to
negative working capital of 1,913,630 at December 31, 2005. Our working
capital deficiency is principally the result of borrowings which are currently
due or will become due within the next 12 months in addition to our accounts
payable and accrued expenses.
Net cash used in operating activities was $ 125,075 for the three months ended
March 31, 2006 compared to net cash used in operating activities of $ 209,348
for the three months ended March 31, 2005. The decrease is primarily a result
of a decrease in our net loss as a result of decreasing our operating expenses,
including decreased payroll and marketing expense in our National Preplanning
subsidiary.
Net cash used in investing activities for the three months ended March 31, 2006
was $ 1,300 as compared to none in the period ended March 31, 2005. Activities
were limited to the purchase of property, plant and equipment.
Net cash provided by financing activities was $ 223,124 for the three months
ended March 31, 2006 as compared with $135,880 for the three months ended March
31, 2005. During the three months ended March 31, 2006, the net cash provided
by financing activities came from the sale of bridge notes of the Company
reduced by repayments of other Company debt. As a result of these activities,
our cash positions were
$ 133,441 at March 31, 2006 as compared to $ 5,860 as of March 31, 2005.
On December 23, 2005, the Company entered into two definitive agreements with
Dutchess Private Equities Fund, L.P. ["Dutchess"]. The agreements were
subsequently amended on February 20, 2006. Both agreements require the Company
to file a registration statement to register the shares of common stock
underlying such agreements.
On December 23, 2005, the Company entered into an agreement providing for the
sale of $220,000 in principal amount of five-year convertible debentures. The
convertible debentures bear interest at 12% per annum and mature in December
2010. The Company's obligation to repay the amounts outstanding under the
convertible debentures is secured by substantially all of the Company's assets.
Additionally, on December 23, 2005, the Company entered into an investment
agreement providing for the sale and issuance from time to time of up to
$10,000,000 in shares of Common Stock for a period of up to 36 months from the
date the registration statement is declared effective. The maximum number of
shares that the Company may put to Dutchess at any one time shall be equal to,
at the Company's election, either:
(a) 200% of the average daily volume in the U.S. market of the Common Stock for
the ten trading days prior to the date the Company notifies its intent to sell
shares, multiplied by the average of the three daily closing bid prices
immediately preceding the date a put notice is delivered, or
(b) a number of shares having a value of $200,000. The Company may not submit a
new put notice until after the completion of a previous sale under the
investment agreement. The purchase price for the common stock to be sold shall
be equal to 93% of the lowest closing best bid price of the common stock during
the five-day period following the date the Company delivers a put notice.
Under the Investment Agreement, the Company is obligated to file a registration
statement by January 13, 2006 for the registration of the shares of common stock
issuable upon conversion of the convertible debentures, exercise of the warrants
and upon a sale under the Investment Agreement. The Company is further obligated
to use its best efforts to cause the SEC to declare the registration statement
effective within 90 days after the filing date of the registration statement.
The Company filed the registration agreement on January 11, 2006.
Subsequent to the year ended December 31, 2005, the Company amended the Dutchess
Transaction as follows:
On February 20, 2006, the Company modified the December 23, 2005 Debenture
Agreement that provided for the sale of $220,000 of five-year convertible
debentures to Dutchess.
The amendment changes the following terms:
Convertible at any time at the lesser of (i) the lowest closing bid price of
the Common Stock between December 12, 2005 and the date of filing of the
Registration Statement, or (ii) $0.10. Additionally, the amendment removes the
ability of Dutchess to switch the conversion price of the Debenture from a fixed
price to one that is based on the market price of the Company's stock in the
event of default and removes the right to use proceeds from the Investment
Agreement to redeem the Convertible Debenture.
The Investment Agreement with Dutchess provides for the sale and issuance to
Dutchess from time to time of up to $10,000,000 in shares of common stock for a
period of up to 36 months from the date the registration statement is declared
effective.
The amendment removes Dutchess's obligation under the investment agreement to
take the shares under the agreement on the condition that the shares be free
trading under the cover provisions of the Investment Agreement.
16
On February 20, 2006, the Company entered into a second agreement providing for
the sale of and issuance of $221,000 in principal amount of its five-year
convertible debenture to Dutchess. The convertible debentures bear interest at
10% per annum. The debenture is convertible into shares of the Company's Common
Stock, at any time at the lesser of (i) the lowest closing bid price of the
common stock between February 20, 2006 and the date of filing of a registration
statement covering the resale of the shares underlying this convertible
debenture, or (ii) $0.10.
The Company's obligation to repay the amounts outstanding under the Convertible
Debentures is secured by substantially all of the Company's assets.
In connection with the Convertible Debentures, the Company also granted warrants
to purchase 412,500 shares of common stock. The warrants may be exercised for a
period of five years at an exercise price of $0.10.
There can be no assurance that the Company will be successful in any of its
plans as discussed. To the extent that the Company is unsuccessful in its plans
to increase its cash position, the Company may find it necessary to further
curtail its operations and possible future acquisitions. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
PLAN OF OPERATION
We create, provide and market death care financial service products, currently
focusing on prearrangement or pre-need products. Prearrangement and preneed
products allow an individual to secure the funding for and in some instances the
goods and services for their future funerals prior to their death. For preneed
funding products we sell, as an agent for various life insurance companies which
underwrite the policies, life insurance policies in amounts from $ 3,000 to $
15,000 which upon an individual's death would be used for the payment of his or
her funeral costs.
We have established a worksite and affinity marketing strategy by positioning
the prearrangement of death care and other pre-need products as a voluntary or
contributory benefit for corporations, unions, and affinity groups to offer
their employees or members. In this regard we seek to market preneed funding
products and the ability of individuals to take this funding and use it to
purchase a prearrangement at funeral homes by introducing these products to
individuals as a benefit of their employment or union membership similar to the
way they are introduced to health insurance, life insurance, dental insurance
and legal plans. The funding products that we sell are called preneed or final
expense insurance policies. This insurance policy is similar to a fixed pay
whole life insurance policy with an inflation rider which acts to increase
annually the amount of the benefit that is paid to an individual. The policy
value grows over time, which acts as a hedge against inflation and rising
funeral prices. The policy can be assigned to a funeral home when a
prearrangement contract is executed. The funeral home uses the proceeds of the
policy to cover the costs of the funeral contracted for. If a prearrangement is
not made the policy proceeds can be used by the descendants beneficiaries to
cover the costs of the descendants funeral.
Our subsidiary, National Preplanning has entered into various third party
marketing agreements which allow it to market the above mentioned funding
products to employees in the workplace, individuals belonging to unions and to
individuals belonging to various associations. These marketing agreements with
larger and more established insurance agencies which sell a variety of other
insurance products (i.e. health insurance. group life insurance, long term care
insurance, etc.) to their clients allow National Preplanning to market its
products to their clients in return for the sharing of commissions upon the sale
of these products. These agreements additionally allow National Preplanning to
keep its sales costs low until we start to generate more substantial revenues.
Our other subsidiary, American Datasource, Inc. is involved in the
administration of monies in trust that are used for the payment of prearranged
funerals upon the death of an individual. These trust accounts are created by an
individual entering into a prearrangement contract with a funeral director.
Instead of funding a prearrangement with a preneed insurance policy as discussed
above some funeral directors suggest that an individual place monies into trust.
That trust account is professionally money managed by unaffiliated third party's
and the account is assigned to the funeral home, similar to the preneed
insurance policy, and used by the funeral director to cover the funeral costs of
that individuals funeral upon their death. American DataSouce provides
accounting and administrative functions in reporting annually on the monies in
each trust account in addition to the administration of the monies upon an
individuals death.
In addition to the funeral related products we are currently marketing, the
Company is desirous of adding other employee benefit and insurance products and
services to market within as well as outside the workplace that benefit the baby
boomer and senior populations. Products may include other insurance related
products such as disability insurance, long term care, legal plans, reverse
mortgages and other voluntary benefits. The Company may seek to acquire
agencies and companies that currently market these other products.
The Company entered the marketing of funeral funding products through its merger
in March, 2002 with National Preplanning, Inc. and American DataSource, Inc.
The Company was previously engaged in non-digital photographic development
NPI has earned minimal insurance commissions from the sale of preneed and final
expense insurance policies to date. The insurance commissions are paid by the
insurance companies which create, underwrite and issue these policies. The
Company's other subsidiary, American DataSource, Inc., earns administrative fees
on the administration of preneed funds in trust which are paid by the trust.
17
NPI is the subsidiary from which we plan on achieving much of our growth. NPI
has entered into various strategic relationships and selling agreements which
will allow it to market its products to a number of individuals. Although NPI's
agreements allow it to market its products to over 3 million individuals, the
timing of when the marketing occurs, the amount of marketing that occurs and the
communication that is delivered to these potential clients are all subject to
the decisions and control of both our strategic partners and the ultimate client
groups. As a result, NPI's has yet to generate minimal revenues from its
worksite marketing strategy and has only generated minimal revenue selling
pre-need policies out of funeral homes located in New Jersey.
Most of the marketing that is currently planned for National Preplanning's
products are marketing that directs potential consumers to the company's
enrollment website as well as its partner's web enrollment site. Although the
internet has seen a lot of growth in its use for the sale of various products on
various websites, the use of the internet and websites for the sale of voluntary
benefit products is relatively new. The Company will closely monitor the
success or lack thereof of its enrollment and marketing philosophy.
NPI has only generated minimal revenues from its worksite marketing efforts and
there can be no assurance that it will ever generate any substantial revenues
from its worksite marketing efforts. The Company may decide to revert its
National Preplanning marketing strategy to a more common approach such as print,
radio and television advertising directed at individuals outside of worksite and
affinity marketing
Whereas, NPI originally sought to acquire direct third party marketers of
pre-arranged death care which market pre-arranged death care services primarily
by direct mail, as well as run the pre-arrangement office in many funeral home
locations the Company has changed its focus on developing NPI's existing funeral
advisory and funding business and focusing on potential acquisitions in the
employee benefit, insurance, mortgage and worksite marketing areas which allow
for the cross selling of its products in addition to other businesses which
market products and services which benefit the baby boomer and senior population
segments. Our ability to accomplish any acquisitions is dependent upon our
ability to raise capital for said acquisitions. Our ability to raise capital
may be affected by several factors including but not limited to our default
under a $ 50,000 10% Convertible Promissory Note and a lack of liquidity of our
common stock. The Dutchess Capital transaction, which provides the Company with
a means of potentially raising capital, may not be sufficient for the Company to
accomplish these potential acquisitions. The Dutchess documents provide
limitations on the percentage of stock Dutchess can hold at particular times and
in no event may Dutchess hold greater than 4.99% of the outstanding common stock
of the Company. Consequently, if Dutchess cannot sell our shares due to the
lack of liquidity in our common stock, our ability to be able to obtain money
from Dutchess Capital for acquisitions or to pay down our current debt may be
hindered or limited. Additionally our ability to raise capital outside of the
Dutchess transaction may be affected by our minimal revenues, the losses that we
incur, and our financial picture including our working capital deficit.
Potential capital sources may require us to pay off existing indebtedness before
providing any capital to the Company and the Company may be unable to do so.
ADS is currently seeking to increase the amount of pre-need trust monies it
currently administrates. Currently, ADS administers approximately $40 million
in trust funds. In September, 2003, ADS lost a significant amount of revenues
from its business when its largest client, Service Corporation International,
the largest funeral home and cemetery operator in the country removed
approximately $ 70,000,000 of trust assets that ADS administrated and placed
said administration overseas. SCI removed all trust assets under administration
from a variety of outside vendors such as ADS. As a result, ADS has increased
its efforts to administer trust funds held by various state funeral association
trusts, establish and market master trusts to the independent funeral home
community and to acquire existing trust administration companies.
ADS has entered into a marketing agreement with Parkway Advisors, L.P.
["Parkway"], whereby Parkway will will market ADS trust services to their
existing and potential clients. Parkway would share in fees generated by ADS's
services. It is the hope that this agreement will generate additional revenue
for ADS although to date no revenues have been generated from this relationship.
There can be no assurance that we will achieve successful and profitable results
from our distribution and marketing efforts or that we will be able to complete
acquisitions within the worksite marketing and employee benefit sectors.
We intend any acquisitions to be accomplished through issuances of stock, debt
and cash, or a combination of such forms of consideration. Accordingly, any
future merger or acquisition may have a dilutive effect on our stockholders as
of the time of such mergers and acquisitions. Additionally, our ability to
accomplish any future acquisitions may depend on our cash position, our ability
to raise capital, the stock price of our common stock, and our ability to
service any debt we may incur.
We believe that our operating results may fluctuate greatly quarter to quarter
due to several factors, including the success of our merger and acquisition
strategy and the impact of any increases in our results of operations as we
pursue new business both in and outside of the death care services industry.
18
ITEM 3. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive and financial
officer, to allow timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
as ours are designed to do, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As of March 31, 2006, 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 for those material weaknesses discussed in the following
paragraph.
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. We have implemented certain procedures to
help minimize the risks associated with this material weakness, including using
an 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 and relieve our chief
executive officer of his current chief financial officer duties.
Changes in Internal Controls
Our certifying officer believes that we have sufficient compensating controls to
minimize the risks associated with the material weakness identified by our
independent auditors and discussed in the immediately preceding section of this
Item 3. In such regard, 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. There were no changes to
internal controls during the quarter ended March 31, 2006 that have materially
or that are reasonably likely to affect the internal controls.
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, 2005, filed with the Securities and Exchange
Commission on March 24, 2006 (Commission File No.: 0-5418), and to the
references made in such Item, for a discussion of all material pending legal
proceedings to which we or any of our subsidiaries are parties.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On February 20, 2006, the Company amended its Investment Agreement with Dutchess
providing for the sale and issuance to Dutchess from time to time of up to
$10,000,000 in shares of common stock for a period of up to 36 months from the
date the registration statement is declared effective. The amendment removes
Dutchess's obligation under the investment agreement to take the shares under
the agreement on the condition that the shares be free trading under the cover
provisions of the Investment Agreement.
On February 20, 2006, the Company entered into an agreement providing for the
sale of and issuance of $221,000 in principal amount of its five-year
convertible debenture to Dutchess. The convertible debentures bear interest at
10% per annum. The debenture is convertible into shares of the Company's Common
Stock, at any time at the lesser of (i) the lowest closing bid price of the
common stock between February 20, 2006 and the date of filing of a registration
statement covering the resale of the shares underlying this convertible
debenture, or (ii) $0.10. The Company issued 410,250 five year warrants having
an exercise price of $ .10.
We believe the issuance of such common stock, convertible debenture and warrants
are exempt from the registration requirements of the Securities Act pursuant to
the provisions of Section 4(2) of the Securities Act.
19
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Set forth below is a list of the exhibits to this Quarterly Report on Form
10-QSB.
Exhibit
Number Description
- ------ -----------
31.1 Certification pursuant to Exchange Act Rule 13a-14(a) of Mitchell S. Segal
in his capacity as chief executive
officer and chief financial officer of the registrant.
32.1 Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002
of Mitchell S. Segal in his capacity as
chief executive officer and chief financial officer of the
registrant.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 12, 2006
Walker Financial Corporation
By: /s/ Mitchell S. Segal
-------------------------------------
Mitchell S. Segal, President
21
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
31.2 Certification pursuant to Exchange Act Rule 13a-14(a) of Mitchell S. Segal
in his capacity as chief executive officer and chief financial officer of
the registrant.
32.2 Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of
Mitchell S. Segal in his capacity as chief executive officer and chief
financial officer of the registrant.
22