As filed with the Securities and Exchange Commission on January 10, 2006
Registration No. 333-12776
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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 Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
990 Stewart Avenue, Suite 650
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 650
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 Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Share(1) Offering Price Fee
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10(2) 704,327 $.14 $ 98,605.78 $ 10.55
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10(3) 50,000,000 $.14 $7,000,000 $749.00
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10(4) 1,692,308 $.14 $ 236,923.12 $ 25.35
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10(5) 528,169 $.14 $ 73,943.66 $ 7.91
- ---------------------------------------------------------------------------------------------------------------
Total 52,924,804 $7,409,472.56 $792.81
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1) Estimated solely for purposes of calculating the registration fee to Rule 457(c) under the Securities Act
of 1933, as amended. The average of the high and low price per share of the Registrant's Common Stock on the
Over the Counter Bulletin Board as of January 4, 2006 was $.14 per share.
(2) Represents shares issuable upon exercise of Warrants.
(3) Represents shares issuable upon sales under an Investment Agreement.
(4) Represents shares issuable upon conversion of a Convertible Debenture.
(5) Represents shares issuable upon conversion of a Convertible Promissory Note.
The registrant hereby amends this registration statement on such date or date(s) 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, as amended, 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 January 10, 2006
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
52,924,804 Shares of Common Stock
This prospectus relates to the resale by the selling stockholders of up to
52,924,804 shares of our common stock. We will not receive any proceeds from the
resale of shares of our common stock.
The total number of shares sold herewith includes the following shares owned by
or to be issued to Dutchess Private Equities Fund II, LP ("Dutchess"): (i) up to
1,692,308 shares issuable upon conversion of convertible debentures, (ii)
704,327 shares issuable upon exercise of warrants, (iii) up to 50,000,000
shares of common stock issuable pursuant to a "put right" under the Investment
Agreement, also referred to as an Equity Line of Credit with Dutchess Private
Equities Fund II, LP., and (iv) 528,169 shares issuable upon conversion of
convertible promissory notes. We are not selling any shares of common stock in
this offering and therefore will not receive any proceeds from this offering.
We will, however, receive proceeds from the sale of the 50,000,000 shares of
common stock under the Investment Agreement with Dutchess Private Equities, LLP
and the exercise of warrants to purchase an aggregate of 704,327 shares of
common stock. All costs associated with this registration will be borne by us.
A "put right" permits us to require Dutchess to buy shares of our common stock
pursuant to the terms of the Investment Agreement. That Investment Agreement
permits us to "put" up to an aggregate of $10,000,000 in shares of our common
stock to Dutchess. Dutchess will pay us 93% of the lowest closing Best Bid
price (or highest posted bid price) of our common stock during the five trading
day period immediately following the date of our notice to them of our election
to put shares pursuant to the Equity Line of Credit.
With the exception of Dutchess, which is an "underwriter" within the meaning of
the Securities Act of 1933, no other underwriter or person has been engaged to
facilitate the sale of shares of common stock in this offering.
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 January 4, 2006, was $.14.
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 January 10, 2006.
TABLE OF CONTENTS
Page
Prospectus Summary..........................................................1
Risk Factors................................................................5
Forward Looking Statements..................................................9
Use of Proceeds.............................................................10
Market for Common Equity and Related Stockholder Matters....................15
Management's Discussion and Analysis or Plan of Operation...................15
Business....................................................................24
Description of Property.....................................................28
Legal Proceedings...........................................................28
Directors, Executive Officers, Promoters and Control Persons................29
Executive Compensation......................................................30
Certain Relationships and Related Transactions..............................31
Security Ownership of Certain Beneficial Owners and Management..............33
Description of Securities...................................................34
Indemnification for Securities Act Liabilities..............................35
Plan of Distribution........................................................35
Selling Stockholders........................................................38
Legal Matters...............................................................38
Experts.....................................................................38
Available Information.......................................................39
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.
As of December 31, 2004 the Company had an accumulated deficit of approximately
$6.1. For the year ended December 31, 2004, we generated net sales of
approximately $241,000 and had a net loss of approximately $1.9 million. For the
nine months ended September 30, 2005, we generated sales of approximately
$243,000 and incurred a net loss of approximately $2.4 million, of which
$933,793 is attributable to the debt conversion expense related to the
conversion of $ 745,000 10% Convertible Promissory Notes and $ 311,569 is
attributable to interest expense related to other borrowings. As of September
30, 2005, we had an accumulated deficit of approximately $8.5 million and a
negative working capital of approximately $1.6 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 650, Garden City,
New York 11530, and our telephone number at that address is (516) 832-7000. We
are a Delaware corporation.
Recent Financing
Convertible Debenture
On December 23, 2005, we entered into an agreement providing for the sale of
$220,000 in principal amount of five-year convertible debentures to Dutchess
Private Equities Fund, II, L.P. The convertible debentures bear interest at 12%
per annum. The first $95,000 (less expenses) was funded immediately with an
additional $125,000 to be funded immediately upon filing of the registration
statement of which this prospectus forms a part. Dutchess may convert the
convertible debentures into shares of our common stock any time at a fixed
conversion price of $0.13. Our obligation to repay the amounts outstanding
under the convertible debentures is secured by substantially all of our assets.
In connection with the convertible debentures, we also granted to Dutchess
warrants to purchase 423,077 shares of common stock at $0.13 per share. The
warrants may be exercised for a period of five years and the exercise price is
subject to standard adjustment upon the occurrence of certain events, including,
without limitation, upon our consolidation, merger or sale of all of
substantially all of our assets, a reclassification of our common stock, or any
stock splits, combinations or dividends with respect to our common stock.
2
Investment Agreement
On December 23, 2005, we entered into an Investment Agreement with Dutchess
Private Equities Fund, L.P. (Dutchess) providing for the sale and issuance to
Dutchess from time to time of up to $10,000,000 in shares of our common stock
for a period of up to 36 months from the date the registration statement is
declared effective. The maximum number of shares that we may put to Dutchess at
any one time shall be equal to, at our election, either: (A) 200% of the average
daily volume in the U.S. market of our common stock for the three trading days
prior to the date we notify Dutchess of our intent to sell shares to Dutchess,
multiplied by the average of the three daily closing bid prices immediately
preceding the date of notification, or (B) a number of shares having a value of
$200,000. We may not submit a notice until after the completion of a previous
sale under the Investment Agreement. The purchase price for the shares to be
sold shall be equal to 93% of the lowest closing best bid price of the Common
Stock during the five-day period following the date we deliver a notice.
We are obligated to file a registration statement by January 13, 2006 for the
registration of the shares of Common Stock issuable upon conversion of the
convertible debentures, exercise of the warrants and upon a sale under the
Investment Agreement. We are further obligated to use our best efforts to cause
the SEC to declare the registration statement effective within 90 days after the
filing date of the registration statement. If we do not file the registration
statement by January 13, 2006, we will be obligated to pay liquidated damages to
Dutchess in an amount equal to 2% of the principal amount of the debenture
outstanding, pro rata, for every 15 days which such registration statement has
not been filed. In addition, if the registration statement is not filed by the
filing date, the conversion price of the convertible debenture will decrease by
10% of and continue to decrease by 10% for each 15 day calendar period the
registration statement goes without filing. If the registration statement is
not declared effective within 90 days of the filing date, we are obligated to
pay liquidated damages to Dutchess in an amount equal to 2% of the principal
amount of the debenture outstanding, pro rata, for every 30 days which such
registration statement has not been declared effective.
3
The Offering
Common stock offered by
selling stockholders.......... Up to 52,924,804 shares, including the
following:
- up to 423,077 shares of common stock issuable
upon the exercise of common stock purchase
warrants at an exercise price of $.13 per
share;
- up to 93,750 shares of common stock issuable
upon the exercise of common stock purchase
warrants at an exercise price of $.71 per
share;
- up to 187,500 shares of common stock issuable
upon the exercise of common stock purchase
warrants at an exercise price of $.16 per
share;
- up to 1,692,308 shares of common stock
issuable upon the conversion of convertible
debentures at a conversion price of $.13
per share;
- up to 528,169 shares of common stock
issuable upon the conversion of convertible
debentures at a conversion price of $.71
per share; and
- up to 50,000,000 shares of common stock
issuable upon the exercise of a put right
under the Investment Agreement;
Common Stock to be
outstanding after the offering 66,847,024 shares, assuming conversion of
all notes and debentures, exercise of all
warrants and the exercise of all puts under
the Investment Agreement
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 13,922,220 shares of common stock outstanding as of January
4, 2006 and assumes the conversion of all notes and debentures, exercise of all
warrants and the exercise of all puts under the Investment Agreement.
4
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 year ended December 31, 2004 and
$2,402,977 for the nine months ended September 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.
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 organizational
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 have improperly recorded these transactions which required
proposed 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
certain employees during the fiscal years ended December 31, 2004 and 2003. Our
auditors have had to continually propose adjustments in our financial
statements. If we had adequate controls, we believe that our auditors would not
be required to propose 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.
5
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.
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 the investor 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.
6
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 unsuccessful 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.
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 THE INVESTMENT AGREEMENT
There Are A Large Number Of Shares Underlying Our Periodic Equity Investment
Agreement That Are Being Registered In This Prospectus And The Sale Of These
Shares May Depress The Market Price Of Our Common Stock.
The issuance and sale of shares upon delivery of an advance by Dutchess Private
Equities Fund II, LP ("Dutchess") pursuant to the Investment Agreement in the
amount up to $10,000,000 and the conversion of the Debenture and exercise of
warrants by Dutchess are likely to result in substantial dilution to the
interests of other stockholders. As of January 4, 2006, we had 13,922,220 shares
of common stock issued and outstanding. We are registering 52,924,804 shares of
common stock pursuant to this registration statement, of which up to 50,000,000
are reserved for issuance pursuant to the Investment Agreement with Dutchess
Private Equities Fund II, LP.
Assuming The Issuance Of all Shares Under The Investment Agreement, Existing
Shareholders Will Experience Substantial Dilution Of Our Shares Of Common Stock.
Our Investment Agreement with Dutchess contemplates the potential future
issuance and sales of up to $10,000,000 of our Common Stock to Dutchess subject
to certain restrictions and obligations. Given out current capital needs and the
market price of our common stock, we presently have no intention of drawing down
the entire amount available to us unless the market price of our common stock
increases.The following is an example of the shares of our common stock that are
issuable upon the entire drawdown of $10,000,000 on our equity line based on
prices at 25%, 50% and 75% below the closing price of our common stock $.14 on
January 5, 2006.
7
- ------------------------------------------------------------------------------------------------------------------------------
% Below price Price per share Number of shares issuable (1) Shares outstanding (2) % of Outstanding stock(3)
- ------------------------------------------------------------------------------------------------------------------------------
Purchase price (4) $.1302 76,804,916 90,727,136 84.7
- ------------------------------------------------------------------------------------------------------------------------------
25% $.09765 102,406,554 116,328,774 90.4
- ------------------------------------------------------------------------------------------------------------------------------
50% $.0651 153,609,831 167,532,051 91.7
- ------------------------------------------------------------------------------------------------------------------------------
75% $.03255 307,219,662 321,141,882 95.7
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Represents the number of shares issuable if all the entire $10,000,000 under the equity line of credit, was drawn down at the
indicated price.
(2) Based on 13,922,220 shares of common stock issued and outstanding on January 4, 2006.
(3) Percentage of the total outstanding common stock represented by the shares issuable on draw down on the equity line of credit
without regard to any contractual or other restriction on the number of securities the selling stockholders may own at any point
in time.
(4) Based on a price of $.1302 which is 93% of the lowest closing price of our common stock during the five day period commencing
January 2, 2006 through January 9, 2006.
The Lower The Stock Price, the Greater the Number of Shares Issuable Under the
Investment Agreement Which Could Contribute to the Future Decline of Our Stock
Price and Materially Dilute Existing Stockholders' Equity and Voting Rights.
The number of shares that Dutchess will receive under its agreement with us is
calculated based upon the market price of our common stock prevailing at the
time of each "put". The lower the market price, the greater the number of
shares issuable under the agreement. Upon issuance of the shares, to the extent
that Dutchess will attempt to sell the shares into the market, these sales may
further reduce the market price of our common stock. This in turn will increase
the number of shares issuable under the agreement. This may lead to an
escalation of lower market prices and ever greater numbers of shares to be
issued. A larger number of shares issuable at a discount to a continuously
declining stock price will expose our shareholders to greater dilution and a
reduction of the value of their investment.
The Sale of our Stock Under the Dutchess Agreement Could Encourage Short Sales
by Third Parties, Which Could Contribute to the Future Decline of our Stock
Price and Materially Dilute Existing Stockholders' Equity and Voting Rights.
Neither the Investment Agreement or the Debenture Agreement contain restrictions
on short selling. Accordingly, any significant downward pressure on the price of
our common stock can encourage short sales by them or others, subject to
applicable securities laws. This is particularly the case if the shares being
placed into the market exceed the market's ability to absorb the increased
number of shares of stock or if we have not performed in such a manner to show
that the equity funds raised will be used by us to grow. Such an event could
place further downward pressure on the price of our common stock. Even if we
use the proceeds under the agreement to grow our revenues and profits or invest
in assets, which are materially beneficial to us, the opportunity exists for
short sellers and others to contribute to the future decline of our stock price.
If there are significant short sales of our stock, the price decline that would
result from this activity will cause the share price to decline more so, which,
in turn, may cause long holders of the stock to sell their shares thereby
contributing to sales of stock in the market. If there is an imbalance on the
sell side of the market for the stock, our stock price will decline. If this
occurs, the number of shares of our common stock that is issuable pursuant to
the Investment Agreement will increase, which will materially dilute existing
stockholders' equity and voting rights.
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.
8
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.
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.
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.
9
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 receive proceeds
from the sale of shares of our common stock to Dutchess under the Investment
Agreement. The purchase price of the shares purchased under that agreement will
be equal to 93% of the lowest closing Best Bid (or highest posted bid price of
our common stock) for the five trading days following the day that we submit a
Put Notice to Dutchess that we intend to sell shares to it. We may also receive
proceeds from the issuance of shares upon exercise of the warrants, if
exercised.
For illustrative purposes, we have set forth below our intended use of proceeds
for the range of net proceeds indicated below to be received under the
Investment Agreement assuming a sale of 10%, 25%, 50% and 100% of the shares
issuable under that agreement. We have the ability to draw down the full
$10,000,000 pursuant to the agreement, however we may draw down less than that
amount.
10% 25% 50% 100%
---------- ---------- ---------- -----------
Gross Proceeds $1,000,000 $2,500,000 $5,000,000 $10,000,000
Net Proceeds after offering
expenses and fees(1) $ 950,000 $2,450,000 $4,950,000 $ 9,950,000
Debt Repayment $ 940,000 $ 940,000 $ 940,000 $ 940,000
Use of proceeds:
General Working Capital $ 10,000 $1,510,000 $4,010,000 $ 9,010,000
=========== ============= ============= =============
<FN>
(1) Assumes estimated offering expenses and fees of $45,800 (includes (a)
estimated legal fees and expenses of $25,000, (b) estimated accounting fees and
expense of $20,000 and (c) SEC filing fees of $800).
INVESTMENT AGREEMENT
On December 23, 2005, we entered into an Investment Agreement with Dutchess
Private Equities Fund II, LP, ("Dutchess") a Delaware limited partnership, for
the future issuance and purchase of shares of our common stock. This Investment
Agreement establishes what is sometimes termed an equity line of credit or an
equity drawdown facility.
In general, the drawdown facility operates as follows: Dutchess, has committed
to provide us up to $10,000,000 as we request it over a 36 month period, in
return for common stock we issue to Dutchess. We, in our sole discretion, may
during the Open Period deliver a "put notice" (the "Put Notice") to Duchess
which states the dollar amount which we intend to sell to Dutchess on the
Closing Date. The Open Period is the period beginning on the trading after this
Registration Statement is declared effective (the "Effective Date") and which
ends on the earlier to occur of 36 months from the Effective Date or termination
of the Investment Agreement in accordance with its terms. The Closing Date
shall mean no more than 7 trading days following the Put Notice Date. The Put
Notice Date shall mean the Trading Day immediately following the day on which
Dutchess receives a Put Notice, however a Put Notice shall be deemed delivered
on (a) the Trading Day it is received by facsimile or otherwise by Dutchess if
such notice is received prior to 9:00 am EST, or (b) the immediately succeeding
Trading Day if it is received by facsimile or otherwise after 9:00 am EST on a
Trading Day.
The amount that we shall be entitled to Put to Dutchess shall be equal to, at
our election, either: (A) 200% of the U.S. market average daily volume of our
common stock for the three Trading Days prior to the applicable Put Notice Date,
multiplied by the average of the three daily closing bid prices immediately
preceding the Put Date, or (B) $200,000. During the Open Period, we shall not
be entitled to submit a Put Notice until after the previous Closing has been
completed. The Purchase Price for the Common Stock identified in the Put Notice
shall be equal to 93% of the lowest closing Best Bid price of the Common Stock
during the Pricing Period. The Pricing Period is the period beginning on the
Put Notice Date and ending on and including the date that is 5 trading days
after such Put Notice Date.
DUTCHESS' OBLIGATION TO PURCHASE SHARES
Upon the receipt by Dutchess of a validly delivered Put Notice, Dutchess shall
be required to purchase from us, during the period beginning on the Put Notice
Date and ending on and including the date that is five Trading days after such
Put Notice, that number of shares having an aggregate purchase price equal to
the lesser of (a) the Put Amount set forth in the Put Notice and (b) 200% of the
aggregate trading volume of our common stock during the 10 trading days prior to
the applicable Put Notice Date (x) the lowest closing bid price of our common
stock during the specified Pricing period, but only if such said shares bear no
restrictive legend and are not subject to stop transfer instructions, prior to
the applicable Closing Date.
10
Conditions to Dutchess' obligation to purchase shares
We shall not be entitled to deliver a Put Notice and Dutchess shall not be
obligated to purchase any shares at a closing unless each of the following
conditions are satisfied:
A. a Registration Statement shall have been declared effective and shall remain
effective and available at all times until the Closing with respect to the
subject Put Notice for the resale of all the common stock issuable pursuant to
the Investment Agreement;
B. at all times during the period beginning on the related Put Notice Date and
ending on and including the related Closing Date, the Common Stock shall have
been listed on the Principal Market and shall not have been suspended from
trading thereon for a period of four consecutive Trading Days during the Open
Period and we shall not have been notified of any pending or threatened
proceeding or other action to suspend the trading of our Common Stock;
C. we have complied with our obligations and are otherwise not in breach of a
material provision of, or in default under, the Investment Agreement and the
Registration Rights Agreement or any other agreement executed in connection with
the Investment Agreement, which has not been corrected prior to delivery of the
Put Notice Date;
D. no injunction shall have been issued and remain in force, or action commenced
by a governmental authority which has not been stayed or abandoned, prohibiting
the purchase or the issuance of the Securities; and
E. the issuance of the Securities will not violate any shareholder approval
requirements of the Principal Market.
If any of the foregoing events occurs during a Pricing Period, then Dutchess
shall have no obligation to purchase the Put Amount of Common Stock set forth in
the applicable Put Notice.
Mechanics of Purchase of shares by Dutchess
The closing of the purchase by Dutchess of Shares (a "Closing") shall occur on
the date which is no later than seven Trading Days following the applicable Put
Notice Date (each a "Closing Date"). Prior to each Closing Date, (I) we shall
be required to deliver to Dutchess pursuant to the Investment Agreement,
certificates representing the Shares to be issued to Dutchess on such date and
registered in the name of Dutchess; and (II) Dutchess shall deliver to us the
purchase price to be paid for such Shares.
As compensation to Dutchess for a delay in issuance of the Shares beyond the
Closing Date, we have agreed to pay late payments to Dutchess for late issuance
of the Shares (delivery of the Shares after the applicable Closing Date) in
accordance with the following schedule (where "No. of Days Late" is defined as
the number of trading days beyond the Closing Date. The Amounts are
cumulative.):
LATE PAYMENT FOR EACH
NO. OF DAYS LATE $10,000 OF COMMON STOCK
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
Over 10 $1,000 + $200 for each Business Day late beyond 10 days
We shall pay any late payments in immediately available funds upon demand by
Dutchess.
OVERALL LIMIT ON COMMON STOCK ISSUABLE.
If during the Open Period we become listed on an exchange that limits the number
of shares of our common stock that may be issued without shareholder approval,
then the number of Shares issuable by us and purchasable by Dutchess, including
the shares of Common Stock issuable to Dutchess, shall not exceed that number of
the shares of Common Stock that may be issuable without shareholder approval,
subject to appropriate adjustment for stock splits, stock dividends,
combinations or other similar recapitalization affecting the Common Stock (the
"Maximum Common Stock Issuance"), in excess of the Maximum Common Stock Issuance
shall first be approved by our shareholders in accordance with applicable law
and our By-laws and Amended and Restated Certificate of Incorporation, if such
issuance of shares of Common Stock could cause a delisting on the Principal
Market. Our failure to seek or obtain such shareholder approval shall in no way
adversely affect the validity and due authorization of the issuance and sale of
Securities or Dutchess' obligation in accordance with the terms and conditions
of the Investment Agreement to purchase a number of Shares in the aggregate up
to the Maximum Common Stock Issuance limitation, and that such approval pertains
only to the applicability of the Maximum Common Stock Issuance limitation.
11
TERM
The Investment Agreement shall expire (a) when Dutchess has purchased an
aggregate of $10,000,000 of our Common Stock or (b) 36 months after the
Effective Date of the registration statement of which this prospectus forms a
part, whichever occurs earlier.
SUSPENSION
The Investment Agreement shall be suspended upon any of the following events and
shall remain suspended until such event has been rectified:
A. the trading of our Common Stock is suspended by the SEC, the Principal Market
or the NASD for a period of four consecutive Trading Days during the Open
Period; or,
B. Our Common Stock ceases to be registered under the 1934 Act or listed or
traded on the Principal Market.
Upon the occurrence of one of the above-described events, the Company shall send
written notice of such event to the Investor.
SAMPLE CALCULATION OF STOCK PURCHASES
The following is an example of the calculation of the drawdown amount and the
number of shares we would issue to Dutchess in connection with that drawdown
based on the assumptions noted in the discussion below.
SAMPLE PUT AMOUNT CALCULATION AND PURCHASE PRICE CALCULATION
The Put amount may at our election be either (i) $200,000 or; (ii) 200% of the
averaged daily volume (U.S market only) of our common stock for the 10 trading
days prior to the applicable put notice date, multiplied by the lowest closing
Best Bid Price during the 5 trading days subsequent to the Put Date.
The calculation below is based upon average daily volume of our common stock
prior to a Put Notice Date of December 29, 2005
Set forth below is a trading summary of our Common Stock for the period from
December 14, 2005 through January 6, 2006.
Date Bid Ask Close Volume
- -----------------------------------------------------------
14-Dec-05 0.25 0.30 0.30 95,800
15-Dec-05 0.22 0.25 0.25 20,500
16-Dec-05 0.20 0.22 0.20 20,000
19-Dec-05 0.20 0.24 0.24 52,200
20-Dec-05 0.19 0.24 0.24 0
21-Dec-05 0.16 0.19 0.19 30,000
22-Dec-05 0.16 0.19 0.19 0
23-Dec-05 0.16 0.19 0.19 1,600
27-Dec-05 0.16 0.19 0.16 12,600
29-Dec-05 0.13 0.15 0.14 97,900
30-Dec-05 0.13 0.14 0.14 0
3-Jan-06 0.13 0.14 0.14 0
4-Jan-06 0.13 0.14 0.14 0
5-Jan-06 0.13 0.15 0.14 5,000
6-Jan-06 0.13 0.15 0.14 0
The average daily volume for the 10 trading days prior to December 29, 2005
based upon the foregoing table is 23,270. 200% of the average daily volume is
46,540.
The average of the 5 daily closing bid prices subsequent to the Put Date of
December 29, 2005 is $.13. The total Put Amount based upon the assumptions set
forth above is $46,450 multiplied by 93% of the lowest closing Best Bid Price
during the Pricing Period (93% x .13 = .1209)=$5,616.
12
DEBENTURE AGREEMENT
On December 23, 2005, we entered into an agreement providing for the sale of
$220,000 in principal amount of its five-year convertible debentures to
Dutchess. The convertible debentures bear interest at 12% per annum. The first
$95,000 (less expenses) was funded immediately with an additional $125,000 to be
funded immediately upon filing of the registration statement of which this
prospectus forms a part. Dutchess may convert the convertible debentures into
shares of our common stock any time at a fixed conversion price of $.13. Our
obligation to repay the amounts outstanding under the convertible debentures is
secured by substantially all of our assets.
INTEREST AND PAYMENTS
We will pay 12% annual coupon on the unpaid face amount of the Debenture. We are
required to make payments as set forth in the table below.
Principal Amount with Accrued Applied to Applied to Applied to
Amount Due Interest for Period Payment Principal Interest Redemption
1/1/2006 $220,000.00 $222,180.24 $ 2,180.24 $ 0.00 $2,180.24 $ 0.00
2/15/2006 $220,000.00 $222,180.24 $ 56,315.03 $ 43,307.83 $2,180.24 $ 54,134.79
3/1/2006 $176,692.17 $178,443.22 $ 56,315.03 $ 43,651.18 $1,751.05 $ 54,563.98
4/1/2006 $133,040.98 $134,359.44 $ 56,315.03 $ 43,997.26 $1,318.46 $ 54,996.57
5/1/2006 $ 89,043.73 $ 89,926.17 $ 56,315.03 $ 44,346.07 $ 882.44 $ 55,432.59
6/1/2006 $ 44,697.65 $ 45,140.62 $ 56,315.03 $ 44,697.65 $ 442.96 $ 55,872.07
7/1/2006 ($0.00) ($0.00) $283,755.39 $220,000.00 $8,755.39 $275,000.00
Subsequent to the Effective Date, Dutchess can either request a payment as set
forth in the table above to elect to convert a portion of the Debenture in an
amount equal to the payment amount.
CONVERSION
Dutchess may convert the face amount of the Debenture, plus accrued interest, in
whole or in part by giving us written notice. The fixed conversion price is
$.13. No fractional or scrip shares will be issued on conversion. In addition,
in the event that any portion of the Debenture remains outstanding on the
Maturity Date, such outstanding amount shall be automatically converted into
shares of our common stock. In the event that we do not make delivery of the
common stock as instructed by Dutchess, we shall be obligated to pay to Dutchess
3% in cash of the dollar value of the Debentures being converted, compounded
daily, per each day after the 4th business day following the conversion date
that the Common Stock is not delivered to Dutchess.
The number of shares included in this Registration Statement with respect to the
Debenture is 1,692,308 This is based upon the fixed conversion price of $.13.
EVENTS OF DEFAULT
We will be considered in default if any of the following events occurs:
(a) we do not make a Payment of the principal of the Debenture by conversion
into Common Stock within five (5) business days of the Maturity Date, upon
redemption or otherwise;
13
(b) we do not make a payment, other than a payment of principal, for a period of
three business days thereafter;
(c) any of our representations or warranties contained in the Subscription
Agreement (executed in connection with the Debenture Agreement) or the Debenture
were false when made or we fail to comply with any of our the agreements
executed in connection with Debenture and such failure continues for a period of
five (5) business days, and such default in not cured within five (5) business
days after the receipt of notice from Dutchess;
(d) we, pursuant to or within the meaning of any Bankruptcy Law; (i) commences a
voluntary case; (ii) consents to the entry of an order for relief against us in
an involuntary case; (iii) consents to the appointment of a Custodian on our
behalf or for all or substantially all of our property or (iv) makes a general
assignment for the benefit of our creditors or (v) a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for
relief against us in an involuntary case; (B) appoints a Custodian on our behalf
or for all or substantially all of our property or (C) orders our liquidation,
and the order or decree remains unstayed and in effect for sixty (60) calendar
days;
(e) our Common Stock is suspended or no longer listed on any recognized exchange
including electronic over-the-counter bulletin board for in excess of three
consecutive Trading Days;
(e) we violate any terms and conditions of the Registration Rights Agreement
executed by us in connection with the Debenture Agreement;
(f) the Registration Statement, of which this Prospectus forms a part,
underlying the Debenture is not declared effective by the SEC within twelve (12)
months of the Issuance Date.
In the Event of Default, Dutchess may among other things:
(a) elect to secure a portion of our assets not to exceed 200% of the Face
Amount of the Note, in Pledged Collateral;
(b) elect to garnish Revenue from us in an amount that will repay the Holder on
the payment schedule set forth above;
(c) exercise its right to increase the Face Amount of the Debenture by ten
percent (10%) as an initial penalty and for each Event of Default under the
Debenture;
(d) elect to increase the Face Amount by two and one-half percent (2.5%) per
month (pro-rata for partial periods) paid as a penalty for liquated damages
which will be compounded daily;
LIMITATION ON AMOUNT OF CONVERSION AND OWNERSHIP
The Debenture provides that Dutchess shall not be entitled to convert that
amount of Debenture into common stock, which when added with the sum of the
number of shares beneficially owned by Dutchess would exceed 4.99% of the number
of shares of our common stock outstanding on the conversion date.
14
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 0.25
2004
First Quarter 0.65 0.20
Second Quarter 1.50 0.35
Third Quarter 0.55 0.16
Fourth Quarter 0.76 0.16
2005
First Quarter 0.75 0.21
Second Quarter 0.48 0.15
Third Quarter 0.48 0.22
Fourth Quarter 0.30 0.14
HOLDERS
As of January 4, 2006, we had approximately 226 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.
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."
15
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. This may be as a result of them giving their own products a priority
since they receive a higher commission structure. 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 Dutchess
Private Equity, LLP, discussed below 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. Additionally our ability to raise capital
from sources other than Dutchess may be affected by our minimal revenues, the
losses that we incur, our stockholders deficiency 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.
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.
As a result of the minimal revenues currently being achieved by the Company, 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 Dutchess Private Equity, LLP , the
proceeds of which may 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. We had previously entered into an
equity line with Fusion Capital but do not intend to utilize it and will use the
equity line entered into with Dutchess.
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 organizational 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 as stock based transactions for
options, warrants and common stock at times have improperly recorded and
required audit adjustments proposed 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.
16
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.
REVENUE RECOGNITION
Revenue is recognized at the time the administrative services are performed and
provided, or made available to its customers. Services are billed monthly based
upon predetermined percentage of the total assets included in the respective
pre-need funeral master trust fund.
ACCOUNTING FOR STOCK-BASED COMPENSATION
We account for options granted to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and comply with the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense
is recognized based on the difference, if any, on the date of grant between the
estimated market value of the Company's stock and the 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
Corrections 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.
17
RESULTS OF OPERATIONS
Three Months Ended September 30, 2005 compared to the same period in 2004
Net sales for the three months ended September 30, 2005 were $ 85,490 as
compared to $ 55,586 for the three months ended September 30, 2004, almost all
of which was which was generated by ADS. Although National Preplanning has
entered into several strategic relationships which allows for the marketing of
its products by third parties, the marketing of NPI's products has not resulted
in any material revenues being achieved. ADS seeks to increase its sales lost as
a result of losing the business from its largest client during the 3rd quarter
of 2003, Service Corporation International, which brought all of its trust
assets that were administered by third parties in-house and is close to
achieving net income. Although ADS has achieved positive cash flow it still is
incurring a net loss and seeks to increase its revenues to halt this loss.
Operating expenses for the three months ended September 30, 2005 were $ 353,361
of which $ 235,636 was generated by NPI, $ 29,166 was generated by Walker, and $
88,559 was generated by ADS. Operating expenses were composed of $ 155,485 of
compensation expense, $26,102 of professional fees, consulting fees of $ 54,000,
general and administrative expense of $ 99,924 and depreciation of $17,850.
Operating expenses for the three months ended September 30, 2004 were $ 437,710
of which $ 284,368 was incurred by NPI, and $ 134,175 was incurred by ADS and
19,167 was incured by Walker.
The loss from continuing operations for the three months ended September 30,
2005 was $ 316,488 as compared to $ 453,951 for the three months ended September
30, 2004. The loss from continuing operation for the three months ended
September 30, 2005 was composed of a loss of $ 3,069 from ADS, a loss of $
284,253 from NPI, and a loss of $ 29,166 from Walker International Industries.
This compares with the loss incurred for the three months ended September 30,
2004 of $ 453,951 of which $ 134,000 was incurred by ADS and $279,492 was
incurred by NPI and $ 40,459 was attributable to 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 September 30, 2005 was $48,617 as
compared to interest expense for the three months ended September 30, 2004 of $
71,827. Interest expense is derived by the costs of borrowing funds. The
decrease is due to the savings of interest expense due to the conversion of $
795,000 10% Convertible Promissory Notes to equity.
As a result of the foregoing, we incurred a net loss of $316,488 for the three
months ended September 30, 2005 or $.02 per share, compared to a net loss of
$454,459 for the three months ended September 30, 2004 or $.06 per share.
Nine Months Ended September 30, 2005 compared to the same period in 2004
Net sales for the nine months ended September 30, 2005 were $ 242,583 all of
which was generated by ADS. Net sales for the nine months ended September 30,
2004 were $ 156,377, almost all of which was generated by ADS. Although National
Preplanning has entered into several strategic relationships which allows for
the marketing of its products by third parties, the marketing of NPI's products
has not resulted in any material revenues being achieved. ADS seeks to increase
its sales lost as a result of losing the business from its largest client,
Service Corporation International, which brought all of its trust assets that
were administered by third parties in-house and is close to achieving net
income. Although ADS has achieved positive cash flow it still is still incurring
a net loss and seeks to increase its revenues to halt this loss.
Operating expenses for the nine months ended September 30, 2005 were $ 1,400,198
of which $ 1,016,558 was generated by NPI, $ 296,474 was generated by ADS and $
87,166 was generated by Walker International Industries. Operating expenses for
the nine months ended September 30, 2004 were $ 1,288,917 of which $ 789,000 was
generated by NPI, $ 81,917 was generated by Walker and $ 418,000 was generated
by ADS. Of the expenses that were incurred for the nine months ended September
30, 2005, $ 483,184 was compensation expense, $175,285 were professional fees, $
396,100 were related to consulting expenses, $ 278,012 were general and
administrative expenses and $67,617 was depreciation expense.
Interest expense for the nine months ended September 30, 2005 was $ 311,569 as
compared to interest expense for the nine months ended September 30, 2004 of $
123,743. The increase from the prior year relates to our interest expense
related to the equity conversion of our convertible debt and interest related to
equity.
As a result of the foregoing, we incurred a net loss of $ 2,402,977 for the nine
months ended September 30, 2005 or $ (.18 )per share as compared to a net loss
of $ 1,318,278 for the nine months ended September 30, 2004 or $ (.17) per
share. Of the loss for the nine months ended September 30, 2005, a loss of $
2,261,931 can be attributed to NPI (of which $933,793 debt conversion charge), a
loss of $ 53,891 can be attributed to ADS and a loss of $ 87,155 can be
attributable to Walker International Industries as compared to the nine months
ended September 30, 2004 loss of $1,318,278 where a $849,430 loss can be
attributable to NPI, a loss of $ 143,484 can be attributable to Walker and a
loss of $ 263,369 can be attributable to ADS and $61,995 is attributable for the
discontinuance of Kelly Color. Of the loss attributable to NPI for the nine
months ended September 30, 2005 $ 933,793 is attributable the debt conversion
expense related to the conversion of $ 745,000 10% Convertible Promissory Notes
and $ 311,569 is attributable to interest expense related to other borrowings.
18
YEAR ENDED DECEMBER 31, 2004 AND 2003
Net sales for the year ended December 31, 2004 and 2003 were approximately
$240,810 and $1,025,426 , 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 $1,862,224, of which $1,410,665 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 have negative working capital of $1,569,072 at September 30, 2005 compared to
negative working capital of $1,858,265 at December 31, 2004. A working capital
deficiency or negative working capital results when the Company's current
liabilities exceeds its current assets. Our working capital deficiency is
principally the result of borrowings which are currently due or will become due
within the next 12 months.
Net cash used in operating activities was $ 450,760 for the nine months ended
September 30, 2005 compared to net cash used in operating activities of $
897,012 for the nine months ended September 30, 2004. The decrease is primarily
a result of our closing of the Kelly Color operations in addition to less
expenses incurred at our American DataSource unit due to decreased payroll and
operational expense, including lower rental costs and decreased payroll and
marketing expense in our National Preplanning subsidiary.
Net cash used in investing activities for the nine months ended September 30,
2005 was $ 803 as compared with $ 14,806 for the nine months ended September 30,
2004. During both nine month periods ending September 30, 2005 and September 30,
2004 respectively investing activities were limited to the purchase of property
and equipment.
Net cash provided by financing activities was $ 470,529 for the nine months
ended September 30, 2005 as compared with $441,211 for the nine months ended
September 30, 2004. During the nine months ended September 30, 2005 the Company
sold common stock of $ 100,000, bridge notes in the amount of $ 326,000 and a
note payable in the amount of $ 100,000. As a result of these activities, our
cash and cash equivalents positions were $ 98,294 at September 30, 2005 as
compared to $ 79,329 as of December 31, 2004.
In September 20, 2005, the Company entered into a Modification Agreement which
modified certain terms of Promissory Notes outstanding between the Company and a
lender ("Lender"). Pursuant to this Modification Agreement the maturity dates of
certain Promissory Notes dated May 22, 2004 and August 5, 2004 were extended to
a maturity date of May 15, 2006 with certain principal payments required to be
made by the 15th of the months of January-May, 2006. Additionally 175,000
warrants that were previously issued carrying an exercise price of $ .45
received a reduced exercise price of $ .30. In addition, another 17,500 warrants
to acquire the Company's common stock carrying an exercise price of $ .30 were
issued to the Lender.
19
The Company additionally entered into another 10% Promissory Note for $125,000,
with the Lender having a maturity date of May 15, 2006. Lender was issued
175,000 warrants carrying an exercise price of $ .30.
We intend to use the Dutchess equity line to repay outstanding indebtedness,
for potential acquisitions and for working capital. Failure to have this
registration statement to be declared effective will prevent us from drawing on
the full amount of equity outlined in the agreement and at this point it is
impossible to quantify how much if any capital will be available to us. We are
currently in default with respect to approximately $ 155,000 in promissory
notes.
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 our 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 nine months ended September 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 nine and three months
ended September 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 repaid out of proceeds from our equity line with Dutchess.
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 $147,700 outstanding
under the Line of Credit as of September 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. On
September 20, 2005 the Company entered into a Modification Agreement which
modified certain terms of the 6% Promissory Notes outstanding. Pursuant to this
Modification Agreement the maturity dates of the Promissory Notes dated May 22,
2004 and August 4, 2004 were extended to a maturity date of May 15, 2006.
Additionally 175,000 warrants that were previously issued carrying an exercise
price of $ .45 received a reduced exercise price of $ .30. Using the
Black-Scholes option pricing model an additional charge was not required for the
modification of the 175,000 previously issued warrants. The bridge notes have a
stated repayment plan as follows:
- --------------------------------------------
Maturity Date Payment
- --------------------------------------------
January 15, 2006 $ 30,000
February 15, 2006 40,000
March 15, 2006 50,000
April 15, 2006 60,000
May 15, 2006 70,000
--------
$250,000
========
- --------------------------------------------
On September 20, 2005, the Company also granted to the note holder 17,500
warrants to purchase common stock at an exercise price of $0.30 per share as
consideration for the receipt of $125,000 (bridge note dated September 20,
2005), and 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 using the
Black-Scholes option pricing model has nominal value.
20
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
September 30, 2005, we repaid the officer and stockholder a total of $36,500 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. As a result of the Dutchess equity line discussed below, we
have no current intention to issue shares under the Fusion agreement. On
December 23, 2005, we entered into an Investment Agreement with Dutchess as more
fully described herein. Upon the effectiveness of the registration statement, we
have the right to control the amount of stock sold, if any, subject to certain
limitations, to Dutchess. However, our ability to control the timing and amount
of stock sold may be affected by limitations on the percentage of stock Dutchess
will hold at particular times. Consequently, if Dutchess cannot sell our shares
due to a lack of liquidity in our common stock, our ability to be able to obtain
money from Dutchess Capital for acquisitions or to pay down our current debt may
be hindered or limited.
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 Dutchess equity financing 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.
21
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. In this instance,
insurance agents that work for funeral homes in New Jersey sold pre-need
insurance policies to individuals to cover the costs of their future funerals.
These insurance agents were licensed with certain insurance carriers who issued
said policies through NPI's licensed arrangements with these carriers.
Consequently, NPI shared commissions earned from the sale of these policies. NPI
is not actively marketing in conjunction with these New Jersey insurance agents
and does not expect to receive any additional commission revenues from this
relationship.
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.
Additionally our ability to raise capital from sources other than Dutchess 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
(including under our Investment Agreement with Dutchess described below), debt
and cash, or a combination of such forms of consideration. Potential
acquisitions will have to be structured to take into account 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 Dutchess transactions, the stock price of our common
stock, and our ability to service any debt we may incur.
We believe that our operating results may fluctuate greatly quarter to quarter
due to several factors, including the success of our merger and acquisition
strategy and the impact of any increases in our results of operations as we
pursue new business in the death care services industry.
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 Dutchess 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 Dutchess 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.
22
RECENT DEVELOPMENTS
Debt Modification
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.
Dutchess Financing Transaction
Convertible Debenture
On December 23, 2005, we entered into an agreement providing for the sale of
$220,000 in principal amount of its five-year convertible debentures to Dutchess
Private Equities Fund, II, L.P. The convertible debentures bear interest at 12%
per annum. The first $95,000 (less expenses) was funded immediately with an
additional $125,000 to be funded immediately upon filing of the registration
statement of which this prospectus forms a part. Dutchess may convert the
convertible debentures into shares of our common stock any time at a fixed
conversion price of $13. Our obligation to repay the amounts outstanding under
the convertible debentures is secured by substantially all of our assets.
In connection with the convertible debentures, we also granted to Dutchess
warrants to purchase 423,077 shares of common stock at $0.13 per share. The
warrants may be exercised for a period of five years and the exercise price is
subject to standard adjustment upon the occurrence of certain events, including,
without limitation, upon our consolidation, merger or sale of all of
substantially all of our assets, a reclassification of our common stock, or any
stock splits, combinations or dividends with respect to our common stock.
Investment Agreement
Also on December 23, 2005, we entered into an Investment Agreement with Dutchess
Private Equities Fund, L.P. providing for the sale and issuance to Dutchess from
time to time of up to $10,000,000 in shares of our common stock for a period of
up to 36 months from the date the registration statement is declared effective.
The maximum number of shares that we may put to Dutchess at any one time shall
be equal to, at our election, either: (A) 200% of the average daily volume in
the U.S. market of our common stock for the ten trading days prior to the date
we notify Dutchess of our intent to sell shares to Dutchess, multiplied by the
average of the three daily closing bid prices immediately preceding the date of
notification, or (B) a number of shares having a value of $200,000. We may not
submit a notice until after the completion of a previous sale under the
Investment Agreement. The purchase price for the shares to be sold shall be
equal to 93% of the lowest closing best bid price of the Common Stock during the
five-day period following the date we deliver a notice.
We are obligated to file a registration statement by January 13, 2006 for the
registration of the shares of Common Stock issuable upon conversion of the
convertible debentures, exercise of the warrants and upon a sale under the
Investment Agreement. We are further obligated to use our best efforts to cause
the SEC to declare the registration statement effective within 90 days after the
filing date of the registration statement. If we do not file the registration
statement by January 13, 2006, we will be obligated to pay liquidated damages to
Dutchess in an amount equal to 2% of the principal amount of the debenture
outstanding, pro rata, for every 15 days which such registration statement has
not been filed. In addition, if the registration statement is not filed by the
filing date, the conversion price of the convertible debenture will decrease by
10% of and continue to decrease by 10% for each 15 day calendar period the
registration statement goes without filing. If the registration statement is
not declared effective within 90 days of the filing date, we are obligated to
pay liquidated damages to Dutchess in an amount equal to 2% of the principal
amount of the debenture outstanding, pro rata, for every 30 days which such
registration statement has not been declared effective.
23
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 DataSource 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.
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
24
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.
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 nine months ended September 30, 2005, approximately
94% of ADS's revenues were generated by three customers: American Funeral Plan,
Carriage Services, Inc. and Texas Prepaid Funeral Fund.
25
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.
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.
26
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.
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.
27
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.
DESCRIPTION OF PROPERTY
We maintain our principal office at 990 Stewart Avenue, Suite 650, 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 2,150 square feet of office space
at our principal office. The monthly rent is $4,300. 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 currently expires
in December 2008. 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.
28
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.
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.
29
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.SMr. 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.
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, 2004, 2003 and 2002 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 - - - -
- ------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
<FN>
(1) Mr. Segal became our president and chief executive officer in March 2002 and
our chief financial officer in October 2002.
30
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.
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.
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.
31
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.
The Fusion Capital Agreement provides limitations on the percentage of stock
Fusion will hold at particular times and in no event may Fusion hold greater
than 9.9% of the outstanding stock of the Company. Consequently, if Fusion
cannot sell the shares due to the lack of liquidity in the common stock of the
Company, the Company's ability to be able to obtain money from Fusion Capital
for acquisitions or to pay down the Company's current debt may be hindered or
limited. As a result of our agreement with Dutchess, we have no intention to
obtain capital through the Fusion equity line.
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 January 6,, 2006:
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.
NAME AND ADDRESS NUMBER OF PERCENTAGE OF
OF OWNER TITLE OF CLASS SHARES OWNED(1) CLASS
- --------------------------------------------------------------------------------------
Mitchell S. Segal Common Stock 1,839,670 13.2%
990 Stewart Ave., Suite 650
Garden City, NY 11530
James M. Lucas, Sr. Common Stock 459,960 3.3%
Ensure, Inc.
517 North Sylvania Ave.
Fort Worth, TX 76111
Peter Walker Common Stock 1,052,390(3) 7.6%
990 Stewart Ave., Suite 650
Garden City, NY 11530
All Officers and Directors Common Stock 3,409,020 24.1%
as a group (3 persons)
James M. Lucas, Jr. Common Stock 689,940 5.0%
Ensure, Inc.
517 North Sylvania Ave.
Fort Worth, TX 76111
Fusion Capital Fund II, LLC Common Stock 854,702 (4) 6.1%
222 Merchandise Mart Plaza
Suite 9-112
Chicago, IL 60654
David L. Cohen Common Stock 1,263,841 (5) 9.1%
1800 Rockaway Avenue
Hewlett, NY 11557
<FN>
(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 January 6, 2006 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 13,922,220 shares issued and outstanding on January 6, 2006.
(3) Includes (a) 558,620 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.
(4) Steven Martin and Joshua Scheinfeld retain voting and investment control
over the shares held by Fusion Capital Fund.
(5) 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 January 4, 2006, there were 13,922,220 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. We have 423,077
warrants outstanding exercisable at $0.13 per share that expire in December
2010. We have 187,500 warrants outstanding exercisable at $0.16 that expire in
February 2008. We have 93,750 warrants outstanding exercisable at $0.71 that
expire in February 2008.
CONVERTIBLE SECURITIES
There are currently $645,000 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.
An additional $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 February 15, 2006 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.
The balance of $220,000 consists of convertible debentures. On December 23,
2005, we entered into an agreement providing for the sale of $220,000 in
principal amount of its five-year convertible debentures to Dutchess Private
Equities Fund, II, L.P. The convertible debentures bear interest at 12% per
annum. The first $95,000 (less expenses) was funded immediately with an
additional $125,000 to be funded immediately upon filing of the registration
statement of which this prospectus forms a part. Dutchess may convert the
convertible debentures into shares of our common stock any time at a fixed
conversion price of $.13. Our obligation to repay the amounts outstanding
under the convertible debentures is secured by substantially all of our assets.
If not converted, the debentures are to be repaid in monthly installments until
paid in full by July 1, 2006.
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.
PLAN OF DISTRIBUTION
The selling stockholder, or its pledgees, donees, transferees, or any of its
successors in interest selling shares received from the named selling
stockholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus (all of whom may be a selling
stockholder) may sell the common stock offered by this prospectus from time to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed or quoted at the time of sale, in the
over-the-counter market, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at prices otherwise
negotiated. The selling stockholders may sell the common stock by one or more of
the following methods, without limitation:
o Block trades in which the broker or dealer so engaged will attempt to sell the
common stock as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o An exchange distribution in accordance with the rules of any stock exchange on
which the common stock is listed;
o Ordinary brokerage transactions and transactions in which the broker solicits
purchases;
o Privately negotiated transactions;
o In connection with short sales of company shares;
o Through the distribution of common stock by any selling stockholder to its
partners, members or stockholders;
o By pledge to secure debts of other obligations;
o In connection with the writing of non-traded and exchange-traded call options,
in hedge transactions and in settlement of other transactions in standardized or
over-the-counter options;
o Purchases by a broker-dealer as principal and resale by the broker-dealer for
its account; or
o In a combination of any of the above.
These transactions may include crosses, which are transactions in which the same
broker acts as an agent on both sides of the trade. The selling stockholders may
also transfer the common stock by gift. We do not know of any arrangements by
the selling stockholders for the sale of any of the common stock.
The selling stockholders may engage brokers and dealers, and any brokers or
dealers may arrange for other brokers or dealers to participate in effecting
sales of the common stock. These brokers or dealers may act as principals, or as
an agent of a selling stockholder. Broker-dealers may agree with a selling
stockholder to sell a specified number of the stocks at a stipulated price per
share. If the broker-dealer is unable to sell common stock acting as agent for a
selling stockholder, it may purchase as principal any unsold shares at the
stipulated price. Broker-dealers who acquire common stock as principals may
thereafter resell the shares from time to time in transactions in any stock
exchange or automated interdealer quotation system on which the common stock is
then listed, at prices and on terms then prevailing at the time of sale, at
prices related to the then-current market price or in negotiated transactions.
Broker-dealers may use block transactions and sales to and through
broker-dealers, including transactions of the nature described above. The
selling stockholders may also sell the common stock in accordance with Rule 144
or Rule 144A under the Securities Act, rather than pursuant to this prospectus.
In order to comply with the securities laws of some states, if applicable, the
shares of common stock may be sold in these jurisdictions only through
registered or licensed brokers or dealers.
35
From time to time, one or more of the selling stockholders may pledge,
hypothecate or grant a security interest in some or all of the shares owned by
them. The pledgees, secured parties or person to whom the shares have been
hypothecated will, upon foreclosure in the event of default, be deemed to be
selling stockholders. The number of a selling stockholder's shares offered under
this prospectus will decrease as and when it takes such actions. The plan of
distribution for that selling stockholder's shares will otherwise remain
unchanged. In addition, a selling stockholder may, from time to time, sell the
shares short, and, in those instances, this prospectus may be delivered in
connection with the short sales and the shares offered under this prospectus may
be used to cover short sales.
To the extent required under the Securities Act, the aggregate amount of selling
stockholders' shares being offered and the terms of the offering, the names of
any agents, brokers, dealers or underwriters, any applicable commission and
other material facts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or a post-effective amendment to the
registration statement of which this prospectus is a part, as appropriate. Any
underwriters, dealers, brokers or agents participating in the distribution of
the common stock may receive compensation in the form of underwriting discounts,
concessions, commissions or fees from a selling stockholder and/or purchasers of
selling stockholders' shares, for whom they may act (which compensation as to a
particular broker-dealer might be less than or in excess of customary
commissions). Neither we nor any selling stockholder can presently estimate the
amount of any such compensation.
Dutchess and any underwriters, brokers, dealers or agents that participate in
the distribution of the common stock are "underwriters" within the meaning of
the Securities Act, and any discounts, concessions, commissions or fees received
by them and any profit on the resale of the securities sold by them may be
deemed to be underwriting discounts and commissions. If a selling stockholder
is deemed to be an underwriter, the selling stockholder may be subject to
certain statutory liabilities including, but not limited to Sections 11, 12 and
17 of the Securities Act and Rule 10b-5 under the Exchange Act. Selling
stockholders who are deemed underwriters within the meaning of the Securities
Act will be subject to the prospectus delivery requirements of the Securities
Act. The SEC staff is of a view that selling stockholders who are registered
broker-dealers or affiliates of registered broker-dealers may be underwriters
under the Securities Act. We will not pay any compensation or give any discounts
or commissions to any underwriter in connection with the securities being
offered by this prospectus.
A selling stockholder may enter into hedging transactions with broker-dealers
and the broker-dealers may engage in short sales of the common stock in the
course of hedging the positions they assume with that selling stockholder,
including, without limitation, in connection with distributions of the common
stock by those broker-dealers. A selling stockholder may enter into option or
other transactions with broker-dealers, who may then resell or otherwise
transfer those common stock. A selling stockholder may also loan or pledge the
common stock offered hereby to a broker-dealer and the broker-dealer may sell
the common stock offered by this prospectus so loaned or upon a default may sell
or otherwise transfer the pledged common stock offered by this prospectus.
The selling stockholders and other persons participating in the sale or
distribution of the common stock will be subject to applicable provisions of the
Exchange Act, and the rules and regulations under the Exchange Act, including
Regulation M. This regulation may limit the timing of purchases and sales of any
of the common stock by the selling stockholders and any other person. The
anti-manipulation rules under the Exchange Act may apply to sales of common
stock in the market and to the activities of the selling stockholders and their
affiliates. Regulation M may restrict the ability of any person engaged in the
distribution of the common stock to engage in market-making activities with
respect to the particular common stock being distributed for a period of up to
five business days before the distribution. These restrictions may affect the
marketability of the common stock and the ability of any person or entity to
engage in market-making activities with respect to the common stock.
We have agreed to indemnify the selling stockholder and any brokers, dealers and
agents who may be deemed to be underwriters, if any, of the common stock offered
by this prospectus, against specified liabilities, including liabilities under
the Securities Act. The selling stockholder has agreed to indemnify us against
specified liabilities.
The issued and outstanding common stock, as well as the common stock to be
issued offered by this prospectus was originally, or will be, issued to the
selling stockholders pursuant to an exemption from the registration requirements
of the Securities Act, as amended. We agreed to register the common stock issued
or to be issued to the selling stockholders under the Securities Act, and to
keep the registration statement of which this prospectus is a part effective
until all of the securities registered under this registration statement have
been sold. We have agreed to pay all expenses incident to the registration of
the common stock held by the selling stockholders in connection with this
offering, but all selling expenses related to the securities registered shall be
borne by the individual holders of such securities pro rata on the basis of the
number of shares of securities so registered on their behalf.
We cannot assure you that the selling stockholders will sell all or any portion
of the common stock offered by this prospectus. In addition, we cannot assure
you that a selling stockholder will not transfer the shares of our common stock
by other means not described in this prospectus.
We cannot assure you that the selling stockholders will sell all or any portion
of the common stock offered by this prospectus. In addition, we cannot assure
you that a selling stockholder will not transfer the shares of our common stock
by other means not described in this prospectus.
36
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.
- -----------------------------------------------------------------------------------------------------------------------------------
Common Shares Percentage of Common Shares Issuable Shares Beneficial Ownership
Beneficially Owned Outstanding upon Exercise of Registered in after this Offering(2)
by Selling Shares Securities forming this Offering
Shareholder Before Beneficially part of this Offering
Offering (1) owned Before
Name of Selling Shareholder Offering
- -----------------------------------------------------------------------------------------------------------------------------------
Number of Percent(3)
Shares
- -----------------------------------------------------------------------------------------------------------------------------------
Dutchess Private Equities 694,718(5) 4.99% 51,833,334(6) 51,833,334 -0- 0.0%
Fund II, LLP (4)
J.P. Turner & Associates 187,500(7) 1.3% 187,500 187,500 -0-
Anthony & Jacqueline Towell 12,500(7) * 12,500 12,500 -0-
Flavio Marquez 18,750(7) *
Adrian Kimberly 6,250(7) * 6,250 6,250 -0-
Roy Bento 6,250(7) * 6,250 6,250 -0-
Mickey Robinson 6,250(7) * 6,250 6,250 -0-
Ben Manny 6,250(7) * 6,250 6,250 -0-
Patrick Decavaignac 6,250(7) * 6,250 6,250 -0-
Daniel Decavaignac 6,250(7) * 6,250 6,250 -0-
Deanna Decavaignac 6,250(7) * 6,250 6,250 -0-
David Rosen 6,250(7) * 6,250 6,250 -0-
Patrick & Virginia Lavelle 6,250(7) * 6,250 6,250 -0-
Jason Halpern 6,250(7) * 6,250 6,250 -0-
<FN>
* Less than 1%.
(1) Ownership as of January 6, 2006, for the selling stockholders based on information provided by the selling stockholders or
known to us.
(2) Because the selling stockholders may offer all or only some portion of the shares of common stock to be registered, no estimate
can be given as to the amount or percentage of these shares of common stock that will be held by the selling shareholder upon
termination of the offering. Accordingly, it is assumed that all of the shares of common stock offered pursuant to this prospectus
will be sold, although the selling stockholders are under no obligation known to us to sell any shares of common stock at this time.
(3) A total of 13,922,220 shares of common stock were issued and outstanding as of January 6, 2006.
(4) Michael Novielli and Douglas Leighton, the managing members of Dutchess Capital Management, LLC, the general partner of
Dutchess Private Equities Fund II, LLP share dispositive and voting power with respect to shares held by Dutchess Private Equities
Fund II, LLP.
(5) The transaction documents with Dutchess limit to 4.99% that entity's percentage ownership of our issued and outstanding common
stock.
(6) Represents (i)50,000,000 shares of common stock that potentially may be issued upon the draw down of $10,000,000 on our equity
line, (ii) all of the common stock that potentially may be issued upon the conversion of $220,000 convertible debenture at a fixed
conversion price of $.13 per share in an aggregate of 1,692,308 shares, and (iii) all of the common stock that potentially may
be issued upon the exercise of 423,077 common share purchase warrants. Although we may issue more than 50,000,000 under the
Investment Agreement, this figure represents the maximum number we are contractually bound to register herewith. The Debenture
Agreement contains contractual restrictions on beneficial share ownership limiting Dutchess' beneficial ownership to 4.99%.
(7) Represents shares issuable upon exercise of warrants.
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 appear 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.
38
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.
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-21
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Condensed Consolidated Balance Sheet (Unaudited) as of September 30, 2005 F-21
- -----------------------------------------------------------------------------------------------
Condensed Consolidated Statements of Operations (Unaudited) for the Three and
Nine Months Ended September 30, 2005 and 2004 F-22
- -----------------------------------------------------------------------------------------------
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 2005 and 2004 F-23
- -----------------------------------------------------------------------------------------------
Notes to Condensed Consolidated Financial Statements (Unaudited) F-25 to F-33
- -----------------------------------------------------------------------------------------------
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 Deficiency
----------- ----------- ----------- ----------- ----------- -----------
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)
=========== =========== =========== =========== =========== ===========
<FN>
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
=============== ================
<FN>
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%
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
F-9
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(continued)
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.
F-14
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(continued)
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.
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 $62,500 were made by a stockholder of
the Company who is also an officer. These advances are non-interest bearing and
have no definitive repayment terms. As of September 30, 2005, the amount due
the officer-stockholder is $36,450.
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 (78%)
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 December 2008.
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.
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
F-18
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(continued)
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. This agreement was terminated on June 1,
2005 as a result of our due diligence analysis of the operations of the Company,
its clients, current operations as well as its potential business.
F-20
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2005
(Unaudited)
ASSETS
------
Current assets -
Cash $ 98,294
Accounts receivable, net 28,426
Prepaid expenses and other current assets 1,499
-----------
Total current assets 128,219
-----------
Deferred financing costs, net 35,540
Property and equipment, net 190,856
-----------
Total assets $ 354,615
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities -
Line of credit, bank $ 147,704
Accounts payable and accrued expenses 472,531
Convertible bridge notes payable,
net of debt discount of $46,825 703,175
Notes payable 205,000
10% Senior subordinated secured convertible promissory notes 50,000
Due to officer-stockholder 36,450
Accrued interest 66,991
Discontinued liabilities 15,440
-----------
Total current liabilities 1,697,291
-----------
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 6,298,476
Deferred offering and compensation costs (494,321)
Accumulated deficit (8,515,553)
-----------
Total stockholders' deficiency (1,342,676)
-----------
Total liabilities and stockholders' deficiency $ 354,615
===========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-21
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net revenues $ 85,490 $ 55,586 $ 242,583 $ 156,377
------------ ------------ ------------ ------------
Operating expenses
Compensation 155,485 191,913 483,184 567,399
Professional fees 26,102 16,813 175,285 63,007
Consulting fees 54,000 15,000 396,100 45,000
Depreciation 17,850 61,474 67,617 87,039
General and administrative 99,924 152,510 278,012 526,472
------------ ------------ ------------ ------------
Total Operating Expenses 353,361 437,710 1,400,198 1,288,917
------------ ------------ ------------ ------------
Operating loss (267,871) (382,124) (1,157,615) (1,132,540)
Debt conversion expense -- -- (933,793) --
Interest expense (48,617) (71,827) (311,569) (123,743)
------------ ------------ ------------ ------------
Loss from continuing operations (316,488) (453,951) (2,402,977) (1,256,283)
Loss from discontinued operations -- (508) -- (61,995)
------------ ------------ ------------ ------------
Net loss $ (316,488) $ (454,459) $ (2,402,977) $ (1,318,278)
============ ============ ============ ============
Net Loss per basic and diluted
common shares
Continuing operations ($0.02) ($0.06) ($0.18) ($0.16)
Discontinued operations -- ($0.00) -- ($0.01)
------------ ------------ ------------ ------------
Net loss per basic
and diluted common share $ ($0.02) ($0.06) ($0.18) ($0.17)
============ ============ ============ ============
Weighted average number of
common shares outstanding
basic and diluted 13,687,220 7,733,032 13,476,483 7,612,860
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-22
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine
Months
Ended September 30,
---------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $(2,402,977) $(1,256,283)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 67,617 87,039
Compensatory element of stock issuances 105,000 106,200
Amortization of deferred compensation 262,500 --
Debt conversion expense 933,793 --
Write-down of assets 20,806 --
Amortization of deferred financing cost 214,461 55,918
Accretion of debt discount 31,375 51,793
Changes in operating assets and liabilities:
Accounts receivable, net (7,914) 3,123
Prepaid expenses and other current assets 4,201 3,496
Other assets 9,949 --
Accounts payable and accrued expenses 244,685 (14,916)
Accrued interest 65,744 66,618
----------- -----------
Net cash used in operating activities (450,760) (897,012)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (61,995)
----------- -----------
Change in -
Assets from discontinued operations -- 39,233
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 (803) (14,806)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit, bank 6,829 10,863
Advances from officer-stockholder 13,450 50,000
Repayment of advances from stockholder (27,000) --
Proceeds from sale of bridge notes 326,000 250,000
Fees paid in connection with debt acquisition (48,750) --
Proceeds from notes payable 100,000 --
Principal repayment of notes payable -- (19,652)
Proceeds from sale of common stock 100,000 150,000
----------- -----------
Net cash provided by financing activities 470,529 441,211
----------- -----------
Net increase (decrease) in cash and cash
equivalents 18,966 (487,399)
Cash and cash equivalents - beginning of period 79,328 587,626
----------- -----------
Cash and cash equivalents - end of period $ 98,294 $ 100,227
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period
for:
Interest $ -- $ 2,257
=========== ===========
Income taxes $ -- $ --
=========== ===========
F-23
- -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 $375,000 bridge notes $ 28,500 $ --
=========== ===========
187,500 warrants granted to agent in connection
with sale of $375,000 bridge notes $ 57,600 $ --
=========== ===========
175,000 warrants granted in connection with
the sale of $125,000 of bridge notes $ 36,100 $ --
=========== ===========
17,500 warrants granted in connection with
the extension of $250,000 of bridge notes $ 3,600 $ --
=========== ===========
105,000 warrants granted in connection with
the sale of $125,000 of bridge notes $ -- $ 31,250
=========== ===========
70,000 warrants granted in connection with
the sale of $125,000 of bridge notes $ -- $ 35,000
=========== ===========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-24
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 in the United States of America have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the accompanying condensed consolidated financial statements include all
adjustments (consisting of normal, recurring adjustments) necessary to make the
Company's financial position, results of operations and cash flows not
misleading as of September 30, 2005 and for all periods presented. The results
of operations for the nine months ended September 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 for for the year ended December
31, 2004 as amended on October 21, 2005 included elsewhere in this filing.
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 nine months ended September 30, 2005, the Company incurred a
net loss of $2,402,977 and, at September 30, 2005, had a working capital
deficiency of $1,569,072, an accumulated deficit of $8,515,553 and a
stockholders' deficiency of $1,342,676.
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. The Company believes that the cash flows from a combination of any
future sale of the Kelly Color property, the successful execution of its
marketing plans resulting in increased sales and any additional capital that the
Company may obtain through sales of its equity and debt securities will be
sufficient to pay that portion of its debt that is due within the next twelve
months, as well as to fund the Company's operations. 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.
As discussed further in Note 8 to the financial statements, the Company has
entered into an agreement with Fusion Capital Fund II, LLC ("Fusion Capital")
that provides for the sale to Fusion Capital of $6,000,000 of common stock of
the Company. The Company does not intend to use the equity line it has with
Fusion Capital, but rather intends to use the equity line with Dutchess. The
Dutchess agreement provides limitations on the percentage of stock Dutchess will
hold at particular times
F-25
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
and in no event may Dutchess hold greater than 4.9% of the outstanding common
stock of the Company. Consequently, if Dutchess cannot sell the shares of the
Company due to the lack of liquidity in the common stock of the Company, the
Company's ability to be able to obtain money from Dutchess Capital for
acquisitions or to pay down the Company's current debt may be hindered or
limited. Additionally, the Company's ability to raise capital outside of the
Dutchess transaction may be affected by minimal revenues, the losses that the
Company incurs and the Company's stockholders deficiency. There can be no
assurance that the Company will be successful in any of its plans as discussed.
To the extent that the Company is unsuccessful in its plans to increase its cash
position, the Company may find it necessary to further curtail its operations
and possible future acquisitions. These matters raise substantial doubt about
the Company's ability to continue as a going concern. However, the accompanying
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of the liabilities
in the normal course of business. The financial statements do not include any
adjustments relating to the recovery of assets or the classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
NOTE 3 - SELECTED SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries NPI, Kelly Color and ADS, collectively referred to
as the "Company." All significant intercompany transactions and balances have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION
Revenue is recognized at the time the administrative services are performed and
provided, or made available to its customers. Services are billed monthly based
upon a predetermined percentage of the total assets included in the respective
pre-need funeral master trust fund.
NET LOSS PER SHARE OF COMMON STOCK
Basic net loss per share ("EPS") is computed by dividing net loss available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other instruments to issue common stock were exercised or
converted into common stock. Potentially dilutive securities of 2,294,418 and
2,506,045 at September 30, 2005 and 2004 are excluded from the computation of
diluted net loss per share as their inclusion would be anti-dilutive. A summary
of these potentially diluted securities are as follows:
F-26
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
September 30,
---------------------------
2005 2004
--------- ---------
Options 52,170 52,170
Warrants 1,643,656 1,169,906
Convertible debt 598,592 1,283,969
--------- ---------
2,294,418 2,506,045
========= =========
Stock Based Compensation
STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS
At September 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 the net loss, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. No table has been disclosed to
illustrate the effect on the net loss and loss per share if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation; since no options were granted during the respective
periods net loss and pro forma net loss are identical. The Company has granted
no employee options during the three and nine months ended September 30, 2005
and 2004.
NEW ACCOUNTING PRONOUNCEMENTS
On September 28, 2005, the FASB ratified the following consensus reached in EITF
Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with a
Beneficial Conversion Feature"): a) The issuance of convertible debt with a
beneficial conversion feature results in a basis difference in applying FASB
Statement of Financial Accounting Standards SFAS No. 109, Accounting for Income
Taxes. Recognition of such a feature effectively creates a debt instrument and a
separate equity instrument for book purposes, whereas the convertible debt is
treated entirely as a debt instrument for income tax purposes. b) The resulting
basis difference should be deemed a temporary difference because it will result
in a taxable amount when the recorded amount of the liability is recovered or
settled. c) Recognition of deferred taxes for the temporary difference should be
reported as an adjustment to additional paid-in capital. This consensus is
effective in the first interim or annual reporting period commencing after
December 15, 2005, with early application permitted. The effect of applying the
consensus should be accounted for retroactively to all debt instruments
containing a beneficial conversion feature that are subject to EITF Issue 00-27,
"Application of Issue No. 98-5 to Certain Convertible Debt Instruments" (and
thus is applicable to debt instruments converted or extinguished in prior
periods but which are still presented in the financial statements). The adoption
of this pronouncement is not expected to have a material impact on the Company's
financial statements.
F-27
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
In October 2004, the FASB ratified the consensus reached in EITF Issue No. 04-8,
"The Effect of Contingently Convertible Instruments on Diluted Earnings per
Share." The EITF reached a consensus that contingently convertible instruments,
such as contingently convertible debt, contingently convertible preferred stock,
and other such securities should be included in diluted earnings per share (if
dilutive) regardless of whether the market price trigger has been met. The
consensus became effective for reporting periods ending after December 15, 2004.
The adoption of this pronouncement did not have a material effect on the
Company's financial statements.
In 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 interim or 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.
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"), with interest payable monthly at the
bank's prime rate plus 1.25%. The Line of Credit was modified in June 2005 and,
as modified, requires monthly payments of $1,510 and a final payment of the
outstanding balance and all accrued interest due on July 3, 2006. There was
$147,700 outstanding under the Line of Credit as of September 30, 2005. The Line
of Credit is collateralized by a building located in North Carolina, which as of
September 30, 2005, has been fully depreciated.
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 10% Notes also prohibited additional borrowings by the Company, from any
source, without the prior approval of the placement agent for the 10% Notes or
the holders of a majority of the aggregate principal amount of the 10% Notes. In
May and August 2004, the Company borrowed, without approval, an aggregate of
$250,000 (See Note 6).
F-28
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Further, in July 2004, the Company borrowed, without approval, an additional
$50,000 from an officer/stockholder (see Note 7) and, in December 2004 through
February 2005, sold and issued, without approval, 10% convertible promissory
notes in the aggregate principal amount of $375,000 (see Note 6). On July 11,
2005, the Company sold and issued, without approval a 10% note for $100,000 (see
Note 6). On September 20, 2005, the Company sold and issued, without approval a
10% bridge note for $125,000 (see Note 6)
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 2,936,890 shares of Company
common stock to the holders of 10% Notes in the aggregate principal amount of
$795,000 and accrued interest of $185,203 for settlement of such 10% Notes. As a
result of the debt settlement the Company wrote off $125,695 of unamortized
deferred financing costs. The charge was included as interest expense in the
statement of operations. The Company has a remaining principal balance of
$50,000 due to the holders. Upon the effectiveness of the debt settlement, the
Company recorded a conversion charge of $933,793, which is the estimated fair
value of the additional shares of Company common stock issued in excess of the
amount of shares that were issuable at the original conversion prices for the
debt.
NOTE 6 - NOTES PAYABLE AND BRIDGE NOTES
NOTES PAYABLE
In March 15, 2000, the Company issued a 6% promissory note for $150,000 In
August 2004, the note was extended to the earlier of (a) the date which is 60
days following the effectiveness of a registration statement under the
Securities Act registering for resale the shares of the Company's common stock
issuable upon exercise of the warrants sold and issued with the 6% promissory
note or (b) January 2, 2005.
Beginning June 1, 2004, the Company began repayment of this note under a
repayment plan calling for payments requiring minimum monthly payments of
$10,000 until the entire note is repaid in full, which was scheduled to occur on
March 1, 2005. Due to insufficient operating capital, the Company has not been
able to meet this commitment and currently is not in compliance with the terms
of this note. During the nine months ended September 30, 2005, the Company did
not make any payments under this note. As of September 30, 2005, the principal
balance due under this note was $105,000. The principal balance and accrued
interest is presented on the accompanying balance sheet as a current liability.
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. As of September 30, 2005, the
principal balance and accrued interest has been included on the accompanying
balance sheet as current liabilities.
BRIDGE NOTES
On May 22, 2004, the Company sold and issued, for gross proceeds of $125,000,
(a) a 6% promissory note in the principal amount of $125,000 and due on August
22, 2004 and (b) warrants to purchase 70,000 shares of the Company's common
stock at an exercise price of $0.71 per share. The fair value of the warrants is
$35,000 using the Black-Scholes option pricing model and was recorded as a
deferred debt discount
F-29
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
which will accrete to interest expense over the life of this promissory note.
On August 4, 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.
On September 20, 2005 the Company entered into a Modification Agreement which
modified certain terms of the 6% Promissory Notes outstanding. Pursuant to this
Modification Agreement the maturity dates of the Promissory Notes dated May 22,
2004 and August 4, 2004 were extended to a maturity date of May 15, 2006.
Additionally 175,000 warrants that were previously issued carrying an exercise
price of $ .45 received a reduced exercise price of $ .30. Using the
Black-Scholes option pricing model an additional charge was not required for the
modification of the 175,000 previously issued warrants. The bridge notes have a
stated repayment plan as follows:
- --------------------------------------------
Maturity Date Payment
- --------------------------------------------
January 15, 2006 $ 30,000
February 15, 2006 40,000
March 15, 2006 50,000
April 15, 2006 60,000
May 15, 2006 70,000
--------
$250,000
========
- --------------------------------------------
On September 20, 2005, the Company also granted to the note holder 17,500
warrants to purchase common stock at an exercise price of $0.30 per share as
consideration for the receipt of $125,000 (bridge note dated September 20,
2005), and 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 using the
Black-Scholes option pricing model has nominal value.
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.
F-30
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
In connection with the sale and issuance of the $375,000 of notes due November
5, 2005, the Company incurred fees of $48,750 and granted 187,500 warrants to
the private placement agent for services provided. The estimated fair value of
the warrants is $57,600 using the Black-Scholes option pricing model. The cost
of $106,350 has been capitalized as deferred financing fees and will be
amortized over the life of the debt. The notes are convertible into common stock
of the Company at $0.71 per share.
On September 20, 2005, the Company sold a note payable for proceeds of $125,000;
the bridge notes have a stated interest rate of 10% per annum. In addition the
Company granted to the note holder 175,000 warrants to purchase common stock at
an exercise price of $0.30 per share 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. The bridge notes have a stated repayment plan as
follows:
- --------------------------------------------
Maturity Date Payment
- --------------------------------------------
January 15, 2006 $15,000
February 15, 2006 20,000
March 15, 2006 25,000
April 15, 2006 30,000
May 15, 2006 35,000
--------
$125,000
========
- --------------------------------------------
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. During the nine
months ended September 30, 2005, the Company repaid $27,000 of the advances and
borrowed an additional $13,450. As of September 30, 2005, the total amount due
the officer-stockholder was $36,450.
NOTE 8 - STOCKHOLDERS' DEFICIENCY
In November 2004, the Company entered into a common stock purchase agreement
with Fusion Capital, pursuant to which Fusion Capital has agreed to purchase,
subject to certain conditions, $6,000,000 of 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. 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 and compensation costs. The deferred offering costs will be amortized
to additional paid in capital over a 24-month period and the net cash proceeds
commencing on the effectiveness of the registration of such shares under the
Securities Act. As of November 7, 2005, the Company has not filed a registration
statement with respect to the shares of Company common stock issuable under the
Stock Purchase Agreement.
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.
On January 15, 2005, Company issued 150,000 shares of Company's common stock to
a consultant as a settlement
F-31
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
of terminating its agreement with the consultant. The shares were valued at
$105,000, or $0.70 per share.
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 (Note 6). 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 granted 187,500 warrants to the private
placement agent (Note 6). 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 to an
institutional investor at $0.34 per share for consideration of $100,000.
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 granted to the note holder 17,500 warrants to
purchase common stock at an exercise price of $0.30 per share for the additional
consideration of $125,000 (bridge note dated September 20, 2005), and 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.
NOTE 9 - CONSULTING AGREEMENTS
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 30, 2004, the Company issued 500,000 and
300,000 shares of Company common stock to Phoenix and Vantage, respectively. As
such, the Company recorded deferred compensation of $336,000, which deferred
compensation will be amortized over the life of the agreements. The unamortized
portion of deferred compensation as of September 30, 2005, is $17,500.
On January 15, 2005, Company issued an additional 150,000 shares of Company's
common stock to Vantage as settlement for terminating its agreement with the
consultant. The shares were valued at $105,000 and the charge is included in the
accompanying statement of operations as consulting fees.
For the nine months ended September 30, 2005, the Company has taken a charge of
$262,500 for the amortization of the agreements which have been included in the
accompanying statement of operations as part of consulting fees.
NOTE 10 - COMMITMENT AND CONTINGENCIES
LITIGATION
The Company is involved in litigation through the normal course of business. The
Company believes that the resolution of these matters will not have a material
adverse effect on the financial position of the Company.
F-32
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
NOTE 11 - DISCONTINUED OPERATIONS
On February 4, 2004, the Company sold certain assets of Kelly Color and
discontinued operating in the film processing segment. Accordingly, the Company
currently operates in one segment, the administrative services to independent
funeral homes, state master trusts and companies that own funeral homes or
cemeteries for pre-arrangement funeral and cemetery accounts.
For all periods presented in these condensed consolidated financial statements,
the operations of Kelly Color are reported as discontinued operations. At
September 30, 2005, the discontinued liabilities of Kelly Color are:
Liabilities -
Accounts payable and accrued expenses $ 15,440
The results of discontinued operations for the three and nine months ended
September 30, 2005 and 2004 are:
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
Revenues $ -- $ -- $ -- 47,269
Cost of revenues -- -- -- (80,847)
Operating expenses -- (508) -- (28,417)
-------- -------- -------- --------
Net loss $ -- $ (508) $ -- $(61,995)
======== ======== ======== ========
NOTE 12 - ECONOMIC DEPENDENCY
MAJOR CUSTOMER
During each of the three months ended September 30, 2005 and 2004, the Company
had sales to three customers totaling $80,567, or 94%, and $47,870, or 86%, of
the Company's net revenues, respectively.
During each of the nine months ended September 30, 2005 and 2004, the Company
had sales to customers totaling $225,503, or 93%, and $133,091, or 85%, of the
Company's net revenues, respectively.
At September 30, 2005, $23,750, or 84%, of the Company's total accounts
receivable was due from two customers.
NOTE 13 - 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 consolidated operating results.
NOTE 14 - SUBSEQUENT EVENTS
On November 30, 2005, the Company entered into a consulting agreement for
business development services. As consideration the Company will pay to the
Consultant $330,000 which is payable in common stock at $.30 per share of which
150,000 shares have been issued to date. The term of the agreement is nine
months.
Convertible Debentures:
On December 23, 2005, the Company entered into an agreement providing for the
sale of $220,000 of five-year convertible debenture. The convertible debenture
bear interest at 12% per annum. The first $95,000 was funded immediately with an
additional $125,000 to be funded immediately upon filing of the Registration
Statement. The convertible debenture is convertible into shares of the Company's
common stock, at any time at $0.13. The Company's obligation to repay the
amounts outstanding under the convertible debenture is secured by substantially
all of the Company's assets. In connection with the convertible debenture, the
Company also granted warrants to purchase 423,077 shares of common stock at
$0.13 per share. The Warrants may be exercised for a period of five years and
the exercise price is subject to standard adjustment upon the occurrence of
certain events, including, without limitation, the consolidation, merger, the
sale or transfer of all of substantially all of the assets of the Company, a
reclassification of the common stock, or any stock splits, combinations or
dividends with respect to the common stock.
Investment Agreement:
On December 23, 2005, the Company entered into an Investment Agreement providing
for the sale and issuance from time to time of up to $10,000,000 in shares of
Common Stock for a period of up to 36 months from the date the Registration
Statement is declared effective. The maximum number of shares that the Company
may put at any one time shall be equal to, at the Company's election, either:
(A) 200% of the average daily volume in the U.S. market of the Common Stock for
the ten trading days prior to the date the Company notifies its intent to sell
shares, multiplied by the average of the three daily closing bid prices
immediately preceding the date a Put Notice is delivered, or (B) a number of
shares having a value of $200,000. The Company may not submit a Put Notice
until after the completion of a previous sale under the Investment Agreement.
The purchase price for the Common Stock to be sold shall be equal to 93% of the
lowest closing best bid price of the Common Stock during the five-day period
following the date the Company delivers a Put Notice.
Under the Investment Agreement, the Company is obligated to file a registration
statement by January 13, 2006 for the registration of the shares of Common Stock
issuable upon conversion of the Convertible Debentures, exercise of the Warrants
and upon a sale under the Investment Agreement. The Company is further obligated
to use its best efforts to cause the SEC to declare the Registration Statement
effective within 90 days after the filing date of the Registration Statement. If
the Company does not file the Registration Statement with the SEC by January 13,
2006, it is obligated to pay liquidated damages to the Investor in an amount
equal to 2% of the principal amount of the debenture outstanding, pro rata, for
every 15 days which such registration statement has not been filed. In addition,
if the Registration Statement is not filed by the filing date, the conversion
price of the Convertible Debenture will decrease by 10% of and continue to
decrease by 10% for each 15 day calendar period the registration statement goes
without filing. If the Registration Statement is not declared effective within
90 days of the filing date, the Company is obligated to pay liquidated damages
in an amount equal to 2% of the principal amount of the debenture outstanding,
pro rata, for every 30 days which such registration statement has not been
declared effective by the SEC.
On December 20, 2005, in connection with the Investment Agreement, the Company
was required to remit payment of $15,000 for due diligence fees. The Company
opted to issue 85,000 shares of its common stock valued at approximately $30,000
as security. Subsequently the shares have been returned to the Company and the
$15,000 fee was settled with the proceeds received from the $95,000 of
convertible debentures.
As a result of the Investment Agreement, we intend to no longer draw down on our
equity line with Fusion Capital.
F-33
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 $ 800
Accounting fees and expenses 20,000*
Legal fees and expenses 25,000*
Miscellaneous 4,200
---------
TOTAL $50,000*
=========
<FN>
* Estimated.
II-1
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.
II-2
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.
In September 20, 2005, we issued to a creditor warrants to acquire an aggregate
of the 192,500 shares of the Company's common stock at $.30 per share as part of
a modification agreement relating to a pre-exiting debt obligation of the
Company and the issuance of additional debt instrument. The issuance of these
warrants was exempt from the registration requirements of the Securities Act
pursuant to the provisions of Section 4(2) of the Securities Act.
In December 2005, we issued convertible debentures in the principal amount of
$220,000 and warrants to purchase 366,667 shares of common stock in a financing
transaction. The issuance of these debentures 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-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).
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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).
4.14 Warrant certificate for the purchase of 175,000 shares of
common stock dated September 20, 2005 (incorporated by
reference to Amendment No. 5 to Registration Statement on Form
SB-2 filed December 6, 2005)
4.15 Warrant certificate for the purchase of 17,500 shares of
common stock dated September 20, 2005 (incorporated by
reference to Amendment No. 5 to Registration Statement on Form
SB-2 filed December 6, 2005)
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed
herewith).
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. (incorporated by reference to Registration Statement on
Form SB-2 filed December 6, 2005)
10.8 Preplan Accounting Agreement dated as of August 1, 1999
between American DataSource, Inc. and Carriage Services, Inc.
(previously filed)
10.9 Modification Agreement dated September 20, 2005 by and between
Walker Financial Corporation and Cindy Dolgin (incorporated by
reference to Amendment No. 5 to Registration Statement on Form
SB-2 filed December 6, 2005)
10.10 Promissory Note dated September 20, 2005 for the benefit of
Cindy Dolgin (incorporated by reference to Amendment No. 5 to
Registration Statement on Form SB-2 filed December 6, 2005)
10.11 Consulting Services Agreement dated as of November 30, 2005 by
and between Walker Financial Corporation and Terence Byrne
(incorporated by reference to Amendment No. 5 to Registration
Statement on Form SB-2 filed December 6, 2005)
10.12 Debenture Agreement dated as of December 23, 2005 by and
Between the Company and Dutchess Private Equities Fund II, LP
(incorporated by reference to Current Report on Form 8-K
filed December 30, 2005)
10.13 Warrant Agreement dated as of December 23, 2005 by and
between the Company and Dutchess Private Equities Fund II, LP
(incorporated by reference to Current Report on Form 8-K
filed December 30, 2005)
10.14 Investment Agreement dated as of December 23, 2005 by and
between the Company and Dutchess Private Equities Fund II, LP
(incorporated by reference to Current Report on Form 8-K
filed December 30, 2005)
10.15 Registration Rights Agreement dated as of December 23, 2005
by and between the Company and Dutchess Private Equities Fund
II, LP (incorporated by reference to Current Report on Form
8-K filed December 30, 2005)
10.16 Debenture Registration Rights Agreement dated as of December
23, 2005 by and between the Company and Dutchess Private
Equities Fund II, LP
10.17 Security Agreement dated as of December 23, 2005 by and
between the Company and Dutchess Private Equities Fund II, LP
(incorporated by reference to Current Report on Form 8-K
filed December 30, 2005)
10.18 Subscription Agreement dated as of December 23, 2005 by and
Between the Company and Dutchess Private Equities Fund II, LP
(incorporated by reference to Current Report on Form 8-K
filed December 30, 2005)
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 determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned undertakes that in a primary offering of securities of the
undersigned small business issuer pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned small business issuer will
be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed pursuant to Rule
424;
(ii) (ii) Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned small business issuer or used or referred to
by the undersigned small business issuer;
(iii) (iii) The portion of any other free writing prospectus relating to
the offering containing material information about the undersigned small
business issuer or its securities provided by or on behalf of the undersigned
small business issuer; and
(iv) (iv) Any other communication that is an offer in the offering made
by the undersigned small business issuer to the purchaser.
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.
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 January 11, 2006.
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 January 11, 2006
- ---------------------- Financial Officer and Director
Mitchell S. Segal
/s/ PETER WALKER Secretary and Director January 11, 2006
- ----------------------
Peter Walker
Chairman of the Board of Directors 2005
- ----------------------
James M. Lucas, Sr.