As filed with the Securities and Exchange Commission on November 7, 2005
An Exhibit List can be found on page II-5.
Registration No. 333-122776
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
--------------------------
Amendment No. 3 to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
WALKER FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Delaware 7384 13-2637172
(State or other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction Classification Code Number) Identification No.)
of Incorporation
or Organization)
990 Stewart Avenue, Suite 60A
Garden City, New York 11530
(516) 832-7000
(Address and telephone number of principal executive offices and principal place
of business)
Mitchell S. Segal, Chief Executive Officer
990 Stewart Avenue, Suite 60A
Garden City, New York 11530
(516) 832-7000
(Name, address and telephone number of agent for service)
--------------------------
Copies to:
Gregory Sichenzia, Esq.
Louis A. Brilleman, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
--------------------------
Approximate date of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
--------------------------
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount to be Offering Price Per Aggregate Offering Registration
to be Registered Registered(1) Security Price Fee
- ---------------------------------------------------- ------------- ------------------ ------------------ ------------
Common stock, $.10 par value 4,436,890 $0.44 (1) $ 1,952,231.60 $ 229.78
Common stock, $.10 par value, issuable upon exercise 955,526 $0.44 (1) $ 420,431.44 $ 49.49
of common stock purchase warrants
Common stock, $.10 par value, issuable upon exercise 10,760 $6.30 (2) $ 67,788.00 $ 7.98
of common stock purchase warrants
Common stock, $.10 par value, issuable upon exercise 10,760 $7.23 (2) $ 77,794.80 $ 9.16
of common stock purchase warrants
Common stock, $.10 par value, issuable upon exercise 17,860 $4.20 (2) $ 75,012.00 $ 8.83
of common stock purchase warrants
Common stock, $.10 par value, issuable upon exercise 175,000 $0.45 (2) $ 78,750.00 $ 9.27
of common stock purchase warrants
Total: 5,606,796 $ 314.51(3)
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the
average of the high and low price as reported on the Over-The-Counter
Bulletin Board on February 10, 2005, which was $0.44 per share.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
(3) Previously paid.
--------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Preliminary Prospectus Subject To Completion, Dated November 7, 2005
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
WALKER FINANCIAL CORPORATION
5,606,796 Shares of
Common Stock
This prospectus relates to the sale of up to 5,606,796 shares of our
common stock by selling stockholders, including up to 4,436,890 shares of common
stock and up to 1,169,906 shares of common stock issuable upon exercise of
common stock purchase warrants. We will not receive proceeds from the sale of
our shares by the selling stockholders.
Our common stock is quoted on the Over-The-Counter Bulletin Board under
the symbol "WLKF." The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on October 20,, 2005, was
$.23.
--------------------------
Investing in these securities involves significant risks.
See "Risk Factors" beginning on page 3.
--------------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _________ __, 2005.
TABLE OF CONTENTS
Page
Prospectus Summary............................................................2
Risk Factors..................................................................4
Forward Looking Statements....................................................9
Use of Proceeds...............................................................9
Market for Common Equity and Related Stockholder Matters.....................10
Management's Discussion and Analysis or Plan of Operation....................11
Business.....................................................................21
Description of Property......................................................27
Legal Proceedings............................................................27
Directors, Executive Officers, Promoters and Control Persons.................28
Executive Compensation.......................................................30
Certain Relationships and Related Transactions...............................32
Security Ownership of Certain Beneficial Owners and Management...............33
Description of Securities....................................................34
Indemnification for Securities Act Liabilities...............................35
Plan of Distribution.........................................................36
Selling Stockholders.........................................................38
Legal Matters................................................................39
Experts......................................................................39
Available Information........................................................40
Index to Financial Statements...............................................F-1
You may only rely on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
1
PROSPECTUS SUMMARY
Our Business
We market insurance products, currently focusing on prearrangement and pre-need
products. Prearrangement and pre-need products allow individuals to secure the
funding for and in some instances the goods and services for their future
funerals prior to their deaths. In connection with our pre-need funding products
we sell, as agent on behalf of major insurance carriers, life insurance policies
in amounts from $3,000 to $15,000, which upon an individual's death is used for
the payment of his or her funeral costs. An individual may also freeze or
guarantee the price of the future funeral by prearranging it. This process
entails individuals choosing, prior to their deaths, such items as the type of
interment process they desire (burial or cremation), visitation and religious
services at the funeral parlor or elsewhere and the type of casket and other
goods and services that they desire to be utilized in connection with the
funeral.
We market our products to corporations, unions, and affinity groups that may
offer these products as a voluntary or contributory benefit to their employees
or members, much like they offer health insurance, life insurance, dental
insurance and legal plans. We currently sell pre-need insurance policies that
are fixed pay whole life insurance policies accompanied by an inflation rider.
An inflation rider ensures that the policy value grows over time, and acts as a
hedge against inflation and rising funeral prices.
Our subsidiary, National Preplanning, Inc., has entered into a number of third
party marketing agreements with larger and more established insurance agencies
that sell a variety of other insurance products to market our pre-need funding
products to employees in the workplace, individuals belonging to unions and
various associations. These marketing agreements allow National Preplanning to
market its products to a wider audience. Although National Planning, Inc. has
begun marketing the pre-need funding products no meaningful sales have been
achieved. If and when these agencies start the marketing of our products, they
will share in the insurance commissions.
Our other subsidiary, American Datasource, Inc., administers funds in trust
accounts that are used for the payment of prearranged funerals upon the death of
an individual. A trust account is created by an individual entering into a
prearrangement contract with a funeral director. Instead of funding a
prearrangement with a pre-need insurance policy, an individual places funds into
a trust account. This account is professionally managed by an independent third
party and the account is assigned to the funeral home and used to cover the
decedent's funeral costs. American DataSource issues annual reports on the funds
in each trust account. It also administers the funds upon an individual's death
to ensure that they are used for the purpose of paying for the funeral expenses.
In the future we may add other employee benefit products and services that
benefit the baby boomer and senior populations. Products may include other
insurance related products such as disability insurance, long- term care legal
plans, mortgage products and other voluntary benefits.
We entered the marketing of funeral funding products through our merger in March
2002 with National Preplanning and American DataSource. We were previously
engaged in non-digital photographic development.
We had an accumulated deficit of approximately $6.1 million for the year ended
December 31, 2004. For the year ended December 31, 2004, we generated net sales
of approximately $240,800 and had a net loss of approximately $1.9 million. For
the six months ended June 30, 2005, we generated sales of approximately $157,100
and incurred a net loss of approximately $2.1 million, of which approximately
$934,000 may be attributed to the default under our 10% convertible promissory
notes and the related debt conversion expense. As of June 30, 2005, we had an
accumulated deficit of approximately $8.2 million and a negative working capital
of approximately $1.3 million. We will be required to seek additional financing
of approximately $1 million to fund our operations for the next twelve months.
Our principal offices are located at 990 Stewart Avenue, Suite 60A, Garden City,
New York 11530, and our telephone number at that address is (516) 832-7000. We
are a Delaware corporation.
2
The Offering
Common stock offered by selling stockholders...................... Up to 5,606,796 shares, including the following:
- 4,436,890 shares of common stock issued and outstanding;
- up to 200,000 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $.15 per share;
- up to 724,063 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $.28 per share;
- up to 31,463 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $.35 per share;
- up to 175,000 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $.45 per share;
- up to 17,860 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $4.20 per share;
- up to 10,760 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $6.30 per share; and
- up to 10,760 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $7.23 per share.
This number represents 37.7% of our current outstanding stock.
Common stock to be outstanding after the offering................. 14,857,126 shares, assuming exercise of all warrants set forth
above
Use of proceeds................................................... We will not receive any proceeds from the sale of the common
stock.
Over-The-Counter Bulletin Board Symbol............................ WLKF
The above information regarding common stock to be outstanding after the
offering is based on 13,687,220 shares of common stock outstanding as of October
24, 2005 and assumes the exercise of warrants by our selling stockholders.
3
RISK FACTORS
This investment has a high degree of risk. This means you could lose all or a
part of your investment.
Risks Relating to Our Business:
We Have a History Of Losses Which May Continue, Which May Negatively Impact Our
Ability to Achieve Our Business Objectives.
We incurred a net loss of $1,924,219 for the fiscal year ended December 31, 2004
and $2,086,489 for the six months ended June 30, 2005. We cannot assure you that
we can achieve or sustain profitability on a quarterly or annual basis in the
future. Our operations are subject to the risks and competition inherent in the
establishment of a business enterprise. There can be no assurance that future
operations will be profitable. Revenues and profits, if any, will depend upon
various factors, including whether we will be able to continue expansion of our
net sales. We may not achieve our business objectives and the failure to achieve
such goals would have an adverse impact on us. These matters raise substantial
doubt about our ability to continue as a going concern.
We Have a Limited Operating History and May Not Generate Enough Revenues to Stay
in Business.
We have a limited operating history since our inception on which you can
evaluate us and our potential. While our company was incorporated in 1967, we
only entered into the pre-need death care and employee benefit industry in March
2002 through the merger of National Preplanning and American Datasource. While
our management has been involved in the death care pre-need industry for a
number of years, we have only a limited operating history upon which you may
evaluate our proposed business and prospects. Our proposed business operations
will be subject to numerous risks associated with early stage enterprises. An
investor must consider that an investment in Walker may not generate the
requisite returns because of the high uncertainties of future revenue generation
by companies in their early stages of development, particularly companies with
limited capital in new and rapidly evolving markets. We cannot assure
shareholders that our business strategy will be successful or that we will ever
have profits. Our limited financial resources are significantly less than those
of other companies in our industry. If we are unable to sustain our operations,
you may lose your entire investment.
If We Are Unable to Obtain Additional Funding Our Business Operations Will be
Harmed and if We do Obtain Additional Financing Our Then Existing Shareholders
May Suffer Substantial Dilution.
We will require additional funds to sustain and expand our sales and marketing
activities. We anticipate that we will require up to approximately $1.0 million
to fund our continued operations for the next twelve months, depending on
revenue from operations. Additional capital will be required to effectively
support the operations and to otherwise implement our overall business strategy.
Even if we do receive additional financing, it may not be sufficient to sustain
or expand our research and development operations or continue our business
operations.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our research and development plans. Any
additional equity financing may involve substantial dilution to our then
existing shareholders.
If We Are Unable to Retain the Services of Mr. Segal, or If We Are Unable to
Successfully Recruit Qualified Managerial and Sales Personnel Having Experience
in the Pre-Death Care Services or Employee Benefits Industries, We May Not Be
Able to Continue Our Operations.
Our success depends to a significant extent upon the continued service of Mr.
Mitchell S. Segal, our President and Chief Executive Officer. Loss of the
services of Mr. Segal could have a material adverse effect on our growth,
revenues, and prospective business. We do not maintain key-man insurance on the
life of Mr. Segal. In addition, in order to successfully implement and manage
our business plan, we will be dependent upon, among other things, successfully
recruiting qualified managerial and sales personnel having experience in the
pre-death care services and employee benefit industries. Competition for
qualified individuals is intense. There can be no assurance that we will be able
to find, attract and retain existing employees or that we will be able to find,
attract and retain qualified personnel on acceptable terms.
4
We Do Not Currently Have a CFO or a Controller Which Our Auditors Have
Recognized to be a Material Weakness in Our Internal Controls
During November 2004, our independent auditors, Marcum & Kliegman LLP, advised
us that they had identified a deficiency in our internal controls, which was
designated a "material weakness" because there is inadequate structure within
our accounting department. 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 as 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 our continued cost cutting efforts and a failure
to generate cash flows from operations, which resulted in the termination of
employees during the fiscal years ended December 31, 2004 and 2003. Our auditors
have had to continually make adjustments in our financial statements. If we had
adequate controls, we believe that our auditors would not be required to make
such adjustments. As a result, until we are able to hire a chief financial
officer or controller, the deficiencies in internal controls may not be adequate
enough to correct this weakness.
Many Of Our Competitors Are Larger and Have Greater Financial and Other
Resources Than We Do and Those Advantages Could Make It Difficult For Us to
Compete With Them.
The pre-need death care industry is extremely competitive and includes several
companies that have achieved substantially greater market shares than we have,
and have longer operating histories, have larger customer bases, and have
substantially greater financial, development and marketing resources than we do.
Although not many of these competitors are seeking to market within the employee
benefit/workplace marketplaces, our subsidiary, National Preplanning, has zero
market share in the sale of pre-need funding products. If overall demand for our
products does not improve, it could have a materially adverse affect on our
operating results and cash flows.
Any Decreases in Insurance Premiums and Commission Rates, Which are Set by the
Insurers and Outside Our Control, Could Result in Decreased Revenue for Us
Because We Would Receive Lower Commissions.
We are engaged in insurance agency and brokerage activities and derive revenue
from commissions on the sale of insurance products to clients that are paid by
the insurance underwriters from whom our clients purchase insurance. These
commission rates are set by insurance underwriters and are based on the premiums
that the insurance underwriters charge. Commission rates and premiums can change
based on the prevailing economic and competitive factors that affect insurance
underwriters. These factors, which are not within our control, include the
capacity of insurance underwriters to place new business, underwriting and
non-underwriting profits of insurance underwriters, consumer demand for
insurance products, the availability of comparable products from other insurance
underwriters at a lower cost and the availability of alternative insurance
products to consumers. If there is a decline in the commission rate or premiums
paid, our revenue will decrease, which will adversely affect our financial
condition and results of operations.
Increased Advertising or Better Marketing by Our Competitors, or Increased
Services From Internet Providers, Could Cause Us to Incur Increased Costs in
Order to Capture Market Share.
In recent years, marketing through television, radio and print advertising,
direct mailings and personal sales calls has increased with respect to the sales
of pre-need funeral services. Our subsidiary, National Preplanning, currently
has no market share in the sale of pre-need funding products. Extensive
advertising or effective marketing by competitors would increase the difficulty
in marketing our products and services and cause us to increase our own
marketing costs thereby decreasing our potential revenues. In addition,
competitors may change the types or mix of products or services offered. These
changes may attract customers, limiting our growth potential and causing us to
lose revenue or to incur costs to vary our own types or mix of products or
services in response. In addition, the increased use of the Internet by
customers to research and/or purchase products and services in the future could
cause us to lose market share to competitors offering to sell products or
services over the Internet.
5
The Increasing Number of Cremations in The United States Could Cause Our
Revenues to Decline Because We Could Lose Market Share to Firms Specializing in
Cremations.
Changes or Increases in, or Failure to Comply With, Regulations Applicable to
the Funeral and Pre-Need Services Industries Could Increase Our Costs.
The funeral and pre-need services industries are subject to extensive regulation
and licensing requirements under federal, state and local laws. For example, the
funeral home industry is regulated by the Federal Trade Commission, which
requires funeral homes to take actions designed to protect consumers. State laws
impose licensing requirements and regulate pre-need sales. We are in compliance
with all applicable laws, and currently do not pay any regulatory fees. If
governments and agencies propose amendments or additional regulations, our costs
could increase, which would have a negative effect on our financial condition.
We May Owe Accrued Interest and Fees to Our Remaining Holder of a $50,000
Principal Amount 10% Senior Subordinated Secured Convertible Promissory Note
Because We Defaulted on the Note Which Could Have an Adverse Effect on Our
Liquidity and Cash Flows.
We failed to register for resale the shares issuable upon conversion of the
Notes by May 4, 2004. As a result of this failure, we were obligated to pay the
holders of the Notes a monthly fee equal to 1.5% of the principal amount of the
Notes for each month or portion that we failed to cause such registration. We
did not pay the holders any monthly fee due to them. We also failed to remit the
interest payment due to the holders which constituted an "Event of Default"
which raised the interest rate on the Notes to 12% per annum. The Notes also
prohibited additional borrowings by us without the prior approval of the
placement agent or the holders of a majority of the aggregate principal amount
of the Notes, which we violated. All of the holders have converted their Notes
and fully exercised their rights thereunder, except for one who holds a $50,000
principal amount Note for which we are still liable. If he claims an Event of
Default occurred we will have to make payments to him, which could negatively
affect our liquidity and cash flows.
We May be Unable to Implement Our Acquisition Growth Strategy, Which Could Harm
Our Business and Competitive Position.
Our business strategy includes making strategic acquisitions of other companies
or businesses within the death care, financial services, insurance or employee
benefits industries. Our continued growth will depend on our ability to identify
and acquire, on acceptable terms, companies that complement or enhance our
businesses. The competition for acquisition candidates is intense and we expect
this competition to increase. There is no assurance that we will identify and
successfully compete for appropriate acquisition candidates or complete
acquisitions at reasonable purchase prices, in a timely manner or at all.
Further, we may not be able to realize the anticipated results of future
acquisitions. In implementing our acquisition growth strategy, we may encounter:
o costs associated with incomplete or poorly implemented acquisitions,
o expenses, delays and difficulties of integrating acquired companies
into our existing organization,
o the impact of amortizing goodwill and other intangible assets of
acquired companies on our operating results,
o dilution of the interest of our existing stockholders if we issue
stock in making acquisitions or if we sell stock to raise cash for
acquisitions,
o diversion of management's attention,
o increases in expenses in order to advertise and promote acquired
companies and their and our products and services,
o unusual impacts on our financial condition due to the timing of
acquisitions, and
o expenses of any undisclosed or potential legal liabilities of an
acquired company.
6
Any of these matters could have a material adverse effect on our business,
results of operations and financial condition.
Our Principal Stockholders, Officers And Directors Own a Substantial Interest in
Our Voting Stock and Investors May Not Have Any Voice in Our Management.
Our officers and directors, in the aggregate, beneficially own approximately
24.8% of our outstanding common stock. As a result, these stockholders, acting
together, may have the ability to control substantially all matters submitted to
our stockholders for approval, including:
o election of our board of directors;
o removal of any of our directors;
o amendment of our certificate of incorporation or bylaws; and
o adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving
us.
As a result of their ownership and positions, our directors and executive
officers collectively are able to influence all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, sales of significant amounts of shares held
by our directors and executive officers, or the prospect of these sales, could
adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
Risks Relating to Our Common Stock:
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. During the last twelve months we
have been current in all of our periodic reporting, except for our quarterly
report for the three months ended March 31, 2005. If we fail to remain current
on our reporting requirements, we could be removed from the OTC Bulletin Board.
As a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
7
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
8
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Such forward-looking
statements include statements regarding, among other things, (a) our projected
sales and profitability, (b) our growth strategies, (c) anticipated trends in
our industry, (d) our future financing plans, and (e) our anticipated needs for
working capital. Forward-looking statements, which involve assumptions and
describe our future plans, strategies, and expectations, are generally
identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend," or "project" or the negative of
these words or other variations on these words or comparable terminology. This
information may involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, performance, or achievements to be
materially different from the future results, performance, or achievements
expressed or implied by any forward-looking statements. These statements may be
found under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in this prospectus generally.
Actual events or results may differ materially from those discussed in
forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this prospectus generally. In light of these risks and uncertainties, there can
be no assurance that the forward-looking statements contained in this filing
will in fact occur. In addition to the information expressly required to be
included in this filing, we will provide such further material information, if
any, as may be necessary to make the required statements, in light of the
circumstances under which they are made, not misleading.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering.
9
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol "WLKF".
For the periods indicated, the following table sets forth the high and low bid
prices per share of common stock. These prices represent inter-dealer quotations
without retail markup, markdown, or commission and may not necessarily represent
actual transactions.
High($) Low($)
------- ------
2003
First Quarter 0.80 0.15
Second Quarter 0.75 0.20
Third Quarter 0.55 0.25
Fourth Quarter 0.50 0.21
2004
First Quarter 0.65 0.20
Second Quarter 1.50 0.35
Third Quarter 0.55 0.16
Fourth Quarter 0.76 0.25
2005
First Quarter 0.75 0.21
Second Quarter 0.48 0.15
Third Quarter 0.48 0.22
HOLDERS
As of October 24, 2005, we had approximately 225 holders of our common stock.
The number of record holders was determined from the records of our transfer
agent and does not include beneficial owners of common stock whose shares are
held in the names of various security brokers, dealers, and registered clearing
agencies. The transfer agent of our common stock is American Stock Transfer and
Trust Company.
Dividend Policy
We have never declared or paid any cash dividends on our common stock.
We do not anticipate paying any cash dividends to stockholders in the
foreseeable future. In addition, any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements, and such
other factors as the Board of Directors deem relevant.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Some of the information in this Form SB-2 contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus. See "Risk Factors."
Overview
We entered the marketing of funeral funding products through our merger in March
2002 with National Preplanning and American DataSource. We were previously
engaged in non-digital photographic development.
We market our products to corporations, unions, and affinity groups that may
offer these products as a voluntary or contributory benefit to their employees
or members much like they offer health insurance, life insurance, dental
insurance and legal plans. We currently sell pre-need insurance policies that
are similar to fixed pay whole life insurance policies accompanied by an
inflation rider. An inflation rider ensures that the policy value grows over
time, and acts as a hedge against inflation and rising funeral prices. The
policy may be assigned to a funeral home when a prearrangement contract is
executed, which would use the proceeds of the policy to cover the costs of the
funeral that has been arranged in accordance with the decedent's prior
arrangement. If a prearrangement is not made, the policy proceeds may be used by
the decedent's beneficiaries to cover the costs of the decedent's funeral at the
time of death.
Our subsidiary, National Preplanning, Inc., has entered into a number of third
party marketing agreements with larger and more established insurance agencies
that sell a variety of other insurance products to market our pre-need funding
products to employees in the workplace, individuals belonging to unions and
various associations. These marketing agreements allow National Preplanning to
market its products to a wider audience in return for the sharing of
commissions.
Although we have entered into a marketing agreement with Hilb, Rogal and Hobbs
of Southern California, Parker Benefits and Motivano to market final expense and
prearrangement policies on behalf of major insurance carriers to their clients
and their employees, these firms have not been successful in marketing our
products. As a result, we may be required to market directly to potential
clients in addition to seeking to acquire other agencies that market other
products to its clients base which we then can add our products to their product
lineup. Our ability to accomplish this will be directly related to our ability
to raise capital through Fusion Capital, discussed below under the heading
"Fusion Capital Transaction," and/or other sources in addition to using said
potential capital to pay off our debt obligations.
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. Our ability to sell stock to Fusion
Capital may be affected by limitations on the percentage of stock that entity
may hold. Under our agreement with Fusion Capital, it may not hold more than
9.9% of our common stock. Therefore, if Fusion Capital is unable to sell our
shares due to the lack of liquidity in our common stock, our ability to obtain
money from Fusion Capital for acquisitions, to pay down our current debt or for
our working capital may be hindered or limited. Additionally our ability to
raise capital outside of the Fusion transaction may be affected by our minimal
revenues, the losses that we incur, our stockholders equity and our financial
condition including our working capital deficit. Potential capital sources may
require us to pay off existing indebtedness before providing any capital to us
and we may be unable to do so.
11
Our other subsidiary, American Datasource, Inc., administers funds in trust
accounts that are used for the payment of prearranged funerals upon the death of
an individual. A trust account is created by an individual entering into a
prearrangement contract with a funeral director. Instead of funding a
prearrangement with a pre-need insurance policy, an individual places funds into
a trust account. This account is professionally managed by an independent third
party and the account is assigned to the funeral home and used to cover the
decedent's funeral costs. American DataSource issues annual reports on the funds
in each trust account. It also administers the funds upon an individual's death
to ensure that they are used for the purpose of paying for the funeral expenses.
In addition, in the future we may add other employee benefit products and
services that benefit the baby boomer and senior populations. Products may
include other insurance related products such as disability insurance, long-
term care legal plans, mortgage products and other voluntary benefits.
We are actively looking to expand our services and offerings through
acquisitions. We will seek to finance these acquisitions through the sale of our
equity. Although we are not currently involved in any acquisitions, we have
entered into an equity line, as discussed below, with Fusion Capital, the
proceeds of which will be used towards these potential acquisitions. If and when
an acquisition appears probable, we will revise our disclosure to reflect the
terms of the acquisition agreement and the potential ramifications. We will seek
to raise additional equity and debt to accomplish these potential acquisitions.
We have been exploring a variety of potential acquisitions in the insurance,
employee benefit and mortgage fields. Although we have not entered into any
purchase agreements, we are hopeful that we will be able to enter into and
consummate a transaction in the near future.
During November 2004, our independent auditors, Marcum & Kliegman LLP, advised
us that the auditors had identified a deficiency in our 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 our
internal control procedures to detect potential misstatements and fraudulent
accounting and financial reporting. The subsidiary accounting departments do not
have the sophistication to critically evaluate and implement new accounting
pronouncements, such stock based transactions for options, warrants and common
stock at times are recorded improperly and require additional procedures and
review and audit adjustments to be made by our auditors. We believe this
material weakness resulted from continued cost cutting efforts and a failure to
generate cash flows from operations, which resulted in the termination of
employees during our fiscal years ended December 31, 2004 and 2003. We have
implemented some procedures and are currently developing procedures to help
minimize the risks associated with this material weakness. These procedures
include using an independent accountant/bookkeeper to review, compile and
consolidate our financial statements on a quarterly and annual basis. In
addition, we expect to hire a chief financial officer with public company
experience within the next twelve months and relieve our chief executive officer
of his current chief financial officer duties. While we don't believe that there
has been a material impact on our financial in the past there are uncertainties
that the material weakness may have a material impact on our financial
statements in the future. These uncertainties arise from our need to raise
capital and our inability to critically evaluate and record properly any equity
transactions that we may enter into.
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 generally accepted accounting principles or GAAP 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 critical
accounting policies include: recognition of transactions revenues and accounting
for stock options and warrants.
12
Revenue Recognition
Revenue is recognized at the time the administrative services are performed and
provided, or made available to its customers. Services are billed monthly based
upon predetermined percentage of the total assets included in the respective
pre-need funeral master trust fund.
Accounting for Stock-Based Compensation
We account for options granted to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and comply with the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Under APB No. 25, the compensation
expense is recognized based on the difference, if any, on the date of grant
between the estimated market value of the Company's stock and the strike price,
i.e. the amount an employee must pay to acquire the stock. Compensation expense
is recognized immediately for past services and ratably for future services over
the option-vesting period.
We account for the fair value of options and warrants for non-employees in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation," which
requires that compensation cost be measured after the grant date based on the
value of the award and is recognized over the service period, which is also the
vesting period. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. We will be required to
account for options and warrants for employees during the annual reporting
period beginning after December 15, 2005 as a result of the FASB's issuance of
SFAS No. 123R "Accounting For Stock Based Compensation."
The Black-Scholes option-pricing model is used to estimate the fair value of a
stock option. The model calculates the theoretical fair value based on a number
of assumptions utilizing, the stock price, strike price, expiration date,
risk-free rate of return, and the standard deviation (volatility) of the stock's
return. Stock based compensation valuations may differ significantly if we used
a different option model, based on the before mentioned assumptions and the
alternative model's formula driven calculations. We have not relied on any other
option pricing models for the issuance of our options or warrants as the
Black-Scholes option-pricing model is currently the model most widely used for
reporting companies. The uncertain assumptions estimating the valuation of these
equity transactions may have a material effect on our financial performance
during the reported periods.
New Accounting Pronouncements
In May 2005, the FASB issued FASB 154 - Accounting Changes and Error
Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3. This
Statement replaces APB Opinion 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. This statement is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005.
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended June 30, 2005 and June 30, 2004
Net revenues for the three months ended June 30, 2005 was $ 88,099 which was
generated by ADS as compared to $50,791 for the three months ended June 30,
2004, almost all of which was which was generated by ADS. The increase of
$37,308 is attributable to a monthly fee increase of approximately $14,000
commencing in April 1, 2005 for one client. Although National Preplanning has
entered into several strategic relationships that allow for the marketing of its
products by third parties, the marketing of NPI's products has not resulted in
any material revenues . ADS seeks to replace revenues lost as a result of losing
the business from its largest client, Service Corporation International.
Although ADS has generated positive cash flows, it still has a net loss.
Operating expenses for the three months ended June 30, 2005 were $407,090 of
which $279,209 was generated by NPI, $27,557 was generated by Walker, and $
100,324 was generated by ADS. Operating expenses were composed of $143,349 of
compensation expense, $ 105,221 of professional fees, consulting fees of $
72,100 General and administrative expense of $61,687 and depreciation of
$24,733. Operating expenses for the three months ended June 30, 2004 were
$402,000 of which $232,000 was incurred by NPI, $139,000 was incurred by ADS and
$31,000 was incurred by Walker.
13
The loss from continuing operations for the three months ended June 30, 2005 was
$ 409,038 as compared to $373,658 for the three months ended June 30, 2004. The
loss from continuing operation for the three months ended June 30, 2005 was
composed of a loss of $12,225 from ADS, a loss of $369,267 from NPI, and a loss
of $ 27,546 from Walker. This compares with the loss incurred for the three
months ended June 30, 2004 of which $ 89,000 was incurred by ADS, $255,000 was
incurred by NPI, and $ 30,000 was incurred by Walker. Although NPI has yet to
generate any meaningful revenues the Company continues to incur losses relating
to its infrastructure costs, administrative costs and costs incurred related to
potential acquisitions.
Interest expense for the three months ended June 30, 2005 were $69,241 as
compared to interest expense for the three months ended June 30, 2004 of
$22,012. Interest expense is derived by the costs of borrowing funds.
As a result of the foregoing, we incurred a net loss of approximately $409,038
for the three months ended June 30, 2005 or $ .03 per share, compared to a net
loss of $379,789 for the three months ended June 30, 2004 or $ .05 per share.
ADS currently relies on three clients for the majority of its revenues. A loss
of one of these clients will greatly effect ADS's ability to continue to operate
on a cash flow positive basis. ADS is seeking to expand its client base and the
amount of assets under administration. ADS has recently entered into a marketing
agreement with Parkway Advisors, L.P., pursuant to which Parkway will advise and
market ADS trust services to its 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.
Six Months Ended June 30, 2005 and June 30, 2004
Net revenue for the six months ended June 30, 2005 were $ 157,093 all of which
was generated by ADS. Net revenues for the six months ended June 30, 2004 were
$100,791, almost all of which was generated by ADS. The increase of $56,302 is
attributable to fees for special projects performed for one client as well as a
monthly fee increase of $14,000 commencing in April 1, 2005 for the same client.
Although National Preplanning has entered into several strategic relationships
which allows for the marketing of its products by third parties, the marketing
of NPI's products has not resulted in any material revenues being achieved. ADS
seeks to replace revenues lost as a result of losing the business from its
largest client, Service Corporation International. Although ADS has generated
positive cash flows it still has a net loss.
Operating expenses for the six months ended June 30, 2005 were $ 1,026,031 of
which $ 760,117 was generated by NPI, $ 207,915 was generated by ADS and $57,999
was generated by Walker International Industries. Operating expenses for the six
months ended June 30, 2004 were $ 851,207 of which $ 504,808 was generated by
NPI, $ 62,338 was generated by Walker and $ 284,061 was generated by ADS. Of the
loss incurred for the six months ended June 30, 2005, $327,699 was compensation
expense, $ 149,183 were professional fees, $ 342,100 were related to consulting
expenses and $157,282 were general and administrative expenses and approximately
$49,767 was depreciation expense.
Interest expense for the six months ended June 30, 2005 was $262,952 as compared
to interest expense for the six months ended June 30, 2004 of $ 51,916. The
increase from the prior year relates to our interest expense related to the
write off of deferred financing costs as a result of the conversion of debt to
equity, and interest related to the company's other outstanding debt.
As a result of the foregoing, we incurred a net loss of approximately $
2,086,489 for the six months ended June 30, 2005 or $ .15 per share as compared
to a net loss for the $ 802,332 for the six months ended June 30, 2004 or $ .12
per share. Of the loss for the six months ended June 30, 2005, a loss of $
1,977,679 can be attributed to NPI, a loss of $ 50,822 can be attributed to ADS
and a loss of $ approximately $ 57,988 can be attributable to Walker
International Industries as compared to the six months ended June 30, 2004 where
a $ 478,038 loss can be attributable to NPI, a loss of $ 123,809 can be
attributable to Walker and a loss of 184,072 can be attributable to ADS. Of the
loss attributable to NPI for the six months ended June 30, 2005 $933,793 is
attributable to a debt conversion charge and $ 263,000 is attributable to
interest expense.
14
Year Ended December 31, 2004 and 2003
Net sales for the year ended December 31, 2004 and 2003 were approximately
$240,810 and $1,690,000, respectively, Of these amounts during 2004 and 2003,
$2,177 and $11,000 were generated by NPI, respectively, $238,631 and $1,015,000
were generated by ADS, respectively. The amounts generated by NPI were a result
of its efforts in marketing pre-need policies out of funeral homes located in
New Jersey. NPI no longer markets pre-need policies out of funeral homes.
Although NPI has entered into several strategic relationships that allow for the
marketing of its products in the workplace, the marketing of NPI's products has
not resulted in any material revenues. ADS has still been unable to recover from
the loss of its largest client, Service Corporation International, which now
out-sources its administration of trust funds overseas.
Cost of sales for the year ended December 31, 2004 and 2003 was included in
discontinued operations. Kelly Color no longer operates the photographic lab,
has sold its assets and has placed the building which has housed the
photographic lab up for sale.
Operating expenses for the year ended December 31, 2004 were $1,863,707, of
which $1,173,517 was incurred by NPI, $141,860 was incurred by Walker and
$548,330 was incurred by ADS. For the year ended December 31, 2003, operating
expenses were $1,748,711, of which $675,608 was generated by NPI and $1,073,103
was generated by ADS.
The operating loss from continuing operations for the year ended December 31,
2004 was $1,622,899, of which $1,171,340 was incurred by NPI, $141,860 was
incurred by Walker and $309,699 was incurred by ADS. The loss from discontinued
operations, all of which was incurred by Kelly Color was $61,995. The loss from
continuing operations for the year ended December 31, 2003 was $1,021,969, of
which $788,574 was incurred by NPI and $233,395 was incurred by ADS. Although
NPI has yet to generate any meaningful revenues, we continue to incur losses
relating to increased marketing, sales, infrastructure, technology to prepare
for potential sales to commence in the second quarter of 2005. We reduced the
amount of labor costs at ADS after the loss of our largest client. However, ADS
incurred substantial losses in 2004.
Interest expense for the year ended December 31, 2004 was $239,325, as compared
to an interest expense for the year ended December 31, 2003 of $123,902.
Interest expense is derived by the costs of borrowing funds, amortization of
debt discounts and penalties related to failures to comply with debt provisions.
As a result of the foregoing, we incurred a net loss of approximately $1,924,219
for the year ended December 31, 2004 or $0.241 per share, compared to a net loss
of $1,209,460 for the year ended December 31, 2003 or $0.161 per share. Of the
loss for the year ended December 31, 2004, a loss of $1,410,665 may be
attributed to NPI, a loss of $141,844 may be attributed to Walker, a loss of
$309,715 may be attributed to ADS and a loss of $61,995 may be attributed to the
discontinued operations of Kelly Color. Of the loss for the year ended December
31, 2003, $788,574 may be attributed to NPI, a loss of $187,492 may be
attributed to Walker and a loss of $233,394 may be attributed to ADS. Of ADS's
loss, $174,782 represented a one-time charge related to the impairment of
customer lists.
Liquidity and Capital Resources
We had working capital deficiency of $ 1,326,292 at June 30, 2005 compared to
working capital deficiency of $1,858,265 at December 31, 2004. A working capital
deficiency results when the company's current liabilities exceeds its current
assets. Our working capital deficiency is the result of borrowings which are
currently due or will become due within the next 12 months in addition to an
increase in our accounts payable as the result of the accrual of management
compensation not paid.
Net cash used in operating activities was approximately $305,651 for the six
months ended June 30, 2005, compared to net cash used in operating activities of
$589,351 for the six months ended June 30, 2004. The decrease is primarily a
result of an increase in our net loss for the current six month period offset by
an increase in our accounts payable, debt conversion expense, and interest
expense related to deferred financing charges.
15
There was no net cash used in investing activities for the six months ended June
30, 2005, as compared with $12,479 of net cash used in investing activities for
the six months ended June 30, 2004. During the six months ended June 30, 2004,
investing activities were limited to the purchase of property and equipment.
Net cash provided by financing activities was approximately $245,155 for the six
months ended June 30, 2005 as compared with $115,144 for the six months ended
June 30, 2004. The increase is a result of proceeds received of approximately $
200,000 from the sale of bridge notes in addition to $100,000 of gross proceeds
received from the sale of common stock.
As a result of these activities, our cash and cash equivalents decreased to $
18,832 as of June 30, 2005 compared to a decrease to $ 84,148 at June 30, 2004.
Upon effectiveness of the registration statement of which this prospectus is a
part, we intend to file another registration statement covering the shares
issuable under the Fusion Capital transaction. We intend to use the Fusion
Capital equity line to repay outstanding indebtedness and for working capital.
Failure to have this or the next registration statement to be declared effective
will prevent us from drawing on the full amount of equity outlined in the
agreement and at this point it is impossible to quantify how much if any capital
will be available to us. We are currently in default with respect to
approximately $ 305,000 in promissory notes.
Our recent financing activities included the following transactions:
o In December 2003, we issued 10% Senior Subordinated Secured
Convertible Promissory Notes (each, a "10% Note") in the aggregate
principal amount of $845,000 and due in December 2006. The 10% Notes
were initially convertible into shares of the Company's common stock
at conversion prices of $0.71 per share through December 5, 2005 and
$1.25 thereafter. The subscription agreements for the 10% Notes
required, among other matters, that we register for resale under the
Securities Act the shares issuable upon conversion of the 10% Notes
by May 5, 2004. We were obligated, as a result of the failure to
register such conversion shares by May 5, 2004, to pay to the
holders of the 10% Notes a monthly fee equal to 1.5% of the
principal amount of the 10% Notes for each month, or portion
thereof, that we failed to cause such registration. We failed to
cause such registration by May 5, 2004 and failed to pay the holders
any monthly fee due such holders as a result of the failure to
register the conversion shares. The 10% Notes required an interest
payment on July 1, 2004 in the aggregate amount of $49,057. We
failed to remit these interest payments. The failure to make these
interest payments is an "event of Default" under the 10% Notes,
although the holders of the 10% Notes did not give us notice of such
event of Default. The occurrence of an event of Default would result
in the interest rate on the 10% Notes to be increased to 12% per
annum. We have the right to avoid the declaration of an event of
Default due to the failure to tender the July 1, 2004 interest
payment by issuing to the holders additional shares of our common
stock at the per diem rate of 0.003125 shares for every $1.00 of
principal, or an aggregate of 2,640.625 shares per day. The 10%
Notes also prohibited us from additional borrowings, without the
prior approval of the placement agent for the 10% Notes or the
holders of a majority of the aggregate principal amount of the 10%
Notes. In May and August 2004, we borrowed, without approval, an
aggregate of $250,000. Further, in July 2004, we borrowed, without
approval, an additional $50,000 from an officer/stockholder and, in
December 2004 through February 2005, sold and issued, without
approval, 10% convertible promissory notes in the aggregate
principal amount of $375,000. On July 11, 2005, we sold, without
approval a 10% note. In October 2004, we offered to the holders of
the 10% Notes one share of our common stock for each $0.30 of
principal evidenced by the 10% Notes and one share of our common
stock for each $0.23 of accrued interest due under the 10% Notes
through September 30, 2004 in exchange for the holders waiving
substantially all of their rights under the 10% Notes. We agreed to
(a) use its best efforts to expeditiously register for resale the
shares that the holders of the 10% Notes would receive in such
exchange and (b) issue additional shares to the holders in the event
that we issued shares to certain third parties for consideration
less than $0.30 at any time prior to December 4, 2006. On January 5,
2005, we issued a total of 2,938,036 shares of our common stock to
the holders of 10% Notes in the aggregate principal amount of
$795,000 and accrued interest of $185,203 for settlement of such 10%
Notes. As a result of the debt settlement, we wrote off $125,695 of
deferred financing costs previously amortized. The charge was
included as an interest expense on the statement of operations for
the three months ended June 30, 2005. We have a remaining principal
balance of $50,000 due to the holders of the note, and incurred
approximately $26,000 and $3,950, respectively, of interest and
penalty interest included in the statements of operations for the
six and three months ended June 30, 2005. Upon the effectiveness of
the debt settlement, we recorded a conversion charge of $993,793,
which is the estimated fair value of the additional shares of our
common stock issued in excess of the amount of shares that were
issuable at the original conversion prices for the debt. The $
50,000 10% Senior Secured Note that is still outstanding is due
January, 2006, and is expected to be retired in the next six months
upon the effectiveness of a registration statement concerning the
Fusion transaction.
16
o In July 2002, we entered into a credit facility with a bank
consisting of a $150,000 secured line of credit with interest
payable monthly at the bank's prime rate plus 1.25%, expiring on
July 3, 2004. The Line of Credit was modified in June 2005 and, as
modified, requires monthly payments of $1,510 and a final payment of
the outstanding balance in July 2006. There was $133,280 outstanding
under the Line of Credit as of June 30, 2005. The Line of Credit is
collateralized by the Kelly Color property located in North
Carolina.
o In May 2004, we sold and issued, for gross proceeds of $125,000, (a)
a 6% promissory note in the principal amount of $125,000 and due on
August 22, 2004 and (b) warrants to purchase 70,000 shares of our
common stock at an exercise price of $ .71 per share. The fair value
of these warrants is $35,000 using the Black Scholes option pricing
model and was recorded as a deferred debt discount which will
accrete to interest expense over the life of the promissory note. In
August, 2004, the due date of such promissory note was extended to
no later than January 2, 2005 and the exercise price of the warrants
was reduced to $.45. The maturity date of this note has not been
further extended and, as of June 30, 2005, the principal amount due
under the note remains at $125,000.
o In July 2004, Mitchell S. Segal, our president, chief executive and
financial officer and a stockholder, advanced the Company
$50,000.00. In December 2004, this officer and stockholder advanced
to us an additional $12,500.00. These advances are non-interest
bearing and have no definitive repayment terms. As of March 8, 2005,
we repaid the officer and stockholder a total of $22,500.00 of the
advances.
o In August 2004, the due date of a 6% promissory note originally
issued by NPI prior to March 19, 2002 was extended to the earlier of
(a) the date which is 60 days following the effectiveness of a
registration statement under the Securities Act registering for
resale the shares of our common stock issuable upon exercise of the
warrants sold and issued with the 6% promissory note or (b) January
2, 2005. The consideration tendered by us in connection with the
extension of the due date of the 6% promissory note was a reduction
in the exercise price of the warrants sold and issued with the 6%
promissory note to $.15 per share. In January 2005, the maturity
date of the 6% promissory note was extended to December 31, 2005.
o In August 2004, we sold and issued, for gross proceeds of $125,000,
(a) a 6% promissory note in the principal amount of $125,000 and due
January 2, 2005 and (b) warrants to purchase 105,000 shares of our
Company's common stock at an exercise price of $.45 per share. The
fair value of the warrants is $31,250 using the Black-Scholes option
pricing model and was recorded as a deferred debt discount which
will accrete to interest expense over the life of this promissory
note. the maturity date of this note has not been further extended
and, as of June 30, 2005, the principal amount due under the note
remains at $125,000.
o In September and October 2004, we sold $200,000 of our common stock
to accredited investors pursuant to Regulation D of the Securities
Act of 1933 at a purchase price of $.20.
o On November 24, 2004, we entered into a Common Stock Purchase
Agreement with Fusion Capital Fund II, LLC to obtain up to $6.0
million in equity financing from Fusion Capital. Under this
agreement, Fusion Capital agreed to purchase up to $6.0 million of
newly issued shares of our common stock over a period of up to 24
months. We have the right to control the timing and the amount of
stock sold, if any, to Fusion Capital. Pursuant to the agreement, we
issued to Fusion Capital, as a commitment fee, 794,702 shares of our
common stock. We had previously issued to Fusion Capital 60,000
shares of our common stock upon signing a letter of intent in August
2004. Fusion Capital's purchase of the $6.0 million of our common
stock will commence upon the fulfillment of certain conditions,
including our obligation to register the shares of our common stock
to be acquired by Fusion Capital pursuant to the agreement. Upon
completion of this funding, at our sole discretion, we have the
right to enter into a new agreement with Fusion Capital covering the
sale of up to an additional $6.0 million of our common stock. We are
currently in negotiations with Fusion Capital regarding amending
certain of the terms of the agreement. We can offer no assurances
that the terms of any amendment to our agreement with Fusion Capital
will be beneficial to us or that any amendment will be agreed upon
by the parties.
17
As a result of these activities, our cash and cash equivalents decreased to
$79,329 as of December 31, 2004, compared to cash and cash equivalents of
$597,739 as of December 31, 2003.
We expect to spend approximately $1,000,000 over the next twelve months to fund
and expand our business. Approximately $50,000 will be spent by NPI for
marketing and technology to assist in the distribution and marketing of its
products. ADS will spend approximately $50,000 to upgrade its technology.
During the ordinary course of business, we normally do not rely on loans and
advances from insiders. However, during 2004, an officer and director lent us a
total of $62,500 of which $50,500 remains outstanding. We do, however, rely on
other fund raising activities to support our operations and acquisition
strategy. We intend to utilize proceeds of the equity financing from Fusion
Capital to support our operations.
We are obligated to register a total of 2,936,890 shares for resale of our
common stock issued to the former holders of our 10% Senior Secured Convertible
Promissory Notes.
Fusion Capital Transaction
On November 24, 2004, we entered into a common stock purchase agreement with
Fusion Capital to obtain up to $6.0 million in equity financing from Fusion
Capital. Under the agreement, Fusion Capital agreed to purchase up to $6.0
million of our common stock over a period of time up to twenty-four months
commencing after the date a registration statement with respect to the shares to
be sold to Fusion Capital is declared effective. We intend to file that
registration statement as soon as the registration statement of which this
prospectus forms a part is declared effective.
Pursuant to this agreement, we issued to Fusion Capital 794,702 commitment
shares and 60,000 signing fee shares. No further cash payments are due to Fusion
Capital to obtain this funding. Funding of the initial $6.0 million would occur
over a period of time commencing upon fulfillment of certain conditions. Upon
completion of this funding, at our sole discretion, we have the right to enter
into a new agreement with Fusion Capital covering the sale of up to an
additional $6.0 million of common stock. We anticipate that we will be able to
draw $1 million of the $ 6.0 million allowed to be drawn down to continue our
operations for the next twelve months, subject to the limitations enumerated
below. However, there can be no assurance that we will be able to issue any
shares under the agreement with Fusion Capital, especially if we are unable to
have this or the next registration statement be declared effective. It is
anticipated that during the 12 months from the time a potential registration
statement is declared effective concerning the Fusion Capital Transaction, we
will additionally draw down monies to satisfy our current liabilities thereby
reducing our working capital deficit.
We have the right to control the timing and the amount of stock sold, if any, to
Fusion Capital. However, our ability to control the timing and the amount of
stock sold may be affected by limitations on the percentage of stock Fusion
Capital may hold. Under our agreement, Fusion Capital may not hold more than
9.9% of our common stock. Consequently, if Fusion Capital cannot sell our shares
due to the lack of liquidity in our common stock, our ability to obtain money
from Fusion Capital for acquisitions or to pay down our current debt may be
hindered or limited. Additionally our ability to raise capital outside of the
Fusion transaction may be affected by our minimal revenues, the losses that we
incur, our stockholders equity and our financial condition including our working
capital deficit. Potential capital sources may require us to pay off existing
indebtedness before providing any capital to us and we may be unable to do so.
The parties are currently considering a renegotiation of some or all of the
terms pursuant to which this agreement was made. We can offer no assurances of
the terms of a new agreement with Fusion Capital or that any agreement will be
consummated.
18
Plan of Operations
We entered the death care pre-arrangement business as a result of our
acquisitions of NPI and ADS in March 2002. Through our Kelly Color subsidiary,
we acted as a film processor for professional photographers, our historical
business since incorporation in 1967. We discontinued the operations of Kelly
Color in February 2004.
NPI has generated only minimal amounts of revenue from the sale of pre-need and
final expense insurance policies . The insurance commissions are paid by the
insurance companies that create, underwrite and issue these policies for which
we act as agents. ADS earns administrative fees on the administration of
pre-need funds in trust which are paid by the trust.
NPI is the subsidiary from which we plan on achieving much of our growth. NPI
has entered into various strategic relationships and selling agreements which
will allow it to market its products to a number of individuals. Although NPI's
agreements allow it to market its products to over 3 million individuals, the
timing of when the marketing occurs, the amount of marketing that occurs and the
communication that is delivered to these potential clients are all subject to
the decisions and control of both our strategic partners and the ultimate client
groups. As a result, NPI's has yet to generate minimal revenues from its
worksite marketing strategy and has only generated minimal revenue selling
pre-need policies out of funeral homes located in New Jersey.
Most of the marketing that currently is planned for NPI's products is marketing
that directs potential consumers to our enrollment website, as well as our
partner's web enrollment site. Although the internet has seen a significant
level of growth in use for the sale of various products, the use of the internet
for the sale of voluntary benefit products is relatively new. We will closely
monitor the response rate to our enrollment and marketing strategy.
NPI originally sought to acquire direct third party marketers of pre-arranged
death care that marketed pre-arranged death care services primarily by direct
mail, as well as operating the pre-arrangement office in many funeral home
locations. We have since changed our focus to focus on potential acquisitions in
the employee benefit, insurance, mortgage and work-site marketing areas which
allow for the cross-selling of our products, in addition to other businesses
which market products and services which benefit the baby boomer and senior
population segments.
Our ability to acquire businesses is dependent upon our ability to raise capital
which may be affected by several factors including our default under a $ 50,000
10% Convertible Promissory Note and a lack of liquidity of our common stock. The
Fusion Capital transaction may not provide us with sufficient capital to
complete any acquisitions. Our agreement with Fusion Capital limits the
percentage of stock Fusion Capital may hold to 9.9% of our outstanding common
stock. Consequently, if Fusion Capital is unable to sell our shares due to the
lack of liquidity in our common stock, our ability to be able to obtain money
from Fusion Capital for acquisitions or to pay down our current debt may be
hindered or limited. Additionally our ability to raise capital outside of the
Fusion transaction may be affected by our minimal revenues, the losses that we
incur, and our financial picture including our working capital deficit.
Potential capital sources may require us to pay off existing indebtedness before
providing any capital to us and we may be unable to do so.
ADS is currently seeking to increase the amount of pre-need trust monies it
administers. ADS administers approximately $40 million in trust funds. In
September 2003, ADS lost a significant source of revenues when its biggest
client, Service Corporation International, the largest funeral home and cemetery
operator in the country, removed approximately $70 million of trust assets that
ADS administered and sought administration of such assets overseas. SCI removed
all trust assets under administration from a variety of outside vendors such as
ADS. As a result, ADS has increased its efforts to administer trust funds held
by various state funeral association trusts, establish and market master trusts
to the independent funeral home community and to acquire existing trust
administration companies.
There can be no assurance that we will achieve successful and profitable results
from our distribution and marketing efforts or that we will be able to complete
acquisitions within the work-site marketing and employee benefit sectors.
We intend any acquisitions to be accomplished through issuances of stock, debt
and cash, or a combination of such forms of consideration. Potential
acquisitions will have to be structured to take into account the limitations
relating to the amount and timing of the capital to be derived from Fusion
Capital described above, in addition to our needs to take care of our working
capital deficit and long term liabilities. Acquisition structures may include
increased payouts, earnouts as well as future issuances of common stock subject
to certain conditions. 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, outside of the
Fusion Capital transaction, the stock price of our common stock, and our ability
to service any debt we may incur.
19
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.
There also can be no assurance that we will be successful in consummating any of
our plans, including planned acquisitions, curing defaults under exiting debt
obligations and securing from Fusion Capital or other sources the $1 million in
working capital required to continue our operations for the next twelve months.
To the extent that we are unsuccessful in our plans to increase our cash
position, by raising additional capital from Fusion Capital or from other
sources, we may find it necessary to further curtail some of our operations and
possible future acquisitions. These matters raise substantial doubt about our
ability to continue as a going concern. Our 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 we be
unable to continue as a going concern.
Recent Developments
In September 2005, we entered into a Modification Agreement relating to terms of
certain of our debt obligations. Pursuant to this Modification Agreement, the
maturity dates of certain Promissory Notes dated May 22, 2004 and August 5, 2004
were extended to May 15, 2006 with certain principal payments required to be
made on the 15th of each of five the months starting in January, 2006. In
addition, the exercise price of 175,000 warrants was reduced from $ .45 to $
..30. We also issued to the holder of the notes three-year year warrants to
purchase 17,500 of our common stock at $ .30 per share. We also issued to the
noteholder another 10% Promissory Note evidencing indebtedness of $125,000 with
Lender having a maturity date of May 15, 2006. Lender was issued 175,000
warrants carrying an exercise price of $ .30.
On April 7, 2005, we entered into a purchase agreement to acquire 90% of the
issued and outstanding stock of Disability Access Consultants, Inc. from its
sole shareholder, Barbara Thorpe, for a total of $2 million, $1 million of which
payable in cash and the remainder by a secured promissory note. This agreement
was terminated on June 1, 2005. as a result of our due diligence analysis of the
operations of the company, its clients and current operations as well as its
potential business.
20
BUSINESS
GENERAL
We entered the marketing of funeral funding products through our merger in
March, 2002 with National Preplanning and American DataSource. We were
previously engaged in non-digital photographic development.
We market insurance products, currently focusing on prearrangement or pre-need
products. Prearrangement and pre-need products allow individuals to secure the
funding for and in some instances the goods and services for their future
funerals prior to their deaths. In connection with our pre-need funding products
we sell, as agent on behalf of major insurance carriers, life insurance policies
in amounts from $3,000 to $15,000, which upon an individual's death is used for
the payment of his or her funeral costs. An individual may also freeze or
guarantee the price of the future funeral by prearranging it. This process
entails individuals choosing, prior to their deaths, such items as the type of
interment process they desire (burial or cremation), visitation and religious
services at the funeral parlor or elsewhere and the type of casket and other
goods and services that they desire to be utilized in connection with the
funeral.
We market our products to corporations, unions, and affinity groups that may
offer these products as a voluntary or contributory benefit to their employees
or members much like they offer health insurance, life insurance, dental
insurance and legal plans. We currently sell pre-need insurance policies that
are fixed pay whole life insurance policies accompanied by an inflation rider.
An inflation rider ensures that the policy value grows over time, and acts as a
hedge against inflation and rising funeral prices. The policy may be assigned to
a funeral home when a prearrangement contract is executed, which would use the
proceeds of the policy to cover the costs of the funeral that has been arranged
in accordance with the decedent's prior arrangement. If a prearrangement is not
made, the policy proceeds may be used by the decedent's beneficiaries to cover
the costs of the decedent's funeral at the time of death.
Our subsidiary, National Preplanning, Inc., has entered into a number of third
party marketing agreements with larger and more established insurance agencies
that sell a variety of other insurance products to market our pre-need funding
products to employees in the workplace, individuals belonging to unions and
various associations. These marketing agreements allow National Preplanning to
market its products to a wider audience.
Our other subsidiary, American Datasource, Inc., administers funds in trust
accounts that are used for the payment of prearranged funerals upon the death of
an individual. A trust account is created by an individual entering into a
prearrangement contract with a funeral director. Instead of funding a
prearrangement with a pre-need insurance policy, an individual places funds into
a trust account. This account is professionally managed by an independent third
party and the account is assigned to the funeral home and used to cover the
decedent's funeral costs. American DataSource issues annual reports on the funds
in each trust account. It also administers the funds upon an individual's death
to ensure that they are used for the purpose of paying for the funeral expenses.
American Data Source has entered into a marketing agreement with Parkway
Advisors, Inc. that it hopes will result in an expansion of its client base
although there can be no assurance that this will occur. There are no minimal
payments due under this agreement by either party.
In addition, in the future we may add other employee benefit products and
services that benefit the baby boomer and senior populations. Products may
include other insurance related products such as disability insurance, long-
term care legal plans, mortgage products and other voluntary benefits.
National Preplanning
National Preplanning is our marketing arm and primary face to the end consumer.
Through this business unit, we cultivate corporations, unions, affinity groups
and their employees and members as clients for our final expense and pre-need
insurance products. In addition, National Preplanning has entered into third
party sales and marketing agreements with larger employee benefit and insurance
firms that will become distribution channels for our products. The firms range
from insurance agencies to enrollment firms (firms which enroll individuals in
various insurance programs) which market and sell a variety of insurance and
benefit products to the same corporate, union and association clients that we
seek to sell our product to. National Preplanning provides these marketing
channels with marketing materials and private labels our web based enrollment
site in their name as they introduce our products to these clients in
conjunction with the existing products which they already sell to them.
21
To support its marketing efforts and to provide end consumers an easy-to-use
self-service environment, National Preplanning has developed a technology
platform that will allow an individual to choose a selection of death care
funding options services in a matter of minutes over the Internet. This
technology lends itself to the worksite and affinity marketing strategy we
employ.
In an effort to provide potential consumers more value upon the purchase of one
of the final expense or pre-need insurance products that we sell, National
Preplanning will seek to enter into arrangements with funeral homes whereby we
can direct purchasers of funding products to funeral homes which will not only
use the funding purchased to allow them to secure a prearranged funeral but also
to offer them a discount of ten percent. To this end, National Preplanning has
entered into an agreement with Stewart Enterprises, the third largest funeral
home operator to accept the funding purchased against a prearrangement that they
purchase from Stewart Enterprises. Consequently, National Preplanning will not
sell any death care or funeral service packages directly but rather it will sell
a life insurance product that is used to fund such a person that is purchased
from a funeral home directly. National Preplanning will not receive any revenues
from its relationship with Stewart Enterprises
On June 1, 2004, NPI entered into a strategic pre-need sales and marketing
agreement with Hilb Rogal & Hobbs Insurance Services of Northern California
which will allow NPI to begin marketing funeral pre-arrangement to the employees
and affiliates of businesses belonging to the California Chamber of Commerce.
The California Chamber of Commerce represents approximately 12,000 businesses
having over 2.3 million employees. NPI has been told that HRH will commence
marketing NPI products in the near future. There is no minimum cash commitment
relating to this agreement. This agreement calls for the marketing of the
insurance products that NPI seeks to market through HRH's internet portal to
service the employees of the companies that belong to the California Chamber of
Commerce. It does not appear that these firms are actively marketing our
products. As a result, we may be required to market directly to potential
clients in addition to seeking to acquire other agencies that market other
products to its clients base which we then can add our products to their product
lineup.
On June 15, 2004, NPI received the approval to market its products to the
members of the Benefit Marketing Association, an organization of over 3,200
corporate and individual members engaged in the marketing of benefits that
involve the relationship between an employer and their employees, a business and
their customers and an organization and their members. NPI's marketing to the
members of the Benefit Marketing Association commenced in the third quarter of
2004 and is expected to continue for at least the following three fiscal
quarters. There is no minimum cash commitment relating to this agreement. No
sales have resulted from this agreement and there can be no assurance that any
sales will result from this agreement.
On August 16, 2004, NPI entered into a pre-need sales and marketing agreement
with L.F.A. Insurance Services, Inc., an insurance agency specializing in group
benefits having over 200 clients with over 5,000 total members. LFA will
commence marketing NPI's products in the second quarter of 2005. There is no
minimum cash commitment relating to this agreement. No sales have resulted from
this agreement and there can be no assurance that any sales will result from
this agreement and no sales have resulted from this agreement to date.
On October 6, 2004, NPI entered into a Supplier Agreement with Motivano, Inc.
Motivano is a technology -based seller of voluntary benefits to approximately
1,000,000 employees of companies that offer Motivano's products. Under this
agreement, commencing in April 2005, NPI's products will be included in
Motivano's offerings to such employees. There is no minimum cash commitment
relating to this agreement.
On December 8, 2004, we established an advisory board that will be composed of
distinguished professionals from the insurance, employee benefit and investment
banking communities. The advisory board will serve as a resource to our
executive team and will provide input relating to strategic direction, the
development of key strategic relationships and the company's future growth
plans. The term of the advisory board members is for one year and each member
receives six thousand options and an additional 1,000 options for each advisory
meeting attended.
On December 15, 2004, NPI entered into a pre-need sales and marketing agreement
with The Parker Group Insurance Services, an independent enrollment firm
assisting brokers and their clients in developing, educating, communication and
delivering employee benefit packages. There is no minimum cash commitment
relating to this agreement and no sales have resulted from this agreement to
date.
22
On January 6, 2005, NPI entered into a pre-need sales and marketing agreement
with the Christian Benefit Association. Under this agreement, the association
will market NPI products to its membership, primarily through online enrollment.
There is no minimum cash commitment relating to this agreement and no sales have
resulted from this agreement to date.
American DataSource, Inc.
American DataSource was formed in 1984 as a provider of trust administrative
services to independent funeral homes across the United States. American
DataSource was combined with National Preplanning and merged into Walker
International Industries (our predecessor), a public company, in March, 2002.
American DataSource utilizes its a proprietary software system to administer
pre-need funeral and cemetery trust funds of independent and corporate owned
funeral homes and cemeteries throughout the United States. American DataSource
currently administers over $40 million in pre-need assets.
The trust administration business consists of detailed record keeping,
management of all contracts between the funeral provider and the customers,
allocations of trust earnings and expenses to the individual participants in the
trust, tax reporting, and reconciliation of the trust statement to the books on
a monthly basis.
American DataSource achieves revenues by generating trust administration fees on
prearranged monies funded through trust. We view the administration market of
these assets as a growth vehicle while simultaneously enabling us to
differentiate ourselves from our competitors by offering full-service funding
options.
Although prearranged funerals are funded through either the purchase of a final
expense or pre-need insurance policy or by placing monies in trust, National
Preplanning's marketing efforts are primarily focused on the marketing and
selling of insurance. American Data Source seeks to market its services directly
to funeral homes and funeral home associations as opposed to direct to consumer
marketing by having consumers fund their prearrangements by placing monies in
trust. During the six months ended June 30, 2005, approximately 93% of ADS's
revenues were generated by three customers: American Funeral Plan, Carriage
Services, Inc. and Texas Prepaid Funeral Fund.
STRATEGY
Worksite and Affinity Marketing
Prearranged funeral products were traditionally marketed out of funeral homes
through local direct mail advertising campaigns. We believe, however that we can
gain greater market traction and penetration into the consumer marketplace by
marketing prearranged funerals as a voluntary benefit that an employer, union,
or other affinity group may offer to its employees or members. A variety of
insurance products are not marketed through these channels.
Worksite and affinity marketing is largely comprised of the sale of voluntary
benefits through employers or affinity groups. This marketing strategy has seen
enormous growth in the past few years for several reasons. From a product
provider's standpoint, worksite/affinity marketing reduces customer acquisition
costs, improves sales conversion ratios ( i.e. the amount of sales that occur as
a percentage of the target population), allows for effective customer targeting
and segmentation, reduces customer maintenance costs, and increases customer
retention. We believe our use of worksite and affinity marketing strategies for
our final expense and prearrangement products will provide us with these same
benefits.
From an employer or affinity group perspective, the opportunity to offer
products to its employees and members at no cost has been highly valued. It is
an easy way to offer more value to employees or members at no cost. As a result,
the scope of these voluntary product offerings has grown dramatically, but still
does not appropriately address death care products and services.
23
Target Market Characteristics: Age and Income Segments
Prearrangement products have historically been marketed to individuals who are
65-85 years of age. However, based upon the graying baby boomer population, we
believe there is an opportunity to expand this age bracket to include the aging
Baby Boomer market (consumers aged 45-65) as these individuals address their
personal financial and retirement needs. We believe aging Baby Boomers have a
higher likelihood to purchase funeral related and pre-need products because Baby
Boomers typically: 1) seek out customized products and services; 2) desire to
control all aspects of their lives; and 3) are independent thinkers and develop
their own ideas. The pre-need product fits well with these traits. Considering
these facts, we define our target market broadly as those individuals aged 45-85
spanning the Baby Boomer and senior markets.
Based upon market intelligence gained in our past and current marketing efforts,
we believe our products are best suited for middle to lower income individuals
(adjusted gross income of $35,000 to $75,000) with a minimal to moderate level
of financial sophistication. In addition, the pre-arrangement product is well
received by individuals who are methodical self-planners as well as those who
have witnessed the financial and emotional hardships placed on those who have
made funeral arrangements for recently deceased loved ones. Further, National
Preplanning's products appeal to savers as well as business-minded individuals
who realize that making funeral arrangements is a very emotional process and
want to ensure those planning their funeral are not taken advantage of at a time
when they are vulnerable. Finally, National Preplanning's products may appeal to
people who choose to assemble their own financial plan without employing the
services and incurring the fees of a financial planner.
DISTRIBUTION
National Preplanning is a wholesaler of final expense and pre-need insurance.
These two products are for the most part identical except that a pre-need
insurance policy is assigned to a particular funeral home in conjunction with a
prearrangement contract with that funeral home at the time of issuance as
opposed to a final expense policy which may or may not be assigned to a
particular funeral home. As a wholesaler, National Preplanning does not have a
direct field sales force and has created relationships with agents, brokers and
other intermediaries that currently sell voluntary products into large affinity
groups. These agents and brokers become licensed under National Preplanning's
managing general agency and then resell the prearrangement products on National
Preplanning's behalf. The parties share commissions upon a sale.
Aggregators
Another key component of National Preplanning's marketing strategy involves
striking relationships with organizations that have aggregated large pockets of
National Preplanning's targeted clients. These organizations are unions,
associations, financial institutions, churches and/or employers.
Benefits Delivery Companies
In order to reach employee populations, National Preplanning has partnered with
benefits administration firms that also offer their clients a portfolio of
optional benefits. Benefit administration firms are basically insurance agencies
that solely use a web based platform for the distribution, administration and
enrollment of core and voluntary benefits to employees on behalf of their
employers. This will directly integrate the pre-need product with the benefits
delivery platform, which enables National Preplanning to penetrate thousands of
worksite locations.
Online Distribution Partnerships
National Preplanning may also establish marketing partnerships with established
online insurance marketplaces for the distribution of pre-need products. As
National Preplanning pursues this strategy, it will initiate discussions with
large, established sites that have proven consumer traffic volume that fits the
demographic profile of the National Preplanning consumer population.
24
INDUSTRY
In the U.S., there were 2.4 million deaths in 2000, an increase of more than
250,000 deaths over 1990 totals, due in large part to the population growth and
the increasing age of the population. (Journal of American Medical Association,
291:10). Thus, despite increases in life expectancy and improvements in
healthcare, the prearrangement of death care services is expected to rise at a
rate of one percent annually. In addition, because the market focus of the death
care industry is on one of life's certainties, the industry is not exposed to a
significant risk of recession and, based on third party projections, is expected
to continue to grow steadily.
This growth rate is, in part, due to the graying "Baby Boomer" generation, which
has, and will continue to have, a tremendous effect upon the death care industry
for the next 20-30 years. This generation includes 78 million Americans born
between 1946 and 1965 and represents nearly 30% of the total U.S. population.
(Funeral Wire, May 17, 2005)
Baby Boomers have changed the death care industry in several key ways. First,
they have demanded more personalized service from funeral service providers.
Second, they have pushed for the ability to pre-arrange funerals and finally,
they have shown more interest in cremation. These changes have led to a
significant shift in death care industry offerings.
Specifically focusing on prearrangements, historically these products were
marketed out of funeral homes through local direct mail advertising campaigns.
The product emerged as a new revenue stream for funeral service providers who
were looking to expand revenue and capitalize upon "pre-event" marketing. Today,
the aging of the "baby boomer" population is expected to increase the demand for
prearrangement services for the next 20-30 years.
COMPETITION
The death care industry is highly competitive, although we believe that there is
no other company in the industry with a business model substantially identical
to ours.Nevertheless, we face substantial competition in all aspects of our
current business. Our competitors may be deemed to include insurance companies,
captive distribution systems of insurance companies, independent insurance
intermediaries and boutique broker-general agents. To a small degree, we also
will compete with individual and corporate funeral homes that act as agents for
insurance companies and trust administrators.
Various death care industry constituents, insurance companies and insurance
agencies and agents market various forms of final expense and prearrangement
products. We believe that our strategy of marketing these products to
corporations, unions and associations is unique based upon our knowledge of
existing industry competition. Although we might have a head start in going
after this client base there is nothing to prevent our competitors from using
this marketing strategy. Additionally our efforts have revealed that we are
subject to the timing and desire of our marketing partners as to when they wish
to commence the marketing of our products.
Our general impression is that the average life insurance agent believes that
funeral costs may be covered by life insurance products and, as a result,
National Preplanning's products are not needed. This may affect the number of
marketing agreements we may ultimately be able to enter into. We believe that we
offer a better policy since it includes an inflation rider (previously defined)
.. Similarly, financial planners may advocate that consumers prepare financially
for their own funeral costs by purchasing low risk investments that offer better
yields than National Preplanning products.
Traditional insurance agents and brokers may become valuable distributors of
National Preplanning products after they receive more education on these
products. We believe that insurance agents/brokers as well as financial planners
will particularly appreciate the funeral rate lock feature of National
Preplanning products, which differentiates this offering from other financial
products.
Provider Funeral Homes (Independent and Conglomerate)
Independent and conglomerate funeral homes alike are attempting to market
prearrangement products today. We do not view these groups as competitors.
Rather, we believe that National Preplanning can become a marketing
infrastructure that can be utilized by either independent or conglomerate
funeral homes to improve their ability to achieve revenues from the sale of
prearrangement products. Our marketing infrastructure enables independent and
conglomerates alike to achieve their key goals - increasing market share in
their respective geographic regions while reducing internal costs associated
with marketing and administration. As a result, we view these two groups to be
potential fulfillment partners. In fact, this is a significant differentiator
for us as we seek to aggressively expand our network of participating funeral
home providers.
25
Other Competitors
To the extent that third party marketers, insurance agencies, banks, trust
companies, administrators and/or software companies enter the prearrangement
market, we expect some competition from these arenas. However, we believe our
structure, product mix, marketing strategy, and business partners will enable us
to gain market traction more quickly.
REGULATION
State insurance laws grant supervisory agencies, including state insurance
departments, broad regulatory authority. These supervisory agencies regulate,
among other things, the licensing of insurance brokers and agents, regulation of
the handling and investment of third-party funds held in a fiduciary capacity
and the marketing practices of insurance brokers and agents, in the context of
curbing unfair trade practices. This continual reexamination may result in the
enactment of laws and regulations, or the issuance of interpretations of
existing laws and regulations, that adversely affect our business. More
restrictive laws, rules or regulations may be adopted in the future that could
make compliance more difficult and expensive.
We are required to be licensed to engage in the insurance agency and brokerage
business in most of the jurisdictions where we do business. We currently have
been licensed in the following jurisdictions:
o California,
o Florida,
o Illinois and
o New Jersey.
The insurance laws and regulations of all United States jurisdictions also
require individuals who engage in agency, brokerage and certain other insurance
service activities to be licensed personally. These laws and regulations also
govern the sharing of insurance commissions with third parties. We believe that
any payments made by or received by us are in compliance with applicable laws
and regulations. However, should any regulatory authority take the position, and
prevail, that certain payments by us violate the insurance laws and regulations
relating to the payment or sharing of commissions, that regulatory authority
could require that we stop making or receiving those payments or that the
entities receiving or making those payments become licensed. In addition, if
this were to occur, the regulatory authority could impose fines or penalties on
us. We believe, however, that we could continue to operate our business by
requiring that these entities be licensed or by making payments directly to
licensed individuals.
EMPLOYEES
We currently have eight full time employees, with two in management, two in
business development and sales and four in administration. Currently, there
exists no organized labor agreements or union agreements between our employees
and us. We believe that our relations with our employees are good.
We have entered into consulting agreements with a variety of industry
professionals which call for the introduction by them to potential marketing
partners that may be interested in distributing our products to their customers.
26
DESCRIPTION OF PROPERTY
We maintain our principal office at 990 Stewart Avenue, Suite 60A, Garden City,
New York 11530. Our telephone number at that office is (516) 832-7000 and our
facsimile number is (516) 832-7979. We lease 1,700 square feet of office space
at our principal office. The monthly rent is $2,400. In addition, our
wholly-owned subsidiary, American DataSource, leases offices located at 13111
Norwest Freeway - Suite 100, Houston, Texas 77040. These offices contain
approximately 3,000 square feet and are leased from an unaffiliated third party
for a monthly base rental of approximately $3,000. The lease expires in June
2005. We believe that our current office space and facilities are sufficient to
meet our present needs and do not anticipate any difficulty securing alternative
or additional space, as needed, on terms acceptable to us.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.
27
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Name Age Position
- --------------------------------------------------------------------------------
James M. Lucas, Sr. 58 Chairman of the Board of Directors
Mitchell S. Segal 46 President, Chief Executive Officer, Chief Financial
Officer and Director and President of National
Preplanning, Inc., our wholly-owned subsidiary
Peter Walker 59 Director
Directors are elected to serve until the next annual meeting of stockholders and
until their successors are elected and qualified. Currently there are three
seats on our board of directors.
Currently, our insider Directors are not compensated for their services.
Non-employee directors are entitled to receive automatic grants of options to
purchase 7,150 shares of our common stock upon first becoming a director of our
company and annually thereafter. Officers are elected by the Board of Directors
and serve until their successors are appointed by the Board of Directors.
Biographical resumes of each officer and director are set forth below.
JAMES M. LUCAS, SR. James N. Lucas, Sr. became our chairman of the board upon
completion, and pursuant to the terms, of our acquisition of American
DataSource, Inc. in March 2002. Mr. Lucas served as the president of American
DataSource from 1999 until January 2004. Mr. Lucas currently is President and
Chief Executive Officer of Professional Association Consultants, a third-party
marketer operating in the death care industry. From 1990 to 1995, Mr. Lucas
served as President and owner of International Funeral Associates, Inc. Mr.
Lucas had previously served as President (1990), Executive Vice-President
(1988-1989), Vice-President of Sales and Membership (1986-1987) of International
Funeral Associates. Mr. Lucas sold International Funeral Associates to a major
public insurer in 1995. From 1988 to 1990, Mr. Lucas also served as a
Vice-President of Service Corporation International, one of the world's largest
funeral home operators. From 1968 to 1986, he was the owner and operator of
Lucas Funeral Homes, which consisted of four wholly owned funeral homes and
three partially owned funeral homes in Tarrant County, Texas. Lucas Funeral
Homes was sold to Service Corporation International in 1986. Mr. Lucas received
his Bachelor Degree in Business Administration and a license from the Dallas
Institute of Mortuary Services in 1968.
MITCHELL S. SEGAL. Mitchell S. Segal became our president and chief executive
officer and a member of our board of directors upon completion, and pursuant to
the terms, of our acquisition of National Preplanning Inc. in March 2002. Mr.
Segal has served as the president of National Preplanning since its inception in
1999. He has spoken at several national conferences on issues relating to the
death care industry. Mr. Segal received a B.A. degree from Boston University in
1981 and a J.D. degree from Hofstra Law School in 1984. He was employed by the
accounting firm Arthur Andersen in its tax department from 1984 to 1986. Mr.
Segal served as an assistant vice president in the direct investment division of
NYLIFE Securities, a subsidiary of New York Life Insurance, from 1986 to 1987.
Thereafter, Mr. Segal was a vice president in the realty investment group of
Shearson Lehman Brothers from 1987 to 1990. From 1990 to 1998, Mr. Segal was in
private practice.
PETER WALKER. Peter Walker served as our president and chief executive officer
(from 1984) and chairman of the board (from 1987) of our company until March
2002 when he resigned all of such positions upon completion, and pursuant to the
terms, of our acquisition of American DataSource and National Preplanning Inc.
in March 2002. Despite such resignations, Mr. Walker continues to serve as a
director of our company, which he as been since March 2002 Between 2002 and
February 2004, Mr. Walker served as president of Kelly Color Laboratories, Inc.,
our wholly-owned subsidiary. From 1977 to 1984, Mr. Walker was executive
vice-president, secretary and a director of our company.
Audit Committee
We do not have an Audit Committee. Our board of directors performs some of the
same functions of an Audit Committee, such as: recommending a firm of
independent certified public accountants to audit the annual financial
statements; reviewing the independent auditors independence, the financial
statements and their audit report; and reviewing management's administration of
the system of internal accounting controls. We do not currently have a written
audit committee charter or similar document.
28
Compensation Committee
We do not have a Compensation Committee. Our board of directors perform some of
the same functions of a Compensation Committee, including setting executive
officer compensation.
Nominating Committee
We do not have a Nominating Committee or Nominating Committee Charter. Our board
of directors performed some of the functions associated with a Nominating
Committee. We have elected not to have a Nominating Committee at this time,
however, our Board of Directors intend to continually evaluate the need for a
Nominating Committee.
Advisory Board
On December 8, 2004, we established an Advisory Board that will be composed of
distinguished professionals from the insurance, employee benefit and investment
banking communities. The Advisory Board will serve as a resource to our
executive team and will provide input relating to strategic direction, the
development of key strategic relationships and the company's future growth
plans. On December 14, 2005, Mr. Jack Kwicien became the first member of our
Advisory Board. Mr. Kwicien has over 30 years of executive management and
entrepreneurial experience in the insurance and work-site marketing arenas. Mr.
Kwicien is currently the managing partner of Daymark Capital Advisors, a
consulting and investment banking firm with expertise in benefits
administration, human resource services and work-site marketing of property and
casualty insurance, health insurance and financial services products in the
U.S.. Mr. Kwicien is the founder of Rewards Plus, a national employee benefits
company that leverages internet technology and work-site marketing strategies to
deliver core and voluntary benefits to employers and employees. We granted Mr.
Kwicien a three-year option to purchase 6,000 shares of our common stock upon
his joining our Advisory Board, which shares become exercisable ratably over the
first twelve months following grant. Mr. Kwicien is to receive an additional
three-year option to purchase 1,000 shares of our common stock for each Advisory
Board meeting attended. The shares underlying these options will become
exercisable six months from their respective grants. All of the options granted
or to be granted to Mr. Kwicien have or will have an exercise price equal to the
closing price of our common stock on the effective date of grant. There is no
minimum cash commitment relating to this agreement.
On January 13, 2005, Jim Quimet joined our Advisory Board. Mr. Quimet has
approximately 30 years of experience in the insurance industry of which 20 years
has been devoted to work-site marketing. Mr. Ouimet is Chairman and CEO of the
James Group, LLC, an insurance sales and marketing consulting organization he
founded in 1995. Mr. Ouimet is part owner and a director of the National
Association of Professional Enrollment Specialists (a/k/a The Benefit Marketing
Association), an insurance industry work-site marketing focused association. In
2000, he was inducted into the International Work-site Marketing Hall of Fame.
We granted Mr. Quimet a three-year option to purchase 6,000 shares of our common
stock upon his joining our Advisory Board, which shares become exercisable
ratably over the first twelve months following grant. Mr. Quimet is to receive
an additional three-year option to purchase 1,000 shares of our common stock for
each Advisory Board meeting attended. The shares underlying these options will
become exercisable six months from their respective grants. All of the options
granted or to be granted to Mr. Quimet have or will have an exercise price equal
to the closing price of our common stock on the effective date of grant. There
is no minimum cash commitment relating to this agreement.
The Advisory Board is not part of our Board of Directors.
29
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding our CEO and each of
our most highly-compensated executive officers whose total annual salary and
bonus for the fiscal year ending December 31, 2003, 2002 and 2001 exceeded
$100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Mitchell S. Segal 2004 220,000 0 0 -- -- -- --
President, CEO 2003 210,000 0 0 -- -- -- --
and CFO (1) 2002 156,923 0 0 -- -- -- --
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Peter Walker 2004 100,000 0 0 -- -- -- --
President of 2003 100,000 0 0 -- -- -- --
Kelly Color 2002 100,000 0 0 -- -- -- --
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
(1) Mr. Segal became our president and chief executive officer in March 2002
and our chief financial officer in October 2002.
Stock Option Plans
In September 2002, our stockholders approved our 2002 Equity Incentive Plan. Our
executive officers are eligible to receive awards under this plan.
Option/SAR Grants in Last Fiscal Year
None.
Employment Agreements
Mitchell Segal
We have entered into an employment agreement with Mitchell Segal to serve as our
president and chief executive officer through December 31, 2005. Under Mr.
Segal's employment agreement, we paid Mr. Segal an annual base salary of
$220,000 for 2004, with annual increases of not less than $10,000, plus annual
bonuses 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 our
net income, provided our net income is at least $500,000. The bonus is payable
through 2008, even if Mr. Segal's employment with us is terminated by us 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 our board of directors.
Mr. Segal's employment agreement provides for him to be paid his salary:
o for a six-month period following his termination due to a disability; and
o for the entire remaining employment term in the event his termination is
otherwise than for cause or disability.
30
Peter Walker
We entered into an employment agreement with Peter Walker through March 18,
2012. Under Mr. Walker's employment agreement, we 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. Mr. Walker's employment agreement
does require us to use our best efforts to cause Mr. Walker to be nominated for
election to our board of directors during the term of Mr. Walker's employment
agreement.
Mr. Walker's employment agreement provides for him to be paid his salary:
o for a two year period following his termination due to a disability;
and
o for the entire remaining employment term in the event his
termination is otherwise than for cause or disability; provided
that, if the termination is due to a failure to pay Mr. Walker his
compensation otherwise payable under the employment agreement, then
the rate of compensation shall be
o in the seventh year, 150% of his salary at the time of termination,
o in the eighth year, 200% of his salary at the time of termination,
in the ninth year, 250% of his salary at the time of termination,
and
o in the tenth year, 300% of his salary at the time of termination.
As of December 31, 2004, we were in arrears under Mr. Walker's employment
agreement in the amount of $32,964.
Director Compensation
We currently do not have in effect a policy regarding compensation for serving
on our board of directors. However, we do reimburse our directors for their
reasonable expenses incurred in attending meetings of our board and our
non-employee directors are entitled to receive automatic grants of options to
purchase 7,150 shares of our common stock upon first becoming a director of our
company and annually thereafter.
31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2004, Mitchell S. Segal, our president, chief executive and financial
officer and a stockholder, advanced the Company $50,000.00. During the nine
months ended September 30, 2005, the Company borrowed an additional $13,450 for
working capital purposes and repaid $27,000 of the advances. As of September 30,
2005, the total amount due the officer / stockholder was $36,450. These advances
are non-interest bearing and have no definitive repayment terms.
Our previous executive offices were located at 370 Old Country Road - Suite 200,
Garden City, New York 11530. These offices were provided rent-free pursuant to
an oral arrangement with the Whitmore Group, LLC, an entity in which the
principal owner is James Metzger, one of our former directors. The fair market
value of the rent-free arrangement was immaterial to our financial statements.
On November 24, 2004, we entered into a common stock purchase agreement with
Fusion Capital, an entity that owns in excess of 5% of our issued and
outstanding Common Stock, to obtain up to $6.0 million in equity financing from
Fusion Capital. Under the agreement, Fusion Capital agreed to purchase up to
$6.0 million of newly issued Walker Financial common stock over a period of time
up to twenty-four months commencing after the date a registration statement with
respect to the shares to be sold to Fusion Capital is declared effective. We
intend to file that registration statement as soon as the registration statement
of which this prospectus forms a part is declared effective. We have the right
to control the timing and the amount of stock sold, if any, to Fusion Capital.
Pursuant to this agreement, we agreed to initially issue to Fusion Capital
794,702 commitment shares and 60,000 signing fee shares of our common stock
(which shares have been issued). We will pay no cash commitment fee to Fusion
Capital to obtain this agreed funding. Funding of the initial $6.0 million would
occur over a period of time commencing upon fulfillment of certain conditions.
Upon completion of this funding, at our sole discretion, we have the right to
enter into a new agreement with Fusion Capital covering the sale of up to an
additional $6.0 million of common stock.
32
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of August 30, 2005:
o by each person who is known by us to beneficially own more than 5%
of our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
PERCENTAGE OF PERCENTAGE OF
CLASS CLASS
NAME AND ADDRESS NUMBER OF PRIOR TO AFTER
OF OWNER TITLE OF CLASS SHARES OWNED(1) OFFERING(2) OFFERING(3)
- -----------------------------------------------------------------------------------------------------
Mitchell S. Segal Common Stock 1,839,670 13.4% 12.4%
990 Stewart Ave., Suite 60A
Garden City, NY 11530
James M. Lucas, Sr. Common Stock 459,960 3.4% 3.1h%
American Datasource, Inc.
517 North Sylvania Ave.
Fort Worth, TX 76111
Peter Walker Common Stock 1,109,390(4) 8.1% 7.5%
990 Stewart Ave., Suite 60A
Garden City, NY 11530
All Officers and Directors Common Stock 3,409,020 24.9% 23%
As a Group (3 persons)
James M. Lucas, Jr. Common Stock 689,940 5.0% 4.6%
American Datasource, Inc.
517 North Sylvania Ave.
Fort Worth, TX 76111
Fusion Capital Fund II, LLC Common Stock 854,702(5) 6.2% 5.8%
222 Merchandise Mart Plaza
Suite 9-112
Chicago, IL 60654
David L. Cohen Common Stock 1,263,841(6) 9.2% 0%
1800 Rockaway Avenue
Hewlett, NY 11557
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of August 30, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based upon 13,687,220 shares issued and outstanding on August 30, 2005.
(3) Percentage based on 14,857,126 shares of common stock outstanding.
(4) Includes (a) 615,620 shares of our common stock held by The Robert Walker
Life Insurance Trust in which Mr. Walker serves as trustee and in which Mr.
Walker is the beneficiary of 450,000 shares owned by this trust and is the
brother of the beneficiary of the remaining shares owned by this trust, and (b)
165,000 held by a second trust for which Mr. Walker is the sole beneficiary. Mr.
Walker disclaims any beneficial ownership to the shares owned by The Robert
Walker Life Insurance Trust, other than the 450,000 shares for which he is the
beneficiary under this trust.
(5) Steven Martin and Joshua Scheinfeld retain voting and investment control
over the shares held by Fusion Capital Fund.
(6) Includes (a) 1,238,841 shares of common stock and (b) 25,000 shares of our
common stock issuable upon exercise of options currently exercisable.
33
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 100,000,000 shares of common stock, par value
$.10. As of August 30, 2005, there were 13,687,220 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged American Stock Transfer & Trust Company, located in Brooklyn,
New York, as independent transfer agent or registrar.
PREFERRED STOCK
We are authorized to issue up to 5,000,000 shares of Preferred Stock, par value
$.10, none of which are issued and outstanding.
OPTIONS
There are currently 52,170 options outstanding pursuant to our employee-stock
option plan.
WARRANTS
We have 200,000 warrants outstanding exercisable at $0.15 per share, which
expire in March 2006. We have 724,063 warrants outstanding exercisable at $0.28
per share, which expire in July 2008. We have 31,463 warrants outstanding
exercisable at $0.30 per share, which expire in July 2006. We have 175,000
warrants outstanding exercisable at $0.45 per share, which expire in August
2007. We have 17,860 warrants outstanding exercisable at $4.20 per share, which
expire in July 2006. We have 10,760 warrants outstanding exercisable at $6.30
per share, which expire in July 2006. We have 10,760 warrants outstanding
exercisable at $7.23 per share, which expire in July 2006.
CONVERTIBLE SECURITIES
There are currently $425,000 worth of convertible securities outstanding. Fifty
thousand dollars worth of the convertible securities outstanding are 10% Senior
Secured Convertible Promissory Notes which have a maturity date of December 5,
2006, are convertible, at the option of the holder, into our common stock at any
time prior to December 4, 2005 at the conversion rate (subject to adjustment) of
one share of common stock for every $0.71 of principal and accrued interest
converted and at any time from December 5, 2005 through the maturity date at the
conversion rate (subject to adjustment) of one share of common stock for every
$1.25 of principal and accrued interest converted. Each 10% note is subject to
automatic conversion, at the then applicable conversion rate, if, (a) for any
twenty consecutive trading days, (i) the market price of our common stock equals
or exceeds $3.00 and (ii) the trading volume for our common stock equals or
exceeds 50,000 shares, and (b) the conversion shares are either (i) subject to
an effective registration statement under the Securities Act of 1933 or (ii)
available for resale pursuant to Rule 144 promulgated under the Securities Act.
The remaining $375,000 of convertible securities are 10% Convertible Promissory
Notes and three-year warrants to purchase 93,750 shares of our common stock.
Each of these notes is due on November 5, 2005 and bears interest at the rate of
10% per annum, payable at maturity. The notes may be prepaid, at our sole
discretion, in whole or in part, at any time upon notice to the holders of the
notes. The notes are further subject to mandatory re-payment upon the occurrence
of specified events and after the giving of appropriate notice to the holders.
Each holder of a note has the right, exercisable in the holders' sole
discretion, to convert all or any portion of the principal amount standing under
the holder's note and all accrued and unpaid interest on such principal amount
being converted into shares of our common stock at a conversion price of $0.71
per share. The exercise price of the warrants is $0.71 per share.
34
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Certificate of Incorporation, as amended, provide to the fullest extent
permitted by Delaware law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Certificate of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Certificate of Incorporation,
as amended, are necessary to attract and retain qualified persons as directors
and officers.
Section 145 of the Delaware General Corporation Law provides that a corporation
may indemnify a director, officer, employee or agent made a party to an action
by reason of that fact that he or she was a director, officer employee or agent
of the corporation or was serving at the request of the corporation against
expenses actually and reasonably incurred by him or her in connection with such
action if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and
with respect to any criminal action, had no reasonable cause to believe his or
her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act" or "Securities Act") may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
35
PLAN OF DISTRIBUTION
The common stock offered by this prospectus is being offered by the selling
stockholders. The common stock may be sold or distributed from time to time by
the selling stockholders directly to one or more purchasers or through brokers,
dealers, or underwriters who may act solely as agents at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed. The sale
of the common stock offered by this Prospectus may be effected in one or more of
the following methods:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of
any state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box, puts
and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
In order to comply with the securities laws of certain states, if applicable,
the shares may be sold only through registered or licensed brokers or dealers.
In addition, in certain states, the shares may not be sold unless they have been
registered or qualified for sale in the state or an exemption from the
registration or qualification requirement is available and complied with.
Brokers, dealers, underwriters, or agents participating in the distribution of
the shares as agents may receive compensation in the form of commissions,
discounts, or concessions from the selling shareholder and/or purchasers of the
common stock for whom the broker-dealers may act as agent. The compensation paid
to a particular broker-dealer may be less than or in excess of customary
commissions.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
We cannot presently estimate the amount of compensation that any agent will
receive. We know of no existing arrangements between any stockholder, broker,
dealer, underwriter, or agent relating to the sale or distribution of the shares
offered by this Prospectus. At the time a particular offer of shares is made, a
prospectus supplement, if required, will be distributed that will set forth the
names of any agents, underwriters, or dealers and any compensation from the
selling stockholder and any other required information.
We will pay all of the expenses incident to the registration, offering, and sale
of the shares to the public other than commissions or discounts of underwriters,
broker-dealers, or agents. We have also agreed to indemnify the selling
shareholders and related persons against specified liabilities, including
liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers, and controlling persons, we have been
advised that in the opinion of the SEC this indemnification is against public
policy as expressed in the Securities Act and is therefore, unenforceable.
36
While they are engaged in a distribution of the shares included in this
prospectus the selling stockholders are required to comply with Regulation M
promulgated under the Securities Exchange Act of 1934, as amended. With certain
exceptions, Regulation M precludes the selling stockholder, any affiliated
purchasers, and any broker-dealer or other person who participates in the
distribution from bidding for or purchasing, or attempting to induce any person
to bid for or purchase any security which is the subject of the distribution
until the entire distribution is complete. Regulation M also prohibits any bids
or purchases made in order to stabilize the price of a security in connection
with the distribution of that security. All of the foregoing may affect the
marketability of the shares offered hereby this Prospectus.
This offering will terminate on the date that all shares offered by this
Prospectus have been sold by the selling shareholders.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
37
SELLING STOCKHOLDERS
The following table presents information regarding the selling stockholder.
Neither the selling stockholder nor any of its affiliates has held a position or
office, or had any other material relationship, with us.
Shares Percentage of Percentage of
Beneficially Outstanding Shares Shares to be Outstanding Shares
Selling Owned Before Beneficially Owned Sold in the Beneficially Owned
Stockholder Offering Before Offering Offering After Offering
- ------------------------------ ------------ ------------------ ------------ ------------------
Neil Weissman 200,000(1) 1.50% 200,000(1) 0%
Adkins & Co. 10,760(2) * 10,760(2) 0%
Chris Johnson 5,380(3) * 5,380(3) 0%
J & V Computer Services 5,380(3) * 5,380(3) 0%
John Bach 17,860(4) * 17,860(4) 0%
Allan Levine 14,953(5) * 9,157(5) 0%
Allan Levine 14,953(5) * 14,953(5) 0%
Michael Schumacher 14,953(5) * 14,953(5) 0%
Strategic Growth International 400,000(6) 3.01% 400,000(6) 0%
James Liqouri 31,463(7) * 31,463(7) 0%
Cindy Dolgin 175,000(8) 1.32% 175,000(8) 0%
David L. Cohen 1,263,841(9) 9.44% 1,263,841(9) 0%
Matthew Dancy 92,355 * 92,355 0%
David Dercher 92,355 * 92,355 0%
Gary Glasscock 92,355 * 92,355 0%
Dr. Alexander Haas 184,710 1.38% 184,710 0%
Nasrollah Jahdi 73,884 * 73,884 0%
Frank G. Lake 92,355 * 92,355 0%
Jody Nelson 184,710 1.38% 184,710 0%
Garo Partoyan 92,355 * 92,355 0%
Pisces Partners, L.P. 369,420(10) 2.8% 369,420(10) 0%
Michael and Angela Poujol 110,826 * 110,826 0%
Joseph and Judith Rienzi 129,297 * 129,297 0%
RS & VS, Ltd. 184,710(11) 1.38% 184,710(11) 0%
Dr. Steven Schmidt 129,297 * 129,297 0%
Jay and Carole Schrager 434,710 3.25% 434,710 0%
Domenic Strazzulla 92,355 * 92,355 0%
Sybesma Research Corp. 92,355(12) * 92,355(12) 0%
Reese Cole Partnership 250,000(13) 1.87% 250,000(13) 0%
Phoenix Holding LLC 500,000(14) 3.73% 500,000(14) 0%
Total 5,606,796 5,606,796
* Less than 1%
38
(1) Represents 200,000 warrants exercisable at $.15 per share.
(2) Represents 10,760 warrants exercisable at $6.30 per share. Charles Adkins
retains voting and investment control over the shares held by Adkins & Co.
(3) Represents 10,760 warrants exercisable at $7.23 per share. David Feldman
and Jim Ferrant retains voting and investment control over the shares held
by J & V Computer Services.
(4) Represents 17,860 warrants exercisable at $.4.20 per share.
(5) Represents warrants exercisable at $.28 per share. Each of these selling
stockholders is an affiliate of a broker-dealer. We have been advised that
each of them acquired the securities in the ordinary course of business
and, (2) at the time of the acquisition of the securities to be resold,
the seller had no agreements or understandings, directly or indirectly,
with any person to distribute the securities.
(6) Represents 699,363 warrants exercisable at $.28 per share. Richard Cooper
and Stan Altshuler retain voting and investment control over the shares
held by Strategic Growth International
(7) Represents 31,463 warrants exercisable at $.35 per share.
(8) Represents 175,000 warrants exercisable at $.45 per share.
(9) Represents (i) 1,238,841 shares of common stock and (ii) 25,000 warrants
exercisable at $.28 per share.
(10) Claude M. Walker, Jr. retains voting and investment control over the
shares held by Pisces Partners.
(11) Rodney Scharlemmer retains voting and investment control over the shares
held by RS & VS Ltd.
(12) William Sybesma and Jane Sybesma retain voting and investment control over
the shares held by Sybesma Research Corp.
(13) Robert H. Cole retains voting and investment control over the shares held
by Reese Cole Partnership.
(14) Ro DePetrillo retains voting and investment control over the shares held
by Phoenix Holding LLC.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Marcum & Kliegman LLP, independent registered public accounting firm, have
audited, as set forth in their report thereon appearing elsewhere herein, our
financial statements at December 31, 2004 and 2003 and for the years then ended
that appears in the prospectus. The financial statements referred to above are
included in this prospectus with reliance upon the independent registered public
accounting firm's opinion based on their expertise in accounting and auditing.
39
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Walker Financial Corporation, filed as
part of the registration statement, and it does not contain all information in
the registration statement, as certain portions have been omitted in accordance
with the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
40
INDEX TO FINANCIAL STATEMENTS
Report of independent registered public accounting firm F-2
Consolidated balance sheet at December 31, 2004 F-3
Consolidated statements of operations for the years ended
December 31, 2004 and 2003 F-4
Consolidated statements of stockholders' equity (deficiency)
for the years ended December 31, 2004 and 2003 F-5
Consolidated statements of cash flows for the years ended
December 31, 2004 and 2003 F-6
Notes to consolidated financial statements F-7 to F-20
Condensed Consolidated Balance Sheet (Unaudited) as of
June 30, 2005 F-21
Condensed Consolidated Statements of Operations (Unaudited)
for the Six Months Ended June 30, 2005 and 2004 F-22
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2005 and 2004 F-23
Notes to Condensed Consolidated Financial Statements
(Unaudited) F-24 to F-31
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Walker Financial Corporation
We have audited the accompanying consolidated balance sheet of Walker Financial
Corporation (the "Company") as of December 31, 2004, and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for the years ended December 31, 2004 and 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2004, and the results of operations and cash flows
for the years ended December 31, 2004 and 2003 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has had recurring losses since
inception and has a working capital deficiency and is in default of certain
Bridge Notes as of December 31, 2004. These conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans regarding
those matters also are described in Note 2. The consolidated financial
statements do not include any adjustments that may result from the outcome of
this uncertainty.
/s/ Marcum & Kliegman LLP
Marcum & Kliegman LLP
New York, New York
February 17, 2005
F-2
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2004
ASSETS
Current assets -
Cash and cash equivalents $ 79,329
Accounts receivable 20,512
Discontinued assets 22,436
Prepaid expenses and other current assets 5,700
------------
Total current assets 127,977
Property and equipment, net 257,670
Other assets -
Deferred financing costs, net 143,651
Other assets 9,949
------------
Total other assets 153,600
------------
Total assets $ 539,247
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities -
Accounts payable and accrued expenses $ 229,478
Note payable 105,000
Line of credit, bank 140,874
Accrued interest 186,450
Bridge notes payable, net of debt discount of $10,000 414,000
Due to officer-stockholder 50,000
10% Convertible Senior Subordinated Secured Notes 845,000
Discontinued liabilities 15,440
------------
Total current liabilities 1,986,242
------------
Commitments and contingencies
Stockholders' deficiency -
Common stock, par value $0.10 per share, 10,000,000 shares
authorized, 9,511,510 shares issued and outstanding 951,151
Additional paid in capital 3,994,430
Accumulated deficit (6,112,576)
Deferred compensation (280,000)
------------
Total stockholders' deficiency (1,446,995)
------------
Total liabilities and stockholders' deficiency $ 539,247
============
F-3
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2004 and 2003
2004 2003
------------- --------------
Net revenues $ 240,808 $ 1,025,426
Operating expenses
Compensation 850,941 835,865
Professional Fees 189,196 117,044
Consulting Fees 222,200 151,988
General and Administrative 601,370 643,814
------------ --------------
Total Operating Expenses 1,863,707 1,748,711
Impairment of customer list -- (174,782)
------------ --------------
Operating loss (1,622,899) (898,067)
Interest expense, net (239,325) (123,902)
------------- --------------
Loss before discontinued operations (1,862,224) (1,021,969)
Discontinued operations (61,995) (187,491)
------------- --------------
Net loss $ (1,924,219) $ (1,209,460)
============= ==============
Per Share Information:
Weighted average number of common shares outstanding 8,006,798 7,501,510
============= ==============
Net loss per common share from continuing operations (0.233) (0.136)
Net loss per common share from discontinued operations (0.008) (0.025)
------------- --------------
Basic and diluted net loss per common share (0.241) (0.161)
============= ==============
F-4
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended December 31, 2004 and 2003
Common Additional Total
-------------------------- Paid-in Accumulated Deferred Stockholders'
Shares Par Capital Deficit Compensation Deficit
----------- ----------- ----------- ----------- ------------ -----------
Balance - December 31, 2003 7,501,510 $ 750,151 $ 3,178,084 $(2,978,897) $ -- $ 949,338
----------- ----------- ----------- ----------- ------------ -----------
Issuance of warrants to placement
execution of letter of intent
to conduct private placement -- -- 5,700 -- -- 5,700
Issuance of bridge warrants to finder -- -- 13,300 -- -- 13,300
Issuance of bridge warrants
to bridge notepurchaser -- -- 9,500 -- -- 9,500
Issuance of warrants in
consideration of extension
of note payable -- -- 38,067 -- -- 38,067
Repricing of warrants previously
issued to holder of
note payable -- -- 20,704 -- -- 20,704
Issuance of warrants to consultant -- -- 116,000 -- -- 116,000
Issuance of warrants to placement
agent -- -- 105,625 -- -- 105,625
Net loss -- -- -- (1,209,460) (1,209,460)
----------- ----------- ----------- ----------- ------------ -----------
Balance - December 31, 2003 7,501,510 $ 750,151 $ 3,486,980 $(4,188,357) $ -- $ 48,774
----------- ----------- ----------- ----------- ------------ -----------
Issuance of common stock for services 150,000 15,000 60,000 -- -- 75,000
Issuance of warrants in
consideration of debt -- -- 35,000 -- -- 35,000
Issuance of warrants in
consideration of debt -- -- 31,250 -- -- 31,250
Issuance of common stock for cash 1,000,000 100,000 100,000 -- -- 200,000
Issuance of common stock for services 60,000 6,000 25,200 -- -- 31,200
Issuance of common stock for services 500,000 50,000 160,000 -- (210,000) --
Issuance of common stock for services 300,000 30,000 96,000 -- (126,000) --
Amortization of deferred compensation -- -- -- -- 56,000 56,000
Net Loss -- -- -- (1,924,219) -- (1,924,219)
----------- ----------- ----------- ----------- ------------ -----------
Balance - December 31, 2004 9,511,510 $ 951,151 $ 3,994,430 $(6,112,576) $ (280,000) $(1,446,995)
----------- ----------- ----------- ----------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements
F-5
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004 and 2003
2004 2003
--------------- ----------------
Cash Flows From Operating Activities:
Net loss from continuing operations $ (1,862,224) $ (1,021,969)
--------------- ----------------
Adjustments to reconcile net loss to net cash used in operating activities -
Loss on impairment of customer list -- 174,782
Stock-based compensation 162,200 116,000
Accretion of debt discount 42,917 112,271
Depreciation and amortization 177,917 202,078
Accrued interest 196,408 8,250
Changes in operating assets and liabilities:
Accounts receivable 7,970 94,035
Prepaid expense and other current assets 15,133 27,620
Other assets (12,044) --
Accounts payable and accrued expenses 135,708 (56,739)
--------------- ----------------
Total adjustments 726,209 678,297
--------------- ----------------
Net cash used in operating activities (1,136,015) (343,672)
--------------- ----------------
Cash Flows From Discontinued Operations:
Loss from discontinued operations (61,995) (187,491)
--------------- ----------------
Changes in:
Discontinued assets 31,121 6,092
Discontinued liabilities 5,970 (11,990)
--------------- ----------------
Net cash used in operating activities of discontinued operations (24,904) (193,389)
--------------- ----------------
Cash Flows From Investing Activities:
Purchase of property and equipment (14,806) (24,835)
--------------- ----------------
Net cash used in provided by investing activities (14,806) (24,835)
--------------- ---------------
Cash Flows From Financing Activities:
Principal repayment of notes payable -- (50,000)
Proceeds from private placement 174,000 --
Net proceeds from line of credit, bank 8,315 132,560
Net proceeds from long-term debt -- 570,150
Proceeds from bridge notes 250,000 140,000
Proceeds from sale of common stock 200,000 --
Repayment of long-term debt (25,000) --
Advances from stockholder, net 50,000 --
--------------- ----------------
Net cash provided by financing activities 657,315 792,710
--------------- ----------------
Net (decrease) increase in cash and cash equivalents (518,410) 230,814
Cash and cash equivalents - beginning 597,739 366,925
--------------- ----------------
Cash and cash equivalents - ending $ 79,329 $ 597,739
=============== ================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for -
Interest $ 2,527 $ 45,913
=============== ================
Taxes $ -- $ 15,160
=============== ================
The accompanying notes are an integral part of these consolidated financial
statements
F-6
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
Note 1 - Organization and Nature of Business
Walker Financial Corporation (collectively with its subsidiaries, the "Company")
provides various death care pre-arrangement services through two of its
wholly-owned subsidiaries, National Preplanning, Inc. ("NPI") and American
DataSource ("ADS"). NPI is a managing general insurance agency and third party
marketer of pre-arranged death care servicing to corporations, unions and
affinity groups. ADS provides trust administration services to independent
funeral homes, state master trusts and companies that own funeral homes or
cemetery for pre-need funeral and cemetery trust accounts.
Through its wholly owned subsidiary, Kelly Color, Inc. ("Kelly Color"), the
Company operated in the film processing business through February 2004. As
further discussed in Note 15 to these audited financial statements, the
operations of Kelly Color have been included in these audited financial
statements as discontinued operations.
Note 2 - Going Concern Uncertainty
The accompanying audited 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 fiscal year ended December 30, 2004, the Company incurred a net
loss of $1,924,219 and, for the fiscal year ended December 30, 2003, the Company
incurred a net loss of $1,209,460. The Company had a working capital deficiency
at December 31, 2004 of $1,858,265.
The Company has begun implementing various marketing plans to increase revenues
for both NPI and ADS. The Company also is attempting to sell the real estate,
building and improvements at which Kelly Color formerly conducted its operations
(the "Kelly property"), as well as seeking to make strategic acquisitions. In
addition, the Company will attempt to raise additional capital to assist in the
further execution of its marketing plans and to fund any possible future
acquisitions. The Company believes that the cash flows from a combination of the
sale of the Kelly property, the successful execution of its marketing plans
resulting in increased sales and any additional capital that the Company may
obtain through sales of its equity and debt securities will be sufficient to pay
that portion of its debt that is due within the next twelve months, as well as
to fund the Company's operations. During the fiscal year ended December 31,
2004, the Company sold an aggregate of $624,000 of equity securities and debt
instruments. 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 some of its operations and possible future
acquisitions. These matters raise substantial doubt about the Company's ability
to continue as a going concern. However, the accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of the liabilities in the normal course of
business. The financial statements do not include any adjustments relating to
the recovery of assets or the classification of liabilities that might be
necessary should the company be unable to continue as a going concern.
F-7
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
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 intercompany transactions and balances have been
eliminated in consolidation.
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.
Allowance for Doubtful Accounts
The Company recognizes an allowance for doubtful accounts to ensure accounts
receivable are not overstated due to uncollectibility. Bad debt reserves are
maintained for all customers based on a variety of factors, including the length
of time the receivables are past due, significant one-time events and historical
experience. An additional reserve for individual accounts is recorded when the
Company becomes aware of a customer's inability to meet its financial
obligation, such as in the case of bankruptcy filings or deterioration in the
customer's operating results or financial position. If circumstances related to
customers change, estimates of the recoverability of receivables would be
further adjusted As of December 31, 2004, the Company has not established an
allowance for doubtful accounts.
Property and Equipment
Property and equipment is stated at cost and is being depreciated using the
straight-line method over the estimated useful lives of the assets. Maintenance
and repairs are charged to expense as incurred; costs of major additions and
betterments are capitalized. When property and equipment is sold or otherwise
disposed of, the cost and related accumulated depreciation are eliminated from
the accounts and any resulting gain or loss is reflected in operations.
Software Development Costs
The Company capitalizes software development costs from the point in time when
technological feasibility has been established until the computer software
product is available for use. The annual amortization of the capitalized amounts
will be the greater of the ratio of the current revenue to total projected
revenue for a product, or the straight-line method, and is applied over periods
ranging up to five years. The Company performs periodic reviews to ensure that
unamortized costs remain recoverable through the generation of future revenues.
Website Development Costs
Website development costs consist principally of outside consultants and related
expenses. The Company follows the provisions of Emerging Issues Task Force
("EITF") Issue No. 00-2, "Accounting for Website Development Costs," which
provides guidance in accounting for costs incurred to develop a website. The
Company's website is being continually changed on a regular basis as the
business model continues to evolve. Accordingly, due to the uncertainty of the
Company's future product, these costs are expensed as incurred and are included
in website development costs in the accompanying financial statements.
F-8
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
Research and Development
Research and development costs are charged to expense as incurred.
Stock Options and Similar Equity Instruments
At December 31, 2004, the Company had a Equity Incentive Plan, which is
described more fully in Note 13. As permitted under Statement of Financial
Accounting Standard ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" ("SFAS 148"), which amended SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the Company has elected to continue
to follow the intrinsic value method in accounting for its stock-based employee
compensation arrangements as defined by Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations including "Financial Accounting Standards Board Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB No. 25. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation:
Years Ended December 31,
--------------------------------------
2004 2003
------------------ ------------------
Net loss as reported $ (1,924,219) $ (1,209,460)
Add: Stock-based employee compensation expense included in
reported loss -- --
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effect -- (8,005)
------------------ ------------------
Pro forma (loss) $ (1,924,219) $ (1,217,465)
================== ==================
Basic and diluted net loss per share as reported $ (0.241) $ (0.16)
================== ==================
Basic and diluted pro forma net loss per share $ (0.241) $ (0.16)
================== ==================
The fair value of options at date of grant was estimated using the Black-Scholes
fair value based method with the following weighted average assumptions:
Years Ended December 31,
--------------------------------------
2004 2003
------------------ ------------------
Expected life (years) -- 5 Years
Interest rate -- 5.09%
Annual rate of dividends -- 0.00%
F-9
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
Loss 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 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.
December 30,
--------------------------------------
2004 2003
------------------ ------------------
Options 52,170 --
Warrants 1,169,906 178,021
Convertible debt 2,936,890 1,190,141
------------------ ------------------
4,158,966 1,368,162
================== ==================
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less to be
cash equivalents. As of December 31, 2004, the Company had no cash equivalents.
At times during the year cash balances may exceed the maximum amounts insured by
the FDIC. As of December 31, 2004, the Company had a credit exposure of $51,302.
Concentration of Credit Risk
The Company extends credit to customers which results in accounts receivable
arising from its normal business activities. The Company does not require
collateral or other security to support financial instruments subject to credit
risk. The Company routinely assesses the financial strength of its customers and
based upon factors surrounding the credit risk of the customers believes that
its accounts receivable credit risk exposure is limited.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were $3,549 and
$18,922 for the years ended December 31, 2004 and 2003, respectively.
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.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments including
cash, approximate fair value due to their relatively short maturities. The
various notes payable are recorded at carrying value with terms as disclosed
elsewhere in the notes to financial statements. It is not practical to estimate
the fair value of these amounts because of the uncertainty of the timing of the
payments.
F-10
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
Income Taxes
The Company accounts for income taxes using the liability method, which requires
the determination of deferred tax assets and liabilities based on the
differences between the financial and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which differences are expected to
reverse. Deferred tax assets are adjusted by a valuation allowance, if, based on
the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
At December 31, 2004, the Company has net operating loss carryforwards of
approximately $5,500,000 which expire through 2023. Pursuant to Section 382 of
the Internal Revenue Code regarding substantial changes in ownership,
utilization of these losses may be limited. Based on this and the fact that the
Company has generated operating losses through December 31, 2004, the deferred
tax asset of approximately $2,100,000 has been offset by a valuation allowance
of $2,100,000, which increased by $800,000 in 2004.
New Accounting Pronouncements
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46"), an interpretation of Accounting Research Bulletin
No. 51. FIN 46 expands upon and strengthens existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. A variable interest entity is any
legal structure used for business purposes that either does not have equity
investors with voting rights or has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. However, in December 2003, FASB deferred the
latest date by which all public entities which meet the definition of small
business issuer under SEC Regulation S-B must apply FIN 46 to the first interim
or annual reporting period ended after December 15, 2004. The effect of the
adoption of this new accounting pronouncement is not expected to have a
significant impact on the Company's financial statements.
In December 2004, FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"). SFAS 123R is intended to provide investors and other users of
financial statements with more complete financial information by requiring that
the compensation cost relating to share-based payment transactions be recognized
in financial statements. That cost will be measured based on the fair value of
the equity or liability instruments issued. SFAS 123R covers a wide range of
shared-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. SFAS 123R replaces FASB Statement No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." FSAS No. 123, as originally issued in 1995,
established as preferable a fair value-based method of accounting for
share-based payment transactions with employees. However, the original SFAS 123
permitted entities the option of continuing to apply the guidance in APB Opinion
25 as long as the footnotes to financial statements disclosed what net income
would have been had the preferable fair value-based method been used. Public
entities that are small business issuers will be required to apply SFAS 123R as
of the first interim or annual reporting period that begins after December 15,
2005. The Company has evaluated the impact of the adoption of SFAS 123R and does
not believe the impact will be significant to the Company's overall results of
operations or financial position.
F-11
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
In December 2004, FASB issued SFAS No.153, "Exchanges of Non-monetary Assets, an
Amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions"
("SFAS 153"). The amendments made by SFAS 153 are based on the principle that
exchanges of non-monetary assets should be measured based on the fair value of
the assets exchanged. Further, the amendments eliminate the narrow exception for
non-monetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of non-monetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
FASB believes that exception required that some non-monetary exchanges, although
commercially substantive, be recorded on a carryover basis. By focusing the
exception on exchanges that lack commercial substance, FASB believes SFAS 153
produces financial reporting that more faithfully represents the economics of
the transactions. SFAS 153 is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Earlier application
is permitted for non-monetary asset exchanges occurring in fiscal periods
beginning after the date of issuance. The provisions of SFAS 153 shall be
applied prospectively. The Company has evaluated the impact of the adoption of
SFAS 153 and does not believe the impact will be significant to the Company's
overall results of operations or financial position.
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. Amortization expense for
the year ended December 31, 2004 and 2003 was $0 and approximately $93,000,
respectively.
The customer list consisted of one customer. During the fourth quarter 2003, the
Company ceased doing business with the customer and wrote down the asset to $0.
Accordingly the Company recorded an impairment charge of approximately $175,000.
The charge is included in the statement of operations for the year ended
December 31, 2003.
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 income.
Note 4 - Property and Equipment
Property and equipment consists of the following as of December 31, 2004:
Estimated
2004 Useful Life
----------------- --------------
Equipment $ 66,651 3-5 years
Developed software 432,938 3-5 years
Leasehold improvements 17,406 5 years
-----------------
516,995
Less: accumulated depreciation (259,325)
-----------------
Property and equipment, net $ 257,670
=================
F-12
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
Depreciation and amortization expense for the years ended December 31, 2004 and
2003 was $103,633 and $109,179, respectively.
Accumulated amortization for developed software as of December 31, 2004 was
$194,821. Amortization expense for developed software for each of the years
ended December 31, 2004 and 2003 was $86,587.
Expected amortization is as follows:
Year Amount
---- --------
2006 $ 86,587
2007 86,587
2008 64,943
--------
Total $238,117
========
Note 5 - 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%, originally
expiring on July 3, 2004. The Line of Credit was modified in June 2004 and, as
modified, requires monthly payments of $1,225, commencing on July 21, 2004, with
a final payment of the outstanding balance on June 21, 2005. There was $140,874
outstanding under the Line of Credit as of December 31, 2004. The Line of Credit
is collateralized by a building owned by the Company that is located in North
Carolina.
Note 6 - Note Payable and Accrued Interest
On March 15, 2000, NPI obtained a $150,000 loan and issued a $150,000 note
payable with interest due at 6% per annum. Interest and principal was originally
due on June 14, 2001 (which was subsequently extended to June 30, 2002 and,
thereafter, to June 30, 2003). In connection with such loan, NPI issued a
warrant that, as a result of the NPI merger, entitled the lender to purchase
71,450 shares of the Company's common stock with an exercise price of $3.32. The
Company estimated that the warrant had a fair value of $66,000 using the
Black-Scholes option pricing model. Accordingly, the amount was recorded as a
deferred debt discount and will accrete the discount over the life of the note.
In exchange for the extension of the due date to June 30, 2002, the Company
agreed to reduce the exercise price from $3.22 to $0.25, resulting in an
increase to the fair value of warrant of $27,360, which accreted to interest
expense through June 30, 2002
On June 30, 2003, the Company granted the note holder an additional warrants to
purchase 128,550 shares of the Company's common stock and re-priced existing
warrants to purchase an additional 71,450 shares of the Company's common stock
previously issued to the holder, all in connection with the holder's agreement
not to demand repayment of such indebtedness prior to November 1, 2003. The
newly issued warrants and the re-priced warrants entitle the holder to purchase
one share of the Company's common stock per warrant at any time prior to March
15, 2006 at a purchase price of $0.15 per share. The estimated fair value of the
newly issued warrants is $38,067, using the Black-Scholes option-pricing model.
The estimated fair value of the re-priced warrants is $20,704, using the
Black-Scholes option-pricing model. These warrants have been recorded as
additional deferred debt discount and interest will accrete over the extended
life of the long-term debt. Interest expense accreted during the years ended
December 31, 2004 and 2003 were $0 and $58,771, respectively. As of December 31,
2004, the principal balance due under this note was $105,000 and is presented on
the accompanying balance sheet as a current liability.
F-13
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
On March 1, 2004, the Company began repayment of this note under a repayment
plan calling for payments as follows:
Due Date Amount
------------- -------
March 1, 2004 $10,000
April 1, 2004 15,000
May 1, 2004 20,000
Beginning June 1, 2004, the repayment plan requires minimum monthly payments of
$10,000 until the entire note is repaid in full, which is scheduled to occur on
March 1, 2005. During the year ended December 31, 2004, the Company repaid
$25,000 due under this note.
Note 7 - Bridge Notes
On July 25, 2003, the Company issued to one individual a 11% Secured
Subordinated Promissory Note in the principal amount of $165,000 (the "Bridge
Note") and five year warrants (the "Bridge Warrants") to purchase 25,000 shares
of Common Stock at an exercise price of $0.28 per share. The estimated fair
value of the Bridge Warrants is $9,500, using the Black-Scholes option-pricing
model. The fair value of the Bridge Warrants has been recorded as a deferred
debt discount and interest will accrete over the life of the Bridge Note. The
Bridge 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 Bridge Note and paid a
finder's fee to a registered broker-dealer of $21,450 and the issuance of
additional warrants (the "Finder's Bridge Warrants") to purchase 35,000 shares
of Common Stock at an exercise price of $0.28 per share. The estimated fair
value of the Finder's Bridge Warrants is $13,300, using the Black-Scholes
option-pricing model. The fair value of the Finder's Bridge Warrants has been
recorded as a deferred financing cost and will be amortized over the life of the
Bridge Note. The Company incurred other costs related to the issuance of the
Bridge Note, Bridge Warrants and Finder's Bridge Warrants aggregating to
approximately $11,000. The holder of the bridge note participated in the
Company's private placement discussed in Note 11 to these consolidated financial
statements and the principal amount of the bridge note was utilized by the
holder to purchase a new note in the private placement. Accordingly, the Company
expensed the remaining deferred financing costs at the date of surrender of the
Bridge Note for the new note issued pursuant to the private placement.
In May 2004, the Company sold and issued, for gross proceeds of $125,000, (a) a
6% promissory note in the principal amount of $125,000 and due on August 22,
2004 and (b) warrants to purchase 70,000 shares of the Company's common stock at
an exercise price of $0.71 per share. The fair value of the warrants is $35,000
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of this promissory
note. In August 2004, the due date of such promissory note was extended to no
later than January 2, 2005.
In August 2004, the Company sold and issued, for gross proceeds of $125,000, (a)
a 6% promissory note in the principal amount of $125,000 and due January 2, 2005
and (b) warrants to purchase 105,000 shares of the Company's common stock at an
exercise price of $.45 per share. The fair value of the warrants is $31,250
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of this promissory
note.
For the year ended December 31, 2004, the Company recorded additional interest
expense for the accretion of the debt discount of $42,917.
On February 10, 2005, the Company issued $377,000 of 10% convertible promissory
notes [the "Notes"] and 93,750 warrants to purchase common stock at an exercise
price of $0.71 per share.
F-14
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
The notes are convertible at $0.71 per share or 30.211 shares for every $25,000
principal and interest converted.
During December 2004, the Company received an advance of 174,000 in connection
with the Notes.
Note 8 - Issuance of Warrants and Option
During the years ended December 31, 2004 and 2003, the Company issued warrants
and an option as follows:
o The Company ratified the issuance, as of November 25, 2002, of 31,463 warrants
to a consultant for services rendered. These warrants entitle the holder to
purchase one share of Common Stock per warrant at any time prior to November 25,
2005 at a purchase price of $0.30 per share.
o The Company issued 400,000 warrants in connection with the retention of an
investor relations consultant. These warrants entitle the holder to purchase one
share of Common Stock per warrant at any time prior to October 1, 2008 at a
purchase price of $0.28 per share. The estimated fair value of these warrants is
$116,000, using the Black-Scholes option-pricing model. In December 2003, the
Company terminated its relationship with this consultant. Accordingly, the
Company recorded $116,000 of consulting expense at December 31, 2003.
o The Company issued 15,000 warrants in connection with the retention of a
registered broker-dealer to act as placement agent (the "Placement Agent") for
the private placement of Company securities discussed in Note 11 to these
consolidated financial statements. These warrants entitle the holder to purchase
one share of Common Stock per warrant at any time prior to June 13, 2008 at a
purchase price of $0.28 per share. The estimated fair value of these warrants is
$5,700, using the Black-Scholes option-pricing model. The estimated fair value
of these warrants has been recorded as a deferred financing cost and will be
amortized over the life of the Bridge Note. The Company is required to issue
additional warrants to the Placement Agent upon the successful completion of the
private placement.
o The Company issued a total of 60,000 Bridge Warrants in connection with the
sale of the Bridge Note discussed in Note 9 to these consolidated financial
statements. The Placement Agent received 35,000 Bridge Warrants as the finder's
fee in connection with the sale of the Bridge Note. Each Bridge Warrant entitles
its holder to purchase one share of Common Stock at any time prior to July 25,
2008 at a purchase price of $0.28 per share.
o The Company granted, under the Company's 2002 Equity Incentive Plan, an
employee an option to purchase 25,000 shares of Common Stock at any time prior
to October 2, 2008 at a purchase price of $0.30 per share.
F-15
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
Average Average
Exercise Remaining
Warrants Price Life
--------- --------- ---------
Balance, Janaury 1, 2003 71,450 $ 0.15 1.20
issued 923,456 0.49 2.29
exercised -- -- --
cancelled -- -- --
Balance, December 31, 2003 994,906 $ 0.64 1.74
issued 175,000 $ 0.45 2.59
exercised -- -- --
cancelled -- -- --
Balance, December 31, 2004 1,169,906 $ 1.09 2.39
Note 9 - Related Party Transactions
Advances From Stockholders
As of December 31, 2004, advances totaling $50,000 were made by two individuals
that are stockholders of the Company (one is also an officer). These advances
are non-interest bearing and have no definitive repayment terms.
Note 10 - 10% Senior Subordinated Secured Convertible Promissory Notes
In December 2003, the Company sold and issued 10% Senior Subordinated Secured
Convertible Promissory Notes (each, a "10% Note") in the aggregate principal
amount of $845,000 and due in December 2006. The proceeds raised from the sale
and issuance of the 10% Notes have been used to fund the Company's working
capital and capital expenditure requirements. The 10% Notes were initially
convertible into shares of the Company's common stock at conversion prices of
$0.71 per share through December 5, 2005 and $1.25 thereafter.
The subscription agreements pursuant to which the Company sold the 10% Notes
required, among other matters, that the Company register for resale under the
Securities Act the shares issuable upon conversion of the 10% Notes by May 5,
2004. The Company was obligated, as a result of the failure to register such
conversion shares by May 5, 2004, to pay to the holders of the 10% Notes a
monthly fee equal to 1.5% of the principal amount of the 10% Notes for each
month, or portion thereof, that the Company failed to cause such registration.
The Company failed to cause such registration by May 5, 2004 and failed to pay
the holders any monthly fee due such holders as a result of the failure to
register the conversion shares.
The 10% Notes required an interest payment on July 1, 2004 in the aggregate
amount of $49,057. The Company failed to remit such interest payment to the
holders of the 10% Notes. The failure to pay such interest payment is an "event
of Default" under the 10% Notes, although the holders of the 10% Notes did not
give notice to the Company of such event of Default. The occurrence of an event
of Default would result in the interest rate on the 10% Notes to be increased to
12% per annum. The Company has the right to avoid the declaration of an event of
Default due to the failure to tender the July 1, 2004 interest payment by
issuing to the holders additional shares of the Company's common stock at the
per diem rate of 0.003125 shares for every $1.00 of principal, or an aggregate
of 2,640.625 shares per day. The Company had not tendered such shares as of
December 31, 2004. In addition, the Company incurred additional interest expense
of $101,400 as the non-payment penalty.
F-16
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
The 10% Notes also prohibited additional borrowings by the Company, from any
source, without the prior approval of the placement agent for the 10% Notes or
the holders of a majority of the aggregate principal amount of the 10% Notes. As
discussed in Note 7, in May and August 2004, the Company borrowed an aggregate
of $250,000. Further, as discussed in Note 9, in July 2004, the Company borrowed
an additional $50,000 from an officer/stockholder.
In October 2004, the Company offered to the holders of the 10% Notes one share
of Company common stock for each $0.30 of principal evidenced by the 10% Notes
and one share of Company common stock for each $0.23 of accrued interest due
under the 10% Notes through September 30, 2004 in exchange for the holders
waiving substantially all of their rights under the 10% Notes. The Company did
agree to (a) use its best efforts to expeditiously register for resale the
shares that the holders of the 10% Notes would receive in such exchange and (b)
issue additional shares to the holders in the event that the Company issued
shares to certain third parties for consideration less than $0.30 at any time
prior to December 4, 2006. As of December 31, 2004, the holders of 10% Notes in
the aggregate principal amount of $795,000 had indicated their desire to accept
the Company's offer of exchange. As of December 31, 2004, the Company had not
consummated the exchange and, accordingly, the 10% Notes are reflected as
outstanding and a current liability on the accompanying balance sheet.
Subsequent to December 31, 2004, the Company consummated the exchange and issued
a total of 2,938,036 shares of Company common stock to the holders of such 10%
Notes. The Company will record in the first quarter of 2005 a debt conversion
expense based upon the value of the additional shares issued as a result of
reducing the conversion price.
Note 11 - Economic Dependency
Major Customer
During the year ended December 31, 2004, the Company had sales to three
customers totaling $209,019, or 88% of the Company's total sales for the 2004
fiscal year.
During the year ended December 31, 2003, the Company had sales of $800,123 (48%)
to one customer. During the fourth quarter of the year ended December 31, 2003,
this customer ceased doing business with the Company.
At December 31, 2004, $12,960, or 63% of the Company's total accounts
receivable, was due from one customer.
Note 12 - Commitment and Contingencies
Litigation
The Company is involved in litigation through the normal course of business. The
Company believes that the resolution of these matters will not have a material
adverse effect on the financial position of the Company.
Commitments
The Company has entered into an employment agreement with Mitchell Segal to
serve as the Company's president and chief executive officer through December
31, 2005. Under Mr. Segal's employment agreement, the Company will pay Mr. Segal
an annual base salary of $200,000 for 2003, 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. As of December 31, 2004, the
Company was in arrears in payment of Mr. Segal's salary in the amount of $36,793
and was indebted to him in the amount of $40,000 representing non-interest
bearing advances he made to the Company.
F-17
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
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.
Mr. Walker's employment agreement provides for him to be paid his salary:
o for a two year period following his termination due to a disability and
o for the entire remaining employment term in the event his termination is
otherwise than for cause or disability; provided that, if the termination
is due to a failure to pay Mr. Walker his compensation otherwise payable
under the employment agreement, then the rate of compensation shall be
o in the seventh year, 150% of his salary at the time of termination,
o in the eighth year, 200% of his salary at the time of termination,
o in the ninth year, 250% of his salary at the time of termination, and
o in the tenth year, 300% of his salary at the time of termination.
As of December 31, 2004, the Company was in arrears under Mr. Walker's
employment agreement in the amount of $32,964.
Operating Lease Arrangements
In May 2002, ADS entered into a non-cancelable operating lease for its
facilities located in Houston, Texas expiring in June 2005.
Walker leases office space under a non-cancelable operating lease expiring in
July 2005.
In July 2004, NPI entered into a non-cancelable operating lease for its
facilities located in Garden City, New York expiring in July 2005.
Future minimum rental payments under the above non-cancelable operating leases
as of December 31, 2004 are as follows:
Year Ending
December 31, Amount
--------------- --------------
2005 $ 34,800
==============
Rental expense for the years ended December 31, 2004 and 2003 was approximately
$133,000 and $102,000, respectively.
Note 13 - Capital Stock/Stockholders' Deficiency
During the year ended December 30, 2004, the Company sold and issued an
aggregate of 1,000,000 shares of the Company's common stock for gross proceeds
of $200,000.
F-18
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
In April 2004, the Company entered into a consulting agreement pursuant to which
the Company agreed to issue to the consultant 150,000 shares of Company common
stock and an option to purchase an additional 50,000 shares of Company common
stock, exercisable at $0.20 per share, in consideration for the consultant's
agreement to provide specified services. The Company issued the common stock to
the consultant in connection with the execution of the consulting agreement.
Subsequently, the Company terminated the consultant and refused to deliver the
option due to the Company's belief that the consultant was unable to perform the
agreed-upon services. The consultant retained such 150,000 shares, which were
issued pursuant to the Company's 2002 Equity Incentive Plan. Accordingly, the
Company recorded an expense of $75,000 which represents the fair value of the
common stock issued.
In October 2004, the Company entered into two separate consulting agreements
pursuant to which the Company agreed to issue to the consultants an aggregate of
1.5 million shares of Company common stock in consideration for the consultants'
agreements to provide specified services. The terms of these agreements are each
for approximately one year. The estimated fair value of the services to be
provided under the consultant agreements is $630,000. At December 31, 2004, the
Company issued 500,000 and 300,000 shares of Company common stock to the
consultants. As such, the Company recorded deferred compensation of $336,000,
which deferred compensation will be amortized over the life of the agreements.
For the year ended December 31, 2004, $56,000 was recorded as an expense and is
included in the accompanying statement of operations as part of operating
expense. Subsequent to year end, the Company issued an additional 150,000 shares
of Company common stock to one of the consultants.
On July 26, 2004, the Company entered into a term sheet that contemplated the
sale to a limited liability company of up to $10 million of shares of Company
common stock. The sale of such shares is subject to the prior registration of
such shares for resale by the limited liability company/purchaser and the
Company complying with certain other conditions. The term sheet required the
Company to pay the limited liability company $10,000 in cash and issue the
limited liability company 60,000 shares of Company common stock to reimburse the
limited liability company for its expenses connected to the transaction. The
60,000 shares have been valued at $31,200 and are included in the accompanying
statement of operations as part of operating expenses. Prior to the year end,
the sales transaction with the limited liability company was terminated.
In November 2004, the Company entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC ("Fusion Capital"), pursuant to which Fusion
Capital has agreed to purchase, subject to certain conditions, $6.0 million of
Company common stock to be purchased over a 24-month period. Subsequent to year
end, the Company issued 794,702 shares of Company common stock to Fusion Capital
as a commitment fee.
Note 14 - Equity Incentive Plan
On September 18, 2002, the stockholders of the Company approved the 2002 Equity
Incentive Plan. The plan reserves 70,000 shares of common stock for issuance
under the Plan. The types of Awards that may be granted under the Plan include
one or more of the following types, either alone or in any combination thereof:
o Options;
o Stock Appreciation Rights;
o Restricted Stock;
o Performance Grants;
o Stock Bonuses; and
o any other type of Award deemed by the Committee to be consistent with the
purposes of the Plan (including, but not limited to, Awards of or options
or similar rights granted with respect to unbundled stock units or
components thereof, and Awards to be made to participants who are foreign
nationals or are employed or performing services outside the United
States).
At December 31, 2002 the Company issued ten year options to purchase 7,150
shares of common stock at fair market value at the date of grant to an outside
director of the Company. Such options are exercisable at the date of grant. On
January 1, 2003, the Company issued a ten year options to purchase 7,150 shares
of common stock at fair market value at the date of grant to an outside director
of the Company. Such options are exercisable at the date of grant.
F-19
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
(continued)
Note 15 - Discontinued Operations
As discussed in Note 2 to these financial statements, the Company discontinued
the operations of Kelly Color in
February 2004 and sold certain of the assets of Kelly Color ("Kelly Assets") for
an aggregate purchase price of $12,500 in cash. With the sale of the Kelly
Assets the Company will discontinue to operate in the non-digital photographic
development segment. Accordingly, the Company will report Kelly Color as
discontinued operations effective January 1, 2004. Any remaining assets and
liabilities of Kelly Color will be shown as assets and liabilities of
discontinued operations until such assets are and liabilities are either sold or
otherwise disposed of.
On February 4, 2004, the Company sold certain assets of Kelly Color and
discontinued operating in the film processing segment. Accordingly, the Company
currently operates in one segment, the administrative services to independent
funeral homes, state master trusts and companies that own funeral homes or
cemeteries for pre-arrangement funeral and cemetery accounts.
For all periods presented in the accompanying condensed consolidated financial
statements, the operations of Kelly Color are reported as discontinued
operations. At December 31, 2004, the discontinued assets and liabilities of
Kelly Color are:
Assets -
Prepaid expenses and other current assets $ 1,630
Fixed assets, net 20,806
-------------
Total assets $ 22,436
=============
Liabilities -
Accounts payable and accrued expenses $ 15,440
-------------
Total liabilities $ 15,440
=============
The results of discontinued operations for the year ended December 31, 2004 and
2003 are:
2004 2003
------------------ ----------------
Net revenues $ 47,286 $ 664,327
Costs of revenues (61,410) (369,645)
------------------ ----------------
Operating expenses (47,871) (482,173)
------------------ ----------------
Net loss $ (61,995) $ (187,491)
================== ================
Note 16 - Subsequent Event (unaudited)
On April 7, 2005, we entered into a purchase agreement to acquire 90% of the
issued and outstanding stock of Disability Access Consultants, Inc. from its
sole shareholder, Barbara Thorpe. The consideration for the purchase is $2
million, $1 million of which is payable in cash and the remainder to be payable
by delivery of a secured promissory note in the principal amount of $1 million.
The note is to be secured by a lien on all of our and the acquired company's
equipment, inventory and receivables. The Company expects to close on the
acquisition in the near term. However, there can be no assurance that the
Company will be able to complete the acquisition.
F-20
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2005
(Unaudited)
ASSETS
Current assets -
Cash $ 18,832
Accounts receivable 27,480
Deferred financing costs, net 62,037
Prepaid expenses and other current assets 8,448
-----------
Total current assets 116,797
-----------
Property and equipment, net 207,904
-----------
Total assets $ 324,701
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities -
Line of credit, bank $ 133,280
Accounts payable and accrued expenses 426,123
Bridge notes payable, net of debt discount of $23,750 610,750
Note payable 105,000
10% Senior Subordinated Secured Convertible Promissory Notes 50,000
Due to officer-stockholder 50,500
Accrued interest 51,996
Discontinued liabilities 15,440
-----------
Total current liabilities 1,443,089
-----------
Stockholders' deficiency -
Common stock, par value $.10 per share, 100,000,000
authorized, 13,687,220 shares issued and outstanding 1,368,722
Additional paid-in capital 6,258,776
Deferred compensation (546,821)
Accumulated deficit (8,199,065)
-----------
Total stockholders' deficiency (1,118,388)
-----------
Total liabilities and stockholders' deficiency $ 324,701
===========
See notes to condensed consolidated financial statements
F-21
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------
2005 2004 2005 2004
------------ ------------ ---------- -----------
Net revenues $ 88,099 $ 50,791 $ 157,093 $ 100,791
------------ ------------ ----------- ----------
Operating expenses
Compensation 143,349 214,150 327,699 413,509
Professional Fees 105,221 31,735 149,183 52,295
Consulting Fees 72,100 12,500 342,100 30,000
Depreciation 24,733 43,890 49,767 88,681
General and Administrative 61,687 100,162 157,282 266,722
------------ ------------ ----------- ----------
Total Operating Expenses 407,090 402,437 1,026,031 851,207
------------ ------------ ----------- ----------
Operating loss (318,991) (351,646) (868,938) (750,416)
Debt conversion expense -- -- (933,793) --
Write off of assets (20,806) -- (20,806) --
Interest expense (69,241) (22,012) (262,952) (51,916)
------------ ------------ ----------- ---------
Loss from continuing operations (409,038) (373,658) (2,086,489) (802,332)
Loss from discontinued operations -- (6,131) -- (61,487)
------------ ------------ ----------- ---------
Net loss $ (409,038) $ (379,789) $(2,086,489) $(863,819)
============ ============ =========== ==========
Per share data - basic and diluted
Loss from continuing operations ($0.03) ($0.05) ($0.15) ($0.11)
Loss from discontinued operations -- ($0.00) -- ($0.01)
------------ ------------ ----------- ---------
Net loss per common share $ ($0.03) ($0.05) ($0.15) ($0.12)
============ ============ =========== ==========
Weighted average number of
common shares outstanding 13,532,081 7,565,796 13,668,773 7,533,653
============ ============ =========== ==========
See notes to condensed consolidated financial statements
F-22
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six
Months
Ended June 30,
--------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: $ (305,651) $ (589,351)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
OF DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (61,487)
Change in - ----------- -----------
Assets from discontinued operations -- 38,725
Liabilities from discontinued operations -- 5,970
----------- -----------
Net cash used in operating activities
of discontinued operations -- (16,792)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment -- (12,479)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit, bank (7,595) 15,144
Repayment of advances from stockholder (10,000) --
Advances from shareholder 10,500 --
Proceeds from sale of bridge notes 201,000 125,000
Fees paid in connection with debt acquisition (48,750) --
Principal repayment of notes payable -- (25,000)
Proceeds from sale of common stock 100,000 --
----------- -----------
Net cash provided by financing activities 245,155 115,144
----------- -----------
Net decrease in cash (60,496) (503,478)
Cash - beginning of period 79,328 587,626
----------- -----------
Cash - end of period $ 18,832 $ 84,148
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest -- 2,257
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 2,936,890 shares of common stock
for the settlement of 10% Senior Subordinated
Secured Convertible Promissory Notes and
accrued interest $ 980,203 $ --
=========== ===========
93,750 warrants granted in connection
with sale of bridge notes $ 28,500 $ --
=========== ===========
187,500 warrants granted in connection
with sale of bridge notes $ 57,600 $ --
=========== ===========
F-23
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 1 - Organization and Basis of Presentation
Organization
Walker Financial Corporation (collectively with its subsidiaries, the "Company")
provides various death care pre-arrangement services through two of its
wholly-owned subsidiaries, National Preplanning, Inc. ("NPI") and American
DataSource ("ADS"). NPI is a managing general insurance agency and third party
marketer of pre-arranged death care services to corporations, unions and
affinity groups. ADS provides trust administration services to independent
funeral homes, state master trusts and companies that own funeral homes or
cemetery for pre-need funeral and cemetery trust accounts.
Through its wholly owned subsidiary, Kelly Color, Inc. ("Kelly Color"), the
Company operated in the film processing business through February 2004. As
further discussed in Note 11 to these unaudited financial statements, the
operations of Kelly Color have been included in these unaudited financial
statements as discontinued operations.
Basis of Presentation
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying condensed
consolidated financial statements include all adjustments (consisting of normal,
recurring adjustments) necessary to make the Company's financial position,
results of operations and cash flows not misleading as of June 30, 2005 and for
all periods presented. The results of operations for the six months ended June
30, 2005, are not necessarily indicative of the results of operations for the
full year or any other interim period. These financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
2004 filed on April 15, 2005.
NOTE 2 - Going Concern Uncertainty
The accompanying unaudited consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United Sates
of America, which contemplate continuation of the Company as a going concern.
However, for the six months ended June 30, 2005, the Company incurred a net loss
of $2,086,489 and, at June 30, 2005, had a working capital deficiency of
$1,326,292, an accumulated deficit of $8,199,065 and a stockholders' deficiency
of $1,118,388.
The Company has begun implementing various marketing plans to increase revenues
for both NPI and ADS. The Company also is attempting to sell the real estate,
building and improvements at which Kelly Color formerly conducted its operations
(the "Kelly Color property"), as well as seeking to make strategic acquisitions.
In addition, the Company will attempt to raise additional capital to assist in
the further execution of its marketing plans and to fund any possible future
acquisitions. During the six months ended June 30, 2005, the Company settled 10%
Senior Subordinated Secured Convertible Promissory Notes in the aggregate
principal amount of $795,000 and accrued interest of $185,203 in exchange for
the issuance of 2,936,890 shares of Company common stock (see Notes 5 and 8) and
issued bridge notes in the principal amount of $201,000 (see Note 6). The
Company also issued 294,118 shares of common stock raising $100,000. The Company
believes that the defaults discussed in Notes 5 & 6 will not have an adverse
effect on the Company's ability to raise additional capital. There can be no
assurance that the Company will be successful in any of its plans as discussed.
To the extent that the Company is unsuccessful in its plans to increase its cash
position, the Company may find it necessary to further curtail its operations
and possible future acquisitions. These matters raise substantial doubt about
the Company's ability to continue as a going concern. However, the accompanying
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of the liabilities
in the normal course of business. The financial statements do not include any
adjustments relating to the recovery of assets or the classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
F-24
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
NOTE 3 - Selected Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries NPI, Kelly Color and ADS, collectively referred to
as the "Company." All significant inter-company transactions and balances have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Revenue Recognition
Revenue is recognized at the time the administrative services are performed and
provided, or made available to its customers. Services are billed monthly based
upon a predetermined percentage of the total assets included in the respective
pre-need funeral master trust fund.
Loss Per Share
Basic earnings per share ("EPS") is computed by dividing net loss available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS 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.
June 30,
-----------------------------
2005 2004
--------- ---------
Options 52,170 25,000
Warrants 1,451,156 1,079,904
Convertible debt 598,592 1,253,021
--------- ---------
2,101,918 2,357,925
========= =========
F-25
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
NOTE 3 - Selected Significant Accounting Policies (cont.)
Stock Options and Similar Equity Instruments
At June 30, 2005, the Company had an Equity Incentive Plan. As permitted under
Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"), which
amended SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
the Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation arrangements as defined by
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and related interpretations including "Financial Accounting
Standards Board Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB No. 25. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation is zero, because no
options were granted or vested during the respective periods. Accordingly net
loss and pro forma net loss are identical.
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." This
statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. SFAS No. 123R addresses all
forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will
be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will result in a charge to
operations for stock-based compensation expense. SFAS No. 123R is effective for
public entities that file as small business issuers as of the beginning of the
first annual reporting period that begins after December 15, 2005. The Company
is currently in the process of evaluating the effect that this pronouncement
will have on its financial statements.
In May 2005, the FASB issued FASB 154 - Accounting Changes and Error Corrections
- - a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement
replaces APB Opinion 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes the requirements
for the accounting for and reporting of a change in accounting principle. This
Statement applies to all voluntary changes in accounting principle. It also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions
should be followed. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
NOTE 4 - Line of Credit, Bank
The Company has a credit facility with a bank consisting of a $150,000 secured
line of credit (the "Line of Credit") The Line of Credit was modified in June
2005 and, as modified, requires monthly payments of $1,510 and a final payment
of the outstanding balance in July 2006. There was $133,280 outstanding under
the Line of Credit as of June 30, 2005. The Line of Credit is collateralized by
the Kelly Color property located in North Carolina.
F-26
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
NOTE 5 - 10% Senior Subordinated Secured Convertible Promissory Notes
In December 2003, the Company sold and issued 10% Senior Subordinated Secured
Convertible Promissory Notes (each, a "10% Note") in the aggregate principal
amount of $845,000 and due in December 2006. The 10% Notes were initially
convertible into shares of the Company's common stock at conversion prices of
$0.71 per share through December 5, 2005 and $1.25 thereafter.
The subscription agreements pursuant to which the Company sold the 10% Notes
required, among other matters, that the Company register for resale under the
Securities Act the shares issuable upon conversion of the 10% Notes by May 5,
2004. The Company was obligated, as a result of the failure to register such
conversion shares by May 5, 2004, to pay to the holders of the 10% Notes a
monthly fee equal to 1.5% of the principal amount of the 10% Notes for each
month, or portion thereof, that the Company failed to cause such registration.
The Company failed to cause such registration by May 5, 2004 and failed to pay
the holders any monthly fee due such holders as a result of the failure to
register the conversion shares.
The 10% Notes required an interest payment on July 1, 2004 in the aggregate
amount of $49,057. The Company failed to remit such interest payment to the
holders of the 10% Notes. The failure to pay such interest payment is an "event
of Default" under the 10% Notes, although the holders of the 10% Notes did not
give notice to the Company of such event of Default. The occurrence of an event
of Default would result in the interest rate on the 10% Notes to be increased to
12% per annum. The Company has the right to avoid the declaration of an event of
Default due to the failure to tender the July 1, 2004 interest payment by
issuing to the holders additional shares of the Company's common stock at the
per diem rate of 0.003125 shares for every $1.00 of principal, or an aggregate
of 2,640.625 shares per day.
The 10% Notes also prohibited additional borrowings by the Company, from any
source, without the prior approval of the placement agent for the 10% Notes or
the holders of a majority of the aggregate principal amount of the 10% Notes. In
May and August 2004, the Company borrowed, without approval, an aggregate of
$250,000. Further, in July 2004, the Company borrowed, without approval, an
additional $50,000 from an officer/stockholder (see Note 7) and, in December
2004 through February 2005, sold and issued, without approval, 10% convertible
promissory notes in the aggregate principal amount of $375,000 (see Note 6). On
July 11, 2005, the Company sold and issued, without approval a 10% note.
In October 2004, the Company offered to the holders of the 10% Notes one share
of Company common stock for each $0.30 of principal evidenced by the 10% Notes
and one share of Company common stock for each $0.23 of accrued interest due
under the 10% Notes through September 30, 2004 in exchange for the holders
waiving substantially all of their rights under the 10% Notes. The Company did
agree to (a) use its best efforts to expeditiously register for resale the
shares that the holders of the 10% Notes would receive in such exchange and (b)
issue additional shares to the holders in the event that the Company issued
shares to certain third parties for consideration less than $0.30 at any time
prior to December 4, 2006.
On January 5, 2005, the Company issued a total of 2,938,890 shares of Company
common stock to the holders of 10% Notes in the aggregate principal amount of
$795,000 and accrued interest of $185,203 for settlement of such 10% Notes. As a
result of the debt settlement the Company wrote off $125,695 of deferred
financing costs previously amortized. The charge was included as an interest
expense on the statement of operations for the six months ended March 31, 2005.
The Company has a remaining principal balance of $50,000 due to the holders of
the note, and incurred approximately $26,000 and $3,950, respectively of
interest and penalty interest included in the statements of operations for the
six and three months ended June 30, 2005. Upon the effectiveness of the debt
settlement, the Company recorded a conversion charge of $933,793, which is the
estimated fair value of the additional shares of Company common stock issued in
excess of the amount of shares that were issuable at the original conversion
prices for the debt.
F-27
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
NOTE 6 - Notes Payable and Bridge Notes
Notes Payable
In August 2004, the due date of a 6% promissory note originally issued by NPI
prior to March 19, 2002 was extended to the earlier of (a) the date which is 60
days following the effectiveness of a registration statement under the
Securities Act registering for resale the shares of the Company's common stock
issuable upon exercise of the warrants sold and issued with the 6% promissory
note or (b) January 2, 2005. The consideration tendered by the Company in
connection with the extension of the due date of the 6% promissory note was a
reduction in the exercise price of the warrants sold and issued with the 6%
Promissory Notes to $0.45 per share.
Beginning June 1, 2004, the Company began repayment of this note under a
repayment plan calling for payments requiring minimum monthly payments of
$10,000 until the entire note is repaid in full, which was scheduled to occur on
March 1, 2005. Due to insufficient operating capital, the Company has not been
able to meet this commitment and currently is not in compliance with the terms
of this note. During the six months ended June 30, 2005, the Company did not
make any payments under this note. As of June 30, 2005, the principal balance
due under this note was $105,000 and is presented on the accompanying balance
sheet as a current liability.
Bridge Notes
In May 2004, the Company sold and issued, for gross proceeds of $125,000, (a) a
6% promissory note in the principal amount of $125,000 and due on August 22,
2004 and (b) warrants to purchase 70,000 shares of the Company's common stock at
an exercise price of $0.71 per share. The fair value of the warrants is $35,000
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of this promissory
note. In August 2004, the due date of such promissory note was extended to no
later than January 2, 2005. The Company currently is not in compliance with the
repayment terms of this note.
In August 2004, the Company sold and issued, for gross proceeds of $125,000, (a)
a 6% promissory note in the principal amount of $125,000 and due January 2, 2005
and (b) warrants to purchase 105,000 shares of the Company's common stock at an
exercise price of $.45 per share. The fair value of the warrants is $31,250
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of this promissory
note. The Company currently is not in compliance with the repayment terms of
this note.
For the above two notes, the Company incurred $10,000 of additional debt
accretion interest expense for the three months ended June 30, 2005 that is
related to the debt discount.
F-28
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
In December 2004 and February 2005, the Company issued 10% convertible
promissory notes in the aggregate principal amount of $375,000 (the "Notes") and
granted 93,750 warrants to purchase common stock at an exercise price of $0.71
per share. The estimated fair value of the warrants is $25,800 using the
Black-Scholes option pricing model and was recorded as a deferred debt discount
which will accrete to interest expense over the life of this promissory note.
The Company incurred additional debt accretion interest expense of $9,950 and
14,250 for the three and six months ended June 30, 2005.
In connection with the sale and issuance of the Notes, the Company incurred fees
of $48,750 and granted 187,500 warrants to the private placement agent for
services provided. The estimated fair value of the warrants is $57,600 using the
Black-Scholes option pricing model. The cost of $106,350 has been capitalized as
deferred financing fees and will be amortized over the life of the debt which is
twelve months. Amortization expense for the three and six months ended June 30,
2005 is approximately $44,300 and $26,600, respectively.
The Notes are convertible at $0.71 per share or 30,211 shares for every $25,000
principal and interest converted. The note did not carry any beneficial
conversion features. The Notes mature in December 2005.
NOTE 7 - Advance from Officer/Stockholder
In July 2004, an officer-stockholder advanced the Company $50,000. The advance
is non-interest bearing and has no definitive repayment terms. The Company
repaid $10,000 of the advance during the three months ended March 31, 2005. In
June of 2005, the officer-stockholder advanced the Company an additional $10,500
and as of June 30, 2005, the total amount due the officer-stockholder was
$50,500.
NOTE 8 - Stockholders' Deficiency
As discussed in Note 5, in January 2005 the Company issued 2,936,890 shares of
Company common stock for the settlement of the 10% Senior Subordinated Secured
Convertible Promissory Notes in the aggregate principal amount of $795,000 and
accrued interest of $185,203.
In November 2004, the Company entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC ("Fusion Capital"), pursuant to which Fusion
Capital has agreed to purchase,$6,000,000 of the Company common stock over a
24-month period commencing upon the effectiveness of a registration statement
with respect to the resale of the Company common stock to be sold to Fusion
Capital under the agreement and provided that the Company remains listed on a
national exchange and other restrictions, as defined. On January 5, 2005, the
Company issued to Fusion Capital 794,702 shares of Company common stock as a
commitment fee. The 794,702 shares were valued at $476,821, or $0.60 per share,
and is included in deferred offering costs. The deferred offering costs charge
will be amortized over a 24-month period commencing on the effectiveness of the
registration of such shares under the Securities Act. As of May 19, 2005, the
Company has not filed a registration statement with respect to the shares of
Company common stock issuable under the Stock Purchase Agreement. The Company
has not recorded any amortization expense for the six and three months ended
June 30, 2005.
On January 15, 2005, Company issued 150,000 shares of Company's common stock to
a consultant as a settlement of terminating its agreement with the consultant.
The shares were valued at $105,000, or $0.70 per share (Note 9).
F-29
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
On February 10, 2005, the Company granted 93,750 warrants to purchase common
stock at an exercise price of $0.71 per share in connection with the $375,000 of
10% convertible promissory notes. The estimated fair value of the warrants is
$25,800 using the Black-Scholes option pricing model and was recorded as a
deferred debt discount which will accrete to interest expense over the life of
this promissory note, which is twelve months. On February 10, 2005, the Company
also granted 187,500 warrants to the private placement agent of the notes. The
estimated fair value of the warrants is $57,600 using the Black-Scholes option
pricing model. The cost has been capitalized as deferred financing fees and will
be amortized over the life of the debt which is 12 months.
On May 18, 2005, the Company issued 294,118 shares of common stock for
consideration of $100,000 ($0.34 per share).
NOTE 9 - Consulting Agreement
In October 2004, the Company entered into two separate consulting agreements
with Phoenix Holdings Ltd ("Phoenix") and Vantage Group LLC ("Vantage"),
pursuant to which the Company agreed to issue to the consultants an aggregate of
1.5 million shares of Company common stock in consideration for the consultants'
agreements to provide specified services. The terms of these agreements are each
for approximately one year. In November 31, 2004, the Company issued 500,000 and
300,000 shares of Company common stock to the consultants. As such, the Company
recorded deferred compensation $210,000 and $126,000, respectively, which
deferred compensation will be amortized over the life of the agreements.
On January 15, 2005, Company issued an additional 150,000 shares of Company's
common stock to Vantage as settlement of terminating its agreement with the
consultant. The shares were valued at $105,000, or $0.70 per share. For the six
months ended June 30, 2005, the Company recorded an expense of $105,000 for the
termination of the agreement and expensed $105,000 of the remaining deferred
compensation. Both charges are included in the accompanying statement of
operations as part of operation expense.
For the six months ended June 30, 2005, the Company incurred $105,000 of
amortization expense for the Phoenix consulting agreement and the charge is
included in the accompanying statement of operations as part of operating
expense. At June 30, 2005, deferred compensation relating to Phoenix was
$70,000.
NOTE 10 - Discontinued Operations
On February 4, 2004, the Company sold certain assets of Kelly Color and
discontinued operating in the film processing segment. Accordingly, the Company
currently operates in one segment, the administrative services to independent
funeral homes, state master trusts and companies that own funeral homes or
cemeteries for pre-arrangement funeral and cemetery accounts. In addition to the
marketing of funeral advisory services and final expense insurance.
For all periods presented in these condensed consolidated financial statements,
the operations of Kelly Color are reported as discontinued operations. At June
30, 2005, the discontinued liabilities of Kelly Color are:
F-30
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
(continued)
Liabilities -
Accounts payable and accrued expenses $15,440
-------
Total liabilities $15,440
=======
The results of discontinued operations for the three and six months ended June
30, 2005 and 2004 are:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ---------------------
2005 2004 2005 2004
--------- -------- --------- --------
Revenues $ -- $ -- $ -- 47,269
Cost of revenues -- -- -- (80,847)
Operating expenses -- (6,131) -- (27,909)
--------- -------- --------- --------
Net loss $ -- $ (6,131) $ -- $(61,487)
========= ======== ========= ========
NOTE 11 - Economic Dependency
Major Customer
During each of the three months ended June 30, 2005 and 2004, the Company had
sales to three customers totaling $82,344, or 93%, and $42,506, or 84%, of the
Company's net revenues, respectively.
During each of the six months ended June 30, 2005 and 2004, the Company had
sales to three customers totaling $144,937, or 92%, and $84,220, or 84%, of the
Company's net revenues, respectively.
At June 30, 2005, $4,000, or 15%, of the Company's total accounts receivable was
due from one customer.
NOTE 12 - Reclassifications
Certain accounts in the prior period's financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year's financial statements. These reclassifications have no effect on
previously reported income.
NOTE 13 - Subsequent Events (revised)
On July 11, 2005, the Company sold and issued a note payable in the aggregate
principal amount of $100,000. The maturity date of the note is November 30, 2005
and has a stated interest rate of 10% per annum.
On September 20, 2005, the Company granted 175,000 warrants to purchase common
stock at an exercise price of $0.30 per share in connection with the issuance of
$125,000 of bridge notes. The estimated fair value of the warrants is $36,100
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of the debt, which
is nine months. On September 20, 2005, the Company also granted the note holder
17,500 warrants to purchase common stock at an exercise price of $0.30 per share
for the extension of the due date for $250,000 of bridge notes dated May 22,
2004 and August 4, 2004, the estimated fair value of the warrants is $3,600
using the Black-Scholes option pricing model and was recorded as a deferred debt
discount which will accrete to interest expense over the life of the extension,
which is nine months.
F-31
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation, as amended, provide to the fullest
extent permitted by Delaware law, our directors or officers shall not be
personally liable to us or our shareholders for damages for breach of such
director's or officer's fiduciary duty. The effect of this provision of our
Certificate of Incorporation, as amended, is to eliminate our rights and our
shareholders (through shareholders' derivative suits on behalf of our company)
to recover damages against a director or officer for breach of the fiduciary
duty of care as a director or officer (including breaches resulting from
negligent or grossly negligent behavior), except under certain situations
defined by statute. We believe that the indemnification provisions in our
Certificate of Incorporation, as amended, are necessary to attract and retain
qualified persons as directors and officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party to
an action by reason of that fact that he or she was a director, officer employee
or agent of the corporation or was serving at the request of the corporation
against expenses actually and reasonably incurred by him or her in connection
with such action if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and with respect to any criminal action, had no reasonable cause to
believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,063
Accounting fees and expenses 15,000*
Legal fees and expenses 35,000*
Miscellaneous 3,937
-------
TOTAL $55,000*
=======
* Estimated.
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ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In June 2002, we issued 2,860 shares of our common stock to one individual for
consideration of $25,000.
In July 2002, we issued 11,000 shares of our common stock to our outside legal
counsel as settlement of $10,000 in professional fees.
In October 2002, we issued, to a single individual, 31,463 shares of our common
stock for the consideration of $188,778.
We issued 128,550 warrants to the holder of indebtedness of ours in the
principal amount of $150,000 and repriced an additional 71,450 warrants
previously issued to the holder, all in connection with the holder's agreement
not to demand repayment of such indebtedness prior to November 1, 2003. These
newly issued warrants and the repriced warrants entitle the holder to purchase
one share of Common Stock per warrant at any time prior to March 15, 2006 at a
purchase price of $0.15 per share. The issuance and repricing of these warrants
was effective October 2, 2003.
On October 2, 2003, we ratified the issuance, as of November 25, 2002, of 31,463
warrants to a consultant for services rendered. These warrants entitle the
holder to purchase one share of Common Stock per warrant at any time prior to
November 25, 2005 at a purchase price of $0.30 per share.
We issued 400,000 warrants in connection with the retention of an investor
relations consultant. These warrants entitle the holder to purchase one share of
Common Stock per warrant at any time prior to October 1, 2008 at a purchase
price of $0.28 per share. The issuance of these warrants was effective October
2, 2003.
We issued 15,000 warrants in connection with the retention of a registered
broker-dealer to act as Placement Agent for a private placement of our
securities. These warrants entitle the holder to purchase one share of Common
Stock per warrant at any time prior to June 13, 2008 at a purchase price of
$0.28 per share. The issuance of these warrants was effective June 14, 2003.
We issued a total of 60,000 warrants in connection with the sale of a Bridge
Note. The Placement Agent received 35,000 warrants as the finder's fee in
connection with the sale of the Bridge Note. Each of these warrants entitles its
holder to purchase one share of Common Stock at any time prior to July 25, 2008
at a purchase price of $0.28 per share. The issuance of these warrants was
effective July 26, 2003.
On October 2, 2003, we granted, under our 2002 Equity Incentive Plan, an
employee an option to purchase 25,000 shares of Common Stock at any time prior
to October 2, 2008 at a purchase price of $0.30 per share.
We sold and issued to a total of eighteen accredited investors, in a private
placement completed in December 2003, 10% Senior Subordinated Secured
Convertible Promissory Notes in the aggregate principal amount of $845,000.
These notes were sold at their face value. Each of these 10% notes, which has a
maturity date of December 5, 2006, is convertible, at the option of its holder,
into our common stock at any time prior to December 4, 2005 at the conversion
rate (subject to adjustment) of one share of common stock for every $0.71 of
principal and accrued interest converted and at any time from December 5, 2005
through the maturity date at the conversion rate (subject to adjustment) of one
share of common stock for every $1.25 of principal and accrued interest
converted. Each 10% note is subject to automatic conversion, at the then
applicable conversion rate, if, (a) for any twenty consecutive trading days, (i)
the market price of our common stock equals or exceeds $3.00 and (ii) the
trading volume for our common stock equals or exceeds 50,000 shares, and (b) the
conversion shares are either (i) subject to an effective registration statement
under the Securities Act of 1933 or (ii) available for resale pursuant to Rule
144 promulgated under the Securities Act.
We issued to Strasbourger, a registered broker-dealer, a total of 264,063
warrants to purchase our common stock in connection with the sale and issuance
of the 10% Notes. Strasbourger acted as placement agent for the issuance and
sale of our 10% Notes in a private placement completed in December 2003.
Strasbourger also received a commission of $86,500 and a non-accountable expense
allowance of $18,400 as compensation for its services as the placement agent for
the private placement of the 10% Notes. Each of these warrants entitles its
holder to purchase one share of our common stock at a purchase price of $0.28
per share at any time on or prior to December 4, 2006.
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In May 2004, we issued, to a single individual, three-year warrants to purchase
70,000 shares of our common stock, exercisable at $0.71 per share, in connection
with such individual's loan to us in the principal amount of $125,000. The
exercise price was changed to $0.45 in August 2005.
In August 2004, we issued, to a single individual, three-year warrants to
purchase 105,000 shares of our common stock, exercisable at $0.45 per share, in
connection with such individual's loan to us in the principal amount of
$125,000.
In September and October 2004, we sold and issued, in a transaction complying
with the requirements of Regulation D, an aggregate of 1 million shares of our
common stock to a total of three accredited investors at an aggregate purchase
price of $200,000. We believe that the issuance of such common stock was exempt
from the registration requirements of the Securities Act pursuant to the
provisions of Section 4(2) of the Securities Act.
On October 5, 2004, we entered into a one-year consulting agreement with Phoenix
Holdings LLC. This agreement calls for Phoenix to provide us with services in
connection with developing acquisition and business opportunities within the
insurance industry. Pursuant to this agreement, we issued to Phoenix 500,000
shares of our common stock and are to pay Phoenix an additional fee of $2,500
per month for the term of the agreement. The issuance of these shares was exempt
from registration pursuant to Section 4(2) under the Securities Act.
On November 24, 2004, we entered into a Common Stock Purchase Agreement with
Fusion Capital Fund II, LLC to obtain up to $6.0 million in equity financing
from Fusion Capital. Under this agreement, Fusion Capital agreed to purchase up
to $6.0 million of newly issued shares of our common stock over a period of up
to 24 months. Pursuant to the agreement, in January 2005, we issued to Fusion
Capital, as a commitment fee, 794,702 shares of our common stock. We had
previously issued to Fusion Capital, in August 2004, 60,000 shares of our common
stock upon signing a letter of intent in August 2004.
On January 5, 2005, we issued a total of 2,936,890 shares of our common stock to
the holders of our outstanding 10% Senior Secured Convertible Promissory Notes
in the aggregate principal amount of $795,000 in exchange for such holders
waiving substantially all of their rights under their respective 10% Promissory
Notes, including their right to payment of principal and interest due under
their 10% Promissory Notes. The accrued interest due under such 10% notes
totaled approximately $65,985. The 10% Promissory Notes were exchanged for
shares of our common stock at the rates of one share for each (a) $.30 of
principal so exchanged, and (b) $ .23 of accrued interest so exchanged. In
connection with the issuance of these 2,936,890 shares, we agreed to (x) use our
best efforts to expeditiously register for resale the shares that such holders
received and (y) issue additional shares to such holders in the event that we
issue shares to certain third parties for consideration less than $.30 at any
time prior to December 4, 2006. We believe that the issuance of said 2,936,891
shares was exempt from the registration requirements of the Securities Act
pursuant to the provisions of Sections 3(a)(9) and 4(2) of the Securities Act.
On January 5, 2005, we issued 794,702 shares of our common stock to Fusion
Capital as a commitment fee for entering into our common stock purchase
agreement with Fusion Capital. We have valued these shares at $476,821, or $0.60
per share, and has been recorded as deferred compensation. The deferred charges
will be amortized over the life of the agreement. We believe that the issuance
of such common stock was exempt from the registration requirements of the
Securities Act pursuant to the provisions of Section 4(2) of the Securities Act.
On January 15, 2005, we issued 150,000 shares of our common stock to a
consultant as a settlement in connection with the terminating of our agreement
with the consultant. We have valued these shares at $105,000, or $0.70 per
share. We believe that the issuance of such common stock was exempt from the
registration requirements of the Securities Act pursuant to the provisions of
Section 4(2) of the Securities Act.
On February 10, 2005, we sold and issued an aggregate of $375,000 of 10%
Convertible Promissory Notes and three-year warrants to purchase 93,750 shares
of our common stock to a total of twelve accredited investors in a transaction
complying with the requirements of Regulation D. Each of these notes are due on
November 5, 2005 and bear interest at the rate of 10% per annum, payable at
maturity. The notes may be prepaid, at our sole discretion, in whole or in part,
at any time upon notice to the holders of the notes. The notes are further
subject to mandatory re-payment upon the occurrence of specified events and
after the giving of appropriate notice to the holders. Each holder of a note has
the right, exercisable in the holders' sole discretion, to convert all or any
portion of the principal amount standing under the holder's note and all accrued
and unpaid interest on such principal amount being converted into shares of our
common stock at a conversion price of $0.71 per share. The exercise price of the
warrants is $0.71 per share. We believe that the issuance of such common stock
and warrants was exempt from the registration requirements of the Securities Act
pursuant to the provisions of Section 4(2) of the Securities Act.
II-3
On February 10, 2005, we committed to issuing to J.P Turner & Co. a total of
187,500 warrants to purchase shares of our common stock at an exercise price of
$0.15 per share as a finder's fee in connection with the offer and sale of our
10% convertible promissory notes in the aggregate principal amount of $375,000.
The warrants will expire on February 10, 2008. We have estimated the fair value
of the warrants at $57,600 using the Black-Scholes option pricing model. The
cost has been capitalized as deferred financing fees and will be amortized over
the life of the debt, which is twelve months. We believe that the issuance of
such warrants will be exempt from the registration requirements of the
Securities Act.
In May 2005, we issued 294,118 shares of our common stock to an institutional
investor at $0.34 per share for consideration of $100,000. We believe that the
issuance of such common stock was exempt from the registration requirements of
the Securities Act pursuant to the provisions of Section 4(2) of the Securities
Act.
II-4
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean Walker Financial Corporation, a
Delaware corporation.
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to exhibit 3.1 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 2002).
3.2 By-Laws of Walker Color, Inc. (incorporated herein by reference to
exhibit 3(b) to the Company's Registration Statement on Form S-1
(File No.: 2-3000002).
4.1 Form of warrant certificate evidencing warrants to purchase an
aggregate of 60,000 shares of our common stock issued on July 25,
2003 (incorporated by reference to Annual Report on Form 10- KSB,
dated April 14, 2004).
4.2 Form of 10% Senior Subordinated Secured Convertible Promissory
Note issued on December 5, 2003 (incorporated by reference to
Annual Report on Form 10-KSB, dated April 14, 2004).
4.3 Security Agreement, dated as of December 5, 2003, among the
Company, the original holders of our 10% Senior Subordinated
Secured Convertible Promissory Notes issued on December 5, 2003
and Strasbourger Pearson Tulcin Wolff, Incorporated, as agent for
such (incorporated by reference to Annual Report on Form 10-KSB,
dated April 14, 2004).
4.4 Form of warrant certificate evidencing warrants to purchase
264,063 shares of our common stock issued to Strasbourger Pearson
Tulcin Wolff, Incorporated, in its capacity as placement agent for
the private placement of our 10% Senior Subordinated Secured
Convertible Promissory Notes issued on December 5, 2003
(incorporated by reference to Annual Report on Form 10-KSB, dated
April 14, 2004).
4.5 Common Stock Purchase Agreement, dated as of November 24, 2004,
between Walker Financial Corporation and Fusion Capital Fund II,
LLC (incorporated by reference to Current Report on Form 8-K,
dated November 30, 2004).
4.6 Registration Rights Agreement, dated as of November 24, 2004,
between Walker Financial Corporation and Fusion Capital Fund II,
LLC (incorporated by reference to Current Report on Form 8-K,
dated November 30, 2004).
4.7 Promissory Note, dated May 22, 2004, of Walker Financial
Corporation in the principal amount of $125,000 and payable to
Cindy Dolgin (incorporated by reference to Quarterly Report on
Form 10-QSB, dated August 23, 2004).
4.8 Warrant certificate, dated May 22, 2004, registered in the name of
Cindy Dolgin (incorporated by reference to the Quarterly Report on
Form 10-QSB, dated August 23, 2004).
4.9 Promissory Note, dated August 5, 2004, of Walker Financial
Corporation in the principal amount of $125,000 and payable to
Cindy Dolgin (incorporated by reference to the Quarterly Report on
Form 10-QSB, dated November 22, 2004).
4.10 Warrant Certificate, dated August 5, 2004, registered in the name
of Cindy Dolgin (incorporated by reference to the Quarterly Report
on Form 10-QSB, dated November 22, 2004).
4.11 Form of 10% Convertible Senior Subordinated Promissory Notes
(incorporated by reference to the Quarterly Report on Form 10-QSB,
dated May 26, 2005).
4.12 Form of warrant certificate evidencing warrants issued to
purchasers of the 10% Convertible Senior Subordinated Promissory
Notes (incorporated by reference to the Quarterly Report on Form
10-QSB, dated May 26, 2005).
II-5
4.13 Warrant certificate evidencing 187,500 warrants registered in the
name of J.P Turner & Co. issued in connection with the sale of the
10% Convertible Senior Subordinated Promissory Notes (incorporated
by reference to the Quarterly Report on Form 10-QSB, dated May 26,
2005).
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed
previously).
10.1 Employment Agreement, dated as of March 19, 2002, among Walker
International, Inc., Kelly Color, Inc. and Peter Walker
(incorporated herein by reference to Form 8-K dated April 3,
2002).
10.2 Employment Agreement, dated as of March 19, 2002, between Walker
International Industries, Inc., National Preplanning, Inc. and
Mitchell Segal (incorporated herein by reference to Form 8-K dated
April 3, 2002).
10.3 Consulting Agreement, dated as of October 5, 2004, between Phoenix
Holdings, LLC and Walker Financial Corporation (incorporated by
reference to the Quarterly Report on Form 10-QSB, dated November
22, 2004).
10.4 Consulting Services Agreement, effective April 10, 2002 (sic),
between Walker International Industries Inc. (sic) and Shannon
Harrison (incorporated by reference to Quarterly Report on Form
10-QSB, dated August 23, 2004).
10.5 Investment Banking Consulting Agreement, dated as of October 5,
2004, between The Vantage Group, Ltd. and Walker Financial
Corporation (incorporated by reference to the Quarterly Report on
Form 10-QSB, dated November 22, 2004).
10.6 Purchase Agreement, dated April 7, 2005, among Walker Financial
Corporation, Disability Access Consultants, Inc. and Barbara
Thorpe (incorporated by reference to the annual Report on Form
10-KSB, dated April 15, 2005).
10.7 Marketing and Development Agreement dated April 25, 2005, and by
and between American DataSource and Parkway Advisors Group, Inc.
(previously filed)
10.8 10.8 Preplan Accounting Agreement dated as of August 1, 1999
between American DataSource, Inc. and Carriage Services, Inc.
(previously filed)
23.1 Consent of Marcum & Kliegman LLP (filed herewith).
23.2 Consent of legal counsel (see Exhibit 5.1).
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
II-6
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Garden
City, State of New York, on November 4 2005.
WALKER FINANCIAL CORPORATION
By: /s/ MITCHELL S. SEGAL
---------------------------------------
Mitchell S. Segal, Chief Executive Officer, Chief Financial
Officer, Principal Executive Officer, Principal Financial
Officer, Principal Accounting Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
/s/ MITCHELL S. SEGAL Chief Executive Officer, Chief November 4, 2005
- --------------------- Financial Officer and Director
Mitchell S. Segal
/s/ PETER WALKER Secretary and Director November 4, 2005
- ---------------------
Peter Walker
Chairman of the Board of Directors 2005
- ---------------------
James M. Lucas, Sr.
II-8