As filed with the Securities and Exchange Commission on March 31, 2006
Registration No. _____________
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) 962,500 $.10 $ 96,250.00 $ 10.30
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10(3) 50,000,000 $.10 $ 5,000,000 $535.00
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10(4) 4,410,000 $.10 $ 441,000.00 $ 47.19
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10(5) 528,169 $.10 $ 52,817.00 $ 5.65
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value $ .10(6) 93,750 $.10 $ 9,375.00 $ 1.00
Common Stock, par value $ .10(7) 187,500 $.10 $ 18,750.00 $ 2.01
Total 56,181,919 $5,977,813.00 $601.15*
- ---------------------------------------------------------------------------------------------------------------
<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 March 27, 2006 was $.10 per share.
(2) Represents shares issuable upon exercise of Warrants to Dutchess.
(3) Represents shares issuable upon sales under an Investment Agreement to Dutchess.
(4) Represents shares issuable upon conversion of a Convertible Debenture to Dutchess
(5) Represents shares issuable upon conversion of a Convertible Promissory Note to certain individuals.
(6) Represents shares issuable upon exercise of Warrants to certain individuals.
(7) Represents shares issuable upon exercise of Warrants to J.P. Turner & Co.
* Previously paid.
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 MARCH 31, 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
56,181,919 SHARES OF COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
56,181,919 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 to be
issued to Dutchess Private Equities Fund II, LP ("Dutchess"): (i) up to
4,410,000 shares issuable upon conversion of convertible debentures, (ii)
962,500 shares issuable upon exercise of warrants, and (iii) up to 50,000,000
shares of common stock issuable to Dutchess pursuant to a "put right" under an
Investment Agreement, also referred to as an Equity Line of Credit. In
addition, it includes shares to be registered on behalf of other selling
security holders, as follows: (i) 281,250 shares issuable upon exercise of
warrants and (ii) 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 Equity Line of Credit with Dutchess and the cash exercise, if any, of
warrants to purchase an aggregate of 835,577 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 Equity Line of Credit. That Equity Line of Credit
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 March 15, 2006, was $.10.
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 ____________, 2006.
TABLE OF CONTENTS
Page
Prospectus Summary..........................................................2
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...................16
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..............................32
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...............................................................39
Experts.....................................................................39
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, 2005 the Company had an accumulated deficit of approximately
$9,400,000. For the year ended December 31, 2005, we generated net revenues of
approximately $328,000 and had a net loss of approximately $3,300,000. We will
be required to seek additional financing of approximately $1,000,000 million to
fund our operations for the next twelve months. We intend to obtain the $
1,000,000 from our financing transaction with Dutchess upon the effectiveness of
this registration statement. However, as discussed herein, there is no
assurance that we will be able to receive the $ 1,000,000 to fund our operations
over 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 FINANCINGS
CONVERTIBLE DEBENTURES
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,
which agreement was amended on February 20, 2006. The convertible debentures
bear interest at 12% per annum. The first $95,000 (less expenses) was funded
immediately while the balance of $125,000 was funded on January 13, 2006. Under
the pricing formula set forth in the debentures, Dutchess may convert the
convertible debentures into shares of our common stock any time at a fixed
conversion price equal to the lowest closing bid price of our common stock
between December 12, 2005 and the date of filing of the registration statement
of which this prospectus forms a part, or $0.13. On February 20, 2006, we
amended the agreement with Dutchess to provide that the convertible debentures
may be converted into shares of our common stock at any time at the lesser of
the lowest closing bid price of our common stock between December 12, 2005 and
the date of filing of this registration statement, or $0.10. In addition, the
amendment no longer permits Dutchess to switch the conversion price of the
debenture from a fixed price to one that is based on the market price of our
stock in the event of default and it removes our obligation to use proceeds from
the Equity Line of Credit, discussed below, to redeem the convertible debenture.
2
In addition, on February 20, 2006, we entered into an agreement with Dutchess
providing for the sale of $221,000 in principal amount of our five-year
convertible debenture. These debentures bear interest at 10% per annum. The
convertible debentures are convertible into shares of our common stock at any
time at the lesser of the lowest closing bid price of our common stock between
February 20, 2006 and the date of filing of a Registration Statement covering
the resale of the shares underlying this convertible debenture, or $0.10. Our
obligation to repay the amounts outstanding under all of these convertible
debentures is secured by substantially all of our assets.
In connection with the debentures issued in December 2005 we also granted to
Dutchess five-year warrants to purchase 423,077 shares of common stock with an
exercise price of $.13 per share which was amended to 550,000 shares of common
stock at an exercise price, of $0.10 per share. In addition, in connection with
the debentures issued in February 2006, we granted to Dutchess warrants to
purchase 412,500 shares of common stock at $0.10 per share. These warrants may
be exercised for a period of five years at an exercise price of $0.10. The
exercise price of all warrants 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
On February 20, 2006, we entered into an Investment Agreement with Dutchess
providing for the sale and issuance to Dutchess from time to time of up to
$10,000,000 in shares of our common stock for a period of up to 36 months from
the effective date the registration statement of which this prospectus forms a
part. The maximum number of shares that we may sell 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 five 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 bid price of the Common Stock during the
five-day period following the date we deliver a notice of our intention to sell
shares to Dutchess.
We are obligated to file a registration statement within ten days after the
filing of our annual report on Form 10-KSB, but in no event later than March 31,
2006 for the registration of the shares of Common Stock issuable upon conversion
of the convertible debentures issued in February, exercise of the warrants
issued in February 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 on time 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, 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 56,181,919 shares, including the
following:
- up to 962,500 shares of common stock issuable
upon the exercise of common stock purchase
warrants at an exercise price of $.10 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 4,410,000 shares of common stock
issuable upon the conversion of convertible
debentures at a conversion price of $.10 per
share;
- up to 528,169 shares of common stock
issuable upon the conversion of convertible
promissory notes 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 70,019,139 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 13,837,220 shares of common stock outstanding as of March
21, 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, 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. Our ability to raise additional financing may
be hampered by our debenture agreement with Dutchess which requires us to apply
all proceeds from future financings to the repayment of the debentures first. In
addition, we are in default with respect to approximately $ 979,000 in debt
obligations that may have to be satisfied before we embark on any expansion of
our business. Potential investors may therefore be reluctant to invest in the
Company. 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 development plans. Any additional equity financing may involve
substantial dilution to our then existing shareholders.
WE HAVE A SIGNIFICANT AMOUNT OF DEBT AND WE MAY INCUR ADDITIONAL DEBT WHICH MAY
HAVE A NEGATIVE IMPACT ON OUR ABILITY TO CONDUCT OUR BUSINESS.
As of December 31, 2005, we had current liabilities, in the aggregate amount of
$1,978,853. These liabilities could have important consequences on us,
including:
o requiring a substantial portion of our cash flow from operations for the
payment of principal and interest on the debt,
o limiting our ability to use our cash flow, or to obtain additional
financing, to fund future working capital, capital expenditures,
acquisitions and other general corporate purposes,
o limiting our flexibility to plan for and react to changes in its business
and industry,
o not having the resources to pay interest on the debt or repay the principal
of the debt at maturity,
o increasing our vulnerability to adverse economic and industry conditions,
and
o placing us at a competitive disadvantage to less leveraged competitors.
5
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. The notes were
due on January 21, 2006 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 noteholder has the
right, exercisable in the holders' sole discretion, to convert all or any
portion of the principal amount outstanding 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 are currently in default on the repayment
of these notes. We intend to retire the principal, accrued interest, including
any penalty interest applicable thereto, by drawing down monies from our
Dutchess Capital equity line. If we are unable for any reason to pay off these
notes and the noteholders declare a default, this may have an adverse impact on
our ability to operate our business. We may need to see additional capital from
sources other than Dutchess, and use monies raised to retire our Dutchess debt
before retiring our other debt. Additionally, we may not be able to use the
capital raised for any acquisitions, prior to paying off all of our debt
outstanding.
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.
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 insurance 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.
6
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.
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. However as of December 8, 2005
we have registered for resale the shares issuable to the $ 50,000 10% Senior
Subordinated Secured Convertible Promissory Note holder upon his conversion of
this note.
WE MAY BE UNABLE TO IMPLEMENT OUR ACQUISITION GROWTH STRATEGY, WHICH COULD HARM
OUR BUSINESS AND COMPETITIVE POSITION.
Our business strategy includes making strategic acquisitions of other companies
or businesses within the death care, financial services, insurance or employee
benefits industries. Our continued growth will depend on our ability to identify
and acquire, on acceptable terms, companies that complement or enhance our
businesses. The competition for acquisition candidates is intense and we expect
this competition to increase. There is no assurance that we will identify and
successfully compete for appropriate acquisition candidates or complete
acquisitions at reasonable purchase prices, in a timely manner or at all.
Further, we may not be able to realize the anticipated results of future
acquisitions. In implementing our acquisition growth strategy, we may encounter:
o costs associated with 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:
7
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
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 $.10 on
March 21, 2006.
- ------------------------------------------------------------------------------------------------------------------------------
% Below price Price per share Number of shares Shares outstanding (2) % of Outstanding % of Outstanding
Issuable (1) stock (3) Owned by Current Stockholders
- ------------------------------------------------------------------------------------------------------------------------------
Purchase price (4) $.10 100,000,000 119,709,139 83.5 11.6
- ------------------------------------------------------------------------------------------------------------------------------
25% $.075 133,333,333 153,042,472 87.1 9.0
- ------------------------------------------------------------------------------------------------------------------------------
50% $.05 200,000,000 219,709,139 91.0 6.3
- ------------------------------------------------------------------------------------------------------------------------------
75% $.025 400,000,000 419,709,139 95.3 3.3
- ------------------------------------------------------------------------------------------------------------------------------
<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 13,837,220 shares of common stock issued and outstanding on March 22, 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 $.093 which is 93% of the lowest closing price of our common stock during the five day period commencing
March 20, 2006 through March 25, 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.
Any significant downward pressure on the price of our common stock can
encourage short sales by third parties , 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 holders
of our stock to sell their shares thereby contributing to sales of stock
8
in the market. If the supply of common stock into the market exceeds the demand
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.
In addition, under the terms of our Equity Line of Credit with Dutchess, our
securities must be traded on the OTC Bulletin Board. Removal of our common
stock from the OTC Bulletin Board for failure to file periodic reports, or any
other reason, will prevent us from issuing our common stock under the Investment
Agreement.
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
9
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this prospectus generally. In light of these risks and uncertainties, there can
be no assurance that the forward-looking statements contained in this filing
will in fact occur. In addition to the information expressly required to be
included in this filing, we will provide such further material information, if
any, as may be necessary to make the required statements, in light of the
circumstances under which they are made, not misleading.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the Selling Stockholders. We will receive proceeds
from the sale of shares of our common stock to Dutchess under the Equity Line of
Credit. 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.
MC<
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
$375,000 10% Convertible Note 420,000 420,000 420,000 420,000
$ 50,000 10% Convertible Note 65,000 65,000 65,000 65,000
$375,000 10% Promissory Notes 431,250 431,250 431,250 431,250
$ 100,000 Promissory Note 33,750 58,300 58,300 58,300
Use of proceeds:
General Working Capital(2) $ 0 $1,475,450 $3,975,450 $8,975,450
=========== =========== =========== ===========
<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).
(2) A portion of General Working Capital may be used for potential acquisitions.
We expect cash, if any, to be received upon exercise of the warrants to be used
for general corporate purposes.
INVESTMENT AGREEMENT
On February 20, 2006, we entered into an Investment Agreement with Dutchess 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
deliver a notice to Dutchess stating the dollar amount which we intend to sell
to Dutchess on the day which is no more than 7 trading days following the the
date in which we gave notice of this intended sale. The notice is deemed
delivered to Dutchess 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 receive from Dutchess pursuant to each
request shall be equal to, at our election, either: (A) 200% of the U.S. market
average daily volume of our common stock for the ten trading Days prior to the
notice date, multiplied by the average of the three daily closing bid prices
immediately preceding the notice date, or (B) $200,000. We shall not be entitled
to submit another notice request for additional funds until after the previous
closing from the prior fund request has been completed. The purchase price for
the Common Stock that Dutchess purchases shall be equal to 93% of the lowest
closing best bid price of the Common Stock during the period beginning on the
notice date and ending on and including the date that is 5 trading days after
such notice date.
DUTCHESS' OBLIGATION TO PURCHASE SHARES
Upon the receipt by Dutchess of a our notice, Dutchess shall be required to
purchase from us, during the period beginning on the notice date and ending on
and including the date that is five trading days after such notice date, the
number of shares set forth in the notice subject to the qualitative restrictions
set forth in the previous paragraph.
Conditions to Dutchess' obligation to purchase shares
10
We shall not be entitled to deliver a sales notice request to Dutchess and
Dutchess shall not be obligated to purchase any shares 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 a closing with respect to the subject
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 notice date and
ending on and including the related closing date for the sale of common stock
detailed in such notice, the common stock shall have been listed on a principal
market and shall not have been suspended from trading thereon for a period of
four consecutive trading days 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
notice;
D. no injunction shall have been issued and remains in force, or action
commenced by a governmental authority which has not been stayed or abandoned,
prohibiting the purchase or the issuance of our common stock during the five
trading days after our notice date; 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 the five trading days after our
notice date, then Dutchess shall have no obligation to purchase the amount of
common stock set forth in the applicable 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
notice date. Prior to a closing, (I) we shall be required to deliver to
Dutchess pursuant to the Investment Agreement, certificates representing the
common 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 common shares.
As compensation to Dutchess for a delay in issuance of the common shares beyond
the Closing Date, we have agreed to pay late payments to Dutchess (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 Per Each $10,000 Increment
NO. OF DAYS LATE OF COMMON STOCK enumerated in a
notice
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 at any time before the Equity Line of Credit is terminated, 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 out common stock, and any additional 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 allowed prior to needing shareholder approval and such approval pertains
only to the amount in excess of this amount.
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 Dutchess.
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 March 13, 2006
Set forth below is a trading summary of our Common Stock for the period from
February 28, 2006 through March 13, 2006.
Date Bid Ask Close Volume
- -----------------------------------------------------------
27-Feb-06 0.10 0.12 0.10 0
28-Feb-06 0.10 0.12 0.10 0
1-Mar-06 0.10 0.12 0.10 0
2-Mar-06 0.10 0.12 0.10 0
3-Mar-06 0.10 0.12 0.10 500
6-Mar-06 0.10 0.12 0.10 0
7-Mar-06 0.10 0.12 0.10 0
8-Mar-06 0.10 0.12 0.10 0
9-Mar-06 0.10 0.12 0.10 0
10-Mar-06 0.10 0.12 0.10 0
13-Mar-06 0.10 0.12 0.10 500
14-Mar-06 0.10 0.12 0.10 0
15-Mar-06 0.10 0.12 0.105 300
16-Mar-06 0.10 0.12 0.11 10,000
17-Mar-06 0.10 0.12 0.11 0
The average daily volume for the 10 trading days prior to March 13, 2006 based
upon the foregoing table is 50. 200% of the average daily volume is 100.
The average of the 5 daily closing bid prices subsequent to the Put Date of
December 29, 2005 is $.10. The total Put Amount based upon the assumptions set
forth above is 100 multiplied by 93% of the lowest closing Best Bid Price during
the Pricing Period (93% x .10 = .093)=$9.30.
12
DEBENTURE AGREEMENT
On December 23, 2005, we entered into an agreement providing for the sale of
$220,000 in principal amount of five-year convertible debentures (the "December
Debentures") to Dutchess. The December Debentures bear interest at 12% per
annum. The first $95,000 (less expenses) was funded immediately while the
balance of $125,000 was funded on January 13, 2006, . Under the pricing formula
set forth in the debentures, Dutchess may convert the convertible debentures
into shares of our common stock any time at a fixed conversion price equal to
the lowest closing bid price of our common stock between December 12, 2005 and
the date of filing of the registration statement of which this prospectus forms
a part, or $0.13. On February 20, 2006, we amended the agreement with Dutchess
to provide that the convertible debentures may be converted into shares of our
common stock at any time at the lesser of the lowest closing bid price of our
common stock between December 12, 2005 and the date of filing of the
registration statement, or $0.10. In addition, the amendment no longer permits
Dutchess to switch the conversion price of the debenture from a fixed price to
one that is based on the market price of our stock in the event of default and
it removes our right to use proceeds from the investment agreement, discussed
below, to redeem the convertible debenture.
In addition, on February 20, 2006, we entered into an agreement with Dutchess
providing for the sale of $221,000 in principal amount of our five-year
convertible debenture (the "February Debentures"). These debentures bear
interest at 10% per annum. The convertible debentures are convertible into
shares of our common stock at any time at the lesser of the lowest closing bid
price of our common stock between February 20, 2006 and the date of filing of
this Registration Statement covering the resale of the shares underlying this
convertible debenture, or $0.10. Our obligation to repay the amounts
outstanding under all of these 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 December
Debenture. We are required to make payments as set forth in the table below.
DECEMBER DEBENTURES AS AMENDED ON FEBRUARY 20, 2006
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
2/21/2006 $220,000.00 $ 222,180.24 $ 2,180.24 $ 0.00 $2,180.24 $ 0.00
3/1/2006 $220,000,00 $ 222,180.24 $ 2,180.24 $ 0.00 $2,180.24 $ 0.00
4/1/2006 $220,000.00 $ 222,180.24 $ 2,180.24 $ 0.00 $2,180.24 $ 0.00
5/1/2006 $220,000,00 $ 222,180.24 $ 56,315.03 $ 43,651.18 $1,751.05 $ 54,563.98
6/1/2006 $176,692.17 $ 178,443,22 $ 56,315.03 $ 43,997.26 $1,318.46 $ 54,996.57
7/1/2006 $133,040.98 $ 134,359.44 $ 56,315.03 $ 44,346.07 $ 882.44 $ 55,432.59
8/1/2006 $ 89,043.73 $ 89,926.17 $ 56,315.03 $ 44,697.65 $ 442.96 $ 55,872.07
9/1/2006 $ 44,697.65 $ 45,140.62 $ 56,315.03 $ 45,052.02 $ 0.00 $ 56,315.03
FEBRUARY DEBENTURES
Principal Amount with Accrued Applied to Applied to Applied to
Amount Due Interest for Period Payment Principal Interest Redemption
----------- ------------------- ----------- ----------- --------- -----------
2/22/2005 $221,000.00 $ 223,190.15 $ 2,190.15 $ 0.00 $2,190.15 $ 0.00
3/1/2005 $221,000.00 $ 223,190.15 $ 2,190.15 $ 0.00 $2,190.15 $ 0.00
4/1/2005 $221,000.00 $ 223,190.15 $ 2,190.15 $ 0.00 $2,190.15 $ 0.00
5/1/2005 $221,000.00 $ 223,190.15 $ 47,327.66 $ 36,110.01 $2,190.15 $ 45,137.51
6/1/2005 $184,889.99 $ 186,722.28 $ 47,327.66 $ 36,396.29 $1,832.29 $ 45,495.37
7/1/2005 $148,493.70 $ 149,965.29 $ 47,327.66 $ 36,684.85 $1,471.60 $ 45,856.06
8/1/2005 $111,808.85 $ 112,916.89 $ 47,327.66 $ 36,975.69 $1,108.05 $ 46,219.62
9/1/2005 $ 74,833.15 $ 75,574.76 $ 47,327.66 $ 37,268.84 $ 741.61 $ 46,586.05
9/1/2005 $ 37,564.31 $ 37,936.58 $ 47,327.66 $ 37,564.31 $ 372.27 $ 46,955.39
Subsequent to the effective date of this registration statement, 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 with
respect to the December Debentures has been amended from $ .13 to $ .10 and $.10
with respect to the February
13
Debentures. No fractional 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
convertible debentures is 4,100,000 consisting of 2,000,000 shares issuable upon
conversion of the December Debentures, based upon a fixed conversion price of
$.10, and 2,100,000 issuable upon conversion of the February Debentures, based
upon a fixed conversion price of $.10.
EVENTS OF DEFAULT
We will be considered in default with respect to all convertible debentures if
any of the following events occurs:
(a) we do not make a payment of principal on the Debenture by conversion into
our common stock within five (5) business days of their maturity dates, upon
redemption or otherwise;
(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 Agreements;
(f) the Registration Statement, of which this Prospectus forms a part,
underlying the Debentures is not declared effective by the SEC within twelve
(12) months from February 20, 2006.
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 Debentures provide that Dutchess shall not be entitled to convert that
amount of the Debentures 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 March 17, 2006 we had approximately 143 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.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTORY COMMENT - TERMINOLOGY
Throughout this registration statement, the terms the "we," "us," "our" and
"our company" refers to Walker Financial Corporation ("Walker") and, unless the
context indicates otherwise, includes, on a consolidated basis, Walker's
wholly-owned subsidiaries, National Preplanning, Inc. ("NPI"), American
DataSource, Inc. ("ADS") and Kelly Color, Inc. ("Kelly Color").
INTRODUCTORY COMMENT - FORWARD-LOOKING STATEMENTS
Statements contained in this registration statement include "forward-looking
statements". Forward-looking statements involve known and unknown risks,
uncertainties and other factors which could cause actual financial or operating
results, performances or achievements expressed or implied by such
forward-looking statements not to occur or be realized. Such forward-looking
statements generally are based on our best estimates of future results,
performances or achievements, predicated upon current conditions and the most
recent results of the companies involved and their respective industries.
Forward-looking statements may be identified by the use of forward-looking
terminology such as "may," "will," "could," "should," "project," "expect,"
"believe," "estimate," "anticipate," "intend," "continue," "potential,"
"opportunity" or similar terms, variations of those terms or the negative of
those terms or other variations of those terms or comparable words or
expressions. Potential risks and uncertainties include, among other things, such
factors as:
o the success of our business strategies and future plans of operations,
o general economic conditions in the United States and elsewhere, as well as the
economic conditions affecting the industry in which we operate,
o changes in the nature and enforcement of laws and regulations affecting our
products, services, customers, suppliers and sales agents,
o the competitive environments within the insurance, employee benefit, mortgage
services areas.
o our ability to raise additional capital, if and as needed,
o the cost-effectiveness of our product and service development activities,
o political and regulatory matters affecting the industry in which we operate,
o the market acceptance, revenues and profitability of our current and future
products and services,
o the extent that our sales network and marketing programs achieve satisfactory
response rates,
o our ability to acquire additional companies operating the insurance and
financial services industry and ability to successfully integrate such
acquirees, if any, into our operations, and
o the other risks detailed in this registration statement and, from time to
time, in our other filings with the Securities and Exchange Commission.
Readers are urged to carefully review and consider the various disclosures made
by us in this registration statement and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this registration statement
speak only as of the date hereof and we disclaim any obligation to provide
updates, revisions or amendments to any forward-looking statements to reflect
changes in our expectations or future events.
You should read the following description of our financial condition and results
of operations in conjunction with the financial statements and
accompanying notes included in this report beginning on page F-1.
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
16
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 Capital, discussed below under the heading
"Dutchess Capital Transaction," and/or other sources of capital 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 defaults under our debt payable and a lack of liquidity of
our common stock. The Dutchess Capital transaction documents provide
limitations on the percentage of stock Dutchess will hold at particular times
and in no event may Dutchess hold greater than 4.9% of the outstanding common
stock of the Company. Consequently, if Dutchess cannot sell our shares due to
the lack of liquidity in our common stock, our ability to be able to obtain
money from Dutchess Capital for acquisitions or to pay down our current debt may
be hindered or limited. Additionally our ability to raise capital outside of the
Dutchess transaction may be affected by our minimal revenues, the losses that we
incur and our stockholders equity.
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 Capital, the proceeds of which
will be used towards these potential acquisitions. If and when an acquisition
appears probable, we will revise our disclosure to reflect the terms of the
acquisition agreement and the potential ramifications. We will seek to raise
additional equity and debt to accomplish these potential acquisitions. We have
been exploring a variety of potential acquisitions in the insurance, employee
benefit and mortgage fields. Although we have not entered into any purchase
agreements, we are hopeful that we will be able to enter into and consummate a
transaction in the near future.
During November 2004, our independent auditors, Marcum & Kliegman LLP, advised
us that the auditors had identified a deficiency in our internal controls, which
was designated a "material weakness." The material weakness indicated that there
is inadequate structure within our accounting operations. We have no central
corporate accounting department. Each subsidiary independently maintains its own
books and records and all disbursements are done at the subsidiary level. This
decentralizes the accounting function and limits the effectiveness of our
internal control procedures to detect potential misstatements and fraudulent
accounting and financial reporting. The subsidiary accounting departments do not
have the sophistication to critically evaluate and implement new accounting
pronouncements, such stock based transactions for options, warrants and common
stock at times are recorded improperly and require additional procedures and
review and audit adjustments to be 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 years ended December 31, 2005 and 2004. 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 financials in the past there are uncertainties that the material
weakness may have a material impact on our financial statements in the future.
These uncertainties arise from our need to raise capital and our inability to
critically evaluate and record properly any equity transactions that we may
enter into.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles or GAAP in the United
States. The preparation of those financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities at the date of our financial statements. Actual results may differ
from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments or
uncertainties, and potentially result in materially different results under
different assumptions and conditions. The Company believes that are our critical
accounting policies include: recognition of transactions revenues and accounting
for stock options and warrants.
17
REVENUE RECOGNITION
Revenue is recognized at the time the administrative services are performed and
provided, or made available to its customers. Services are billed monthly based
upon predetermined percentage of the total assets included in the respective
pre-need funeral master trust fund.
ACCOUNTING FOR STOCK-BASED COMPENSATION
We account for options granted to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and comply with the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense
is recognized based on the difference, if any, on the date of grant between the
estimated market value of the Company's stock and the amount an employee must
pay to acquire the stock. Compensation expense is recognized immediately for
past services and ratably for future services over the option-vesting period.
We account for the fair value of options and warrants for non-employees in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation," which
requires that compensation cost be measured after the grant date based on the
value of the award and is recognized over the service period, which is also the
vesting period. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. We will be required to
account for options and warrants for employees during the annual reporting
period beginning after December 15, 2005 as a result of the FASB's issuance of
SFAS No. 123R "Accounting For Stock Based Compensation."
The Black-Scholes option-pricing model is used to estimate the fair value of a
stock option. The model calculates the theoretical fair value based on a number
of assumptions utilizing, the stock price, strike price, expiration date,
risk-free rate of return, and the standard deviation (volatility) of the stock's
return. Stock based compensation valuations may differ significantly if the
Company used a different option model, based on the before mentioned assumptions
and the alternative model's formula driven calculations. The Company has not
relied on any other option pricing models for the issuance of its options or
warrants as the Black-Scholes option-pricing model is currently the model most
widely used for reporting companies. The uncertain assumptions estimating the
valuation of these equity transactions may have a material effect on our
financial performance during the reported periods.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet debt nor did we have any transactions,
arrangements, obligations (including contingent obligations) or other
relationships with any unconsolidated entities or other persons that may have a
material current or future effect on financial conditions, changes in financial
conditions, result of operations, liquidity, capital expenditures, capital
resources, or significant components of revenue or expenses.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005
Net sales for the year ended December 31, 2005 were $327,657 all of which was
generated by ADS. Net sales for the year ended December 31, 2004 were $240,808,
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. American DataSource has slightly
increased its sales since the loss of business from its largest client, Service
Corporation International, which brought all of its trust assets that were
administered by third parties in-house.
Operating expenses for the year ended December 31, 2005 were $ 2,270,159 as
compared to operating expenses of $1,791,883 for the year ended December 31,
2004. During 2005, such costs include compensation expense of $ 673,772,
professional fees of $280,062, consulting fees of $ 459,401, general and
administrative expense of $ 288,489, offering costs of $476,821 and depreciation
and amortization expense of $ 91,614. Of the total operating expenses for the
year, $ 1,755,046 was incurred by NPI, $ 399,103 was generated by ADS, and $
116,010 was incurred by Walker. For the year ended December 31 2004, operating
expenses were $ 1,791,883, of which $ 1,101 693 was incurred by NPI, $ 141,860
was incurred by Walker and $ 548,330 was incurred by ADS.
The operating loss from continuing operations for the year ended December 31,
2005 was $ 3,296,318 of which $ 3,108,862 was incurred by NPI, $ 116,010 was
incurred by Walker and $ 71,446 was incurred 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. Although NPI has yet to generate any meaningful
revenues the Company continues to incur losses relating to costs of financings
in addition to the costs of running a public entity.
Interest expense for the year ended December 31, 2005 was $ 399,217 as compared
to interest expense for the year ended December 31, 2004 of $ 311,149. Interest
expense is derived by the costs of borrowing funds the expense related to the
accretion of the debt discount and the amortization of the deferred financing
fees over the term of the debt.
As a result of the foregoing, we incurred a net loss of approximately $
3,296,318 for the year ended December 31, 2005 or $0.24 per share, compared to a
net loss of $ 1,924,219 for the year ended December 31, 2004 or $0.24 per share.
LIQUIDITY AND CAPITAL RESOURCES
We have negative working capital of $1,913,630 at December 31, 2005 compared to
negative working capital of $1,858,265 at December 31, 2004. The decrease in our
working capital was a result of our net loss for the year ended December 31,
2005 which has resulted in a significant reduction in our cash and cash
equivalents, an increase in our accounts payable and accrued expenses and the
amount of debt due in the next 12 months.
18
Net cash used in operating activities was approximately $642,058 for the year
ended December 31, 2005 compared to net cash used in operating activities of $
1,136,015 for the year ended December 31, 2004. The decrease is primarily a
result of our increase in our accounts payable and accrued expenses as well as
an increase in our interest expense and debt conversion expense related to our
financing activities which are non-cash items.
There was $ 803 of net cash used in investing activities for the year ended
December 31, 2005 as compared with $14,806 of net cash used in investing
activities for the year ended December 31, 2004 resulting from the purchase and
repair of our equipment.
Net cash provided by financing activities was $ 600,224 for the year ended
December 31, 2005 resulting from proceeds from the sale of bridge notes and
convertible bridge notes, proceeds from notes payable, advances from an officer
stockholder and proceeds from the sale of our common stock. Net cash provided by
financing activities was $ 657,315 for the year ended December 31, 2004
resulting from the proceeds from the sale of bridge notes and convertible bridge
notes and proceeds from the sale of our common stock.
As a result of these activities, our cash and cash equivalents decreased to $
36,692 as of December 31, 2005 compared to a decrease to $79,329 of cash and
cash equivalents at 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.
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 of Credit (described below) to repay
outstanding indebtedness, for potential acquisitions and for working capital.
Failure to have the registration statement registering the shares underlying the
equity line in the Dutchess Transaction
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 $ 425,000 in promissory notes.
Our recent financing activities included the following transactions:
- - On March 15, 2000, the Company issued a 6% promissory note for $150,000. Due
to insufficient operating capital, the Company has not been able to meet this
commitment and currently is not in compliance with the terms of this note.
During the year ended December 31, 2005, the Company did not make any payments
under this note. As of December 31, 2005, the principal balance due under this
note was $105,000. The principal balance is presented on the accompanying
balance sheet as a current liability.
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 December 31, 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.
- - 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.
- - 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.
- - 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.
- - 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.
- - In December 2004 and February 2005, the Company issued 10% convertible
promissory notes in the aggregate principal amount of $375,000
20
(the "Notes") and granted 93,750 warrants to purchase common stock at an
exercise price of $0.71 per share. The convertible promissory notes mature in
February of 2006 due to insufficient operating capital, the Company has not been
able to meet this commitment and currently is not in compliance with the terms
of this note. The Company expects to retire this amount when it has access to
the Dutchess Capital equity line described herein.
- - On July 11, 2005, the Company sold and issued a note payable in the aggregate
principal amount of $100,000. The maturity date of the note was November 30,
2005 and has a stated interest rate of 10% per annum. As of March 15, 2006, the
Company has repaid $ 48,000 of principal and related interest and expects to pay
off the remaining principal and interest when it has access to capital from the
Dutchess equity line described herein.
- - During the year ended December 31, 2005, certain officers and stockholders
advanced the Company $98,221 for working capital purposes. The advances are
non-interest bearing and have no definitive repayment terms. During the year
ended December 31, 2005, the Company repaid $27,000 of the advances. As of
December 31, 2005, the total amount due to the officers-stockholders was
$128,371.
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. 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 can give no
assurance that we will ever be able to utilize our investment agreement with
Dutchess and utilize the proceeds to support our operations and fund the
execution of our business plan.
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, which we
amended on February 20, 2006 increasing the amount of common stock purchasable
to 550,000 at $.10 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.
On February 20, 2006, Walker Financial Corporation (the "Company") amended the
agreement providing for the sale of $220,000 in principal amount of its
five-year convertible debentures ("Convertible Debentures") to Dutchess Private
Equities Fund, II, L.P. (the "Investor"). The Investor may now convert the
Convertible Debentures into shares of the Company's Common Stock, par value
$0.10 per share (the "Common Stock"), at any time at the lesser of (i) the
lowest closing bid price of the Common Stock between December 12, 2005 and the
date of filing of the Registration Statement, or (ii) $0.10. Additionally, the
amendment removes the ability of the Investor to switch the conversion price of
the Debenture from a fixed price to one that is based on the market price of the
Company's stock in the event of default and removes the Investors right to use
proceeds from the Investment Agreement to redeem the Convertible Debenture.
In addition, the Company entered into an agreement providing for the sale of
$221,000 in principal amount of its five-year convertible debentures
("Convertible Debentures") to Dutchess Private Equities Fund, II, L.P. (the
"Investor"). The Convertible Debentures bear interest at 10% per annum The
Investor may convert the Convertible Debentures into shares of the Company's
Common Stock, par value $0.10 per share (the "Common Stock"), at any time at the
lesser of (i) the lowest closing bid price of the Common Stock between February
20, 2006 and the date of filing of a Registration Statement covering the resale
of the shares underlying this Convertible Debenture, or (ii) $0.10
The Company's obligation to repay the amounts outstanding under the Convertible
Debentures is secured by substantially all of the Company's assets and common
stock owned by the President of the Company.
In connection with the Convertible Debentures, the Company also granted to the
Investor warrants to purchase 412,500 shares of common stock at $0.10 per share
(the "Warrants"). 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 the Common
Stock.
We intend to use the Dutchess equity line (described below) to repay outstanding
indebtedness, for potential acquisitions and for working capital. Failure to
have this registration statement registering the shares underlying the equity
line in the Dutchess Transaction
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 $ 1,005,000 in debt obligations.
21
INVESTMENT AGREEMENT
Also on February 20, 2006, the Company entered into an Investment Agreement (the
"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 Common Stock for a period of up to 36 months from the
date the Registration Statement is declared effective. The amendment removes
Dutchess's obligation under the Investment Agreement to take the shares under
the Agreement on the condition that the shares be free trading under the "Cover"
provisions of the Investment Agreement.
The Company is obligated to file a registration statement with 10 days after
filing the Company's annual report for the year ended December 31, 2005, but in
no event later than March 31, 2006 ( the "Filing Date") 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 "Registration Statement"). The Company is further obligated to
use its best efforts to cause the SEC to declare the Registration Statement
effective within 90 days after the filing date of the Registration Statement. If
the Company does not file the Registration Statement with the SEC by the Filing
Date, it is obligated to pay liquidated damages to the Investor in an amount
equal to 2% of the principal amount of the debenture outstanding, pro rata, for
every month which such registration statement has not been filed. 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 21 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 the
Investor 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.
All securities were issued in reliance upon an exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D
promulgated thereunder as a transaction not involving a public offering. In
addition, the investors are accredited investors and/or qualified institutional
buyers, the investors had access to information about the company and their
investment, the investors took the securities for investment and not resale, and
the Company took appropriate measures to restrict the transfer of the
securities.
There can be no assurance that our plans to obtain additional financing to fund
operations will be successful or that the successful implementation of the
business plan and the execution of the investment agreement with Dutchess will
become effective and will actually improve our operating results. If these
financing programs are not successful in raising the capital we require to
execute our development plans, it may be necessary to curtail, or cease entirely
our plan operations.
PLAN OF OPERATIONS
We create, provide and market death care financial service products, currently
focusing on prearrangement or pre-need products. Prearrangement and preneed
products allow an individual to secure the funding for and in some instances the
goods and services for their future funerals prior to their death. For preneed
funding products we sell, as an agent for various life insurance companies which
underwrite the policies, life insurance policies in amounts from $ 3,000 to $
15,000 which upon an individual's death would be used for the payment of his or
her funeral costs.
We have established a worksite and affinity marketing strategy by positioning
the prearrangement of death care and other pre-need products as a voluntary or
contributory benefit for corporations, unions, and affinity groups to offer
their employees or members. In this regard we seek to market preneed funding
products and the ability of individuals to take this funding and use it to
purchase a prearrangement at funeral homes by introducing these products to
individuals as a benefit of their employment or union membership similar to the
way they are introduced to health insurance, life insurance, dental insurance
and legal plans. The funding products that we sell are called preneed or final
expense insurance policies. This insurance policy is similar to a fixed pay
whole life insurance policy with an inflation rider which acts to increase
annually the amount of the benefit that is paid to an individual. The policy
value grows over time, which acts as a hedge against inflation and rising
funeral prices. The policy can be assigned to a funeral home when a
prearrangement contract is executed. The funeral home uses the proceeds of the
policy to cover the costs of the funeral contracted for. If a prearrangement is
not made the policy proceeds can be used by the descendants beneficiaries to
cover the costs of the descendants funeral.
Our subsidiary, National Preplanning has entered into various third party
marketing agreements which allow it to market the above mentioned funding
products to employees in the workplace, individuals belonging to unions and to
individuals belonging to various associations. These marketing agreements with
larger and more established insurance agencies which sell a variety of other
insurance products (i.e. health insurance. group life insurance, long term care
insurance, etc) to their clients allow National Preplanning to market its
products to their clients in return for the sharing of commissions upon the sale
of these products. These agreements additionally allow National Preplanning to
keep its sales costs low until we start to generate more substantial revenues.
Our other subsidiary, American Datasource, Inc. is involved in the
administration of monies in trust that are used for the payment of prearranged
funerals upon the death of an individual. These trust accounts are created by an
individual entering into a prearrangement contract with a funeral director.
Instead of funding a prearrangement with a preneed insurance policy as discussed
above some funeral directors suggest that an individual place monies into trust.
That trust account is professionally money managed by unaffiliated third party's
and the account is assigned to the funeral home, similar to the preneed
insurance policy, and used by the funeral director to cover the funeral costs of
that
22
individuals funeral upon their death. American DataSouce provides accounting and
administrative functions in reporting annually on the monies in each trust
account in addition to the administration of the monies upon an individuals
death.
In addition to the funeral related products we are currently marketing, the
Company is desirous of adding other employee benefit and insurance products and
services to market within as well as outside the workplace that benefit the baby
boomer and senior populations. Products may include other insurance related
products such as disability insurance, long term care, legal plans, reverse
mortgages and other voluntary benefits. The Company may seek to acquire agencies
and companies that currently market these other products.
The Company entered the marketing of funeral funding products through its merger
in March, 2002 with National Preplanning, Inc. and American DataSource, Inc. The
Company was previously engaged in non-digital photographic development
NPI has earned minimal insurance commissions from the sale of preneed and final
expense insurance policies to date. The insurance commissions are paid by the
insurance companies which create, underwrite and issue these policies. The
Company's other subsidiary, American DataSource, Inc., earns administrative fees
on the administration of preneed funds in trust which are paid by the trust.
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, which it has
ceased.
Most of the marketing that is currently planned for National Preplanning's
products are marketing that directs potential consumers to the company's
enrollment website as well as its partner's web enrollment site. Although the
internet has seen a lot of growth in its use for the sale of various products on
various websites, the use of the internet and websites for the sale of voluntary
benefit products is relatively new. The Company will closely monitor the success
or lack thereof of its enrollment and marketing philosophy.
NPI has only generated minimal revenues from its worksite marketing efforts and
there can be no assurance that it will ever generate any substantial revenues
from its worksite marketing efforts. The Company may decide to revert its
National Preplanning marketing strategy to a more common approach such as print,
radio and television advertising directed at individuals outside of worksite and
affinity marketing
Whereas, NPI originally sought to acquire direct third party marketers of
pre-arranged death care which market pre-arranged death care services primarily
by direct mail, as well as run the pre-arrangement office in many funeral home
locations the Company has changed its focus on developing NPI's existing funeral
advisory and funding business and focusing on potential acquisitions in the
employee benefit, insurance, mortgage and worksite marketing areas which allow
for the cross selling of its products in addition to other businesses which
market products and services which benefit the baby boomer and senior population
segments. Our ability to accomplish any acquisitions is dependent upon our
ability to raise capital for said acquisitionsOur ability to raise capital may
be affected by several factors including but not limited to our default under
outstanding notes and a lack of liquidity of our common stock. The Dutchess
Capital transaction, which provides the Company with a means of potentially
raising capital, may not be sufficient for the Company to accomplish these
potential acquisitions. The Dutchess documents provide limitations on the
percentage of stock Dutchess can hold at particular times and in no event may
Dutchess hold greater than 4.99% of the outstanding common stock of the Company.
Consequently, if Dutchess cannot sell our shares due to the lack of liquidity in
our common stock, our ability to be able to obtain money from Dutchess Capital
for acquisitions or to pay down our current debt may be hindered or limited.
Additionally our ability to raise capital outside of the Dutchess transaction
may be affected by our minimal revenues, the losses that we incur, and our
financial picture including our working capital deficit. Potential capital
sources may require us to pay off existing indebtedness before providing any
capital to the Company and the Company may be unable to do so.
ADS is currently seeking to increase the amount of pre-need trust monies it
currently administrates. Currently, ADS administers approximately $40 million in
trust funds. In September, 2003, ADS lost a significant amount of revenues from
its business when its largest client, Service Corporation International, the
largest funeral home and cemetery operator in the country removed approximately
$ 70,000,000 of trust assets that ADS administrated and placed said
administration overseas. SCI removed all trust assets under administration from
a variety of outside vendors such as ADS. As a result, ADS has increased its
efforts to administer trust funds held by various state funeral association
trusts, establish and market master trusts to the independent funeral home
community and to acquire existing trust administration companies.
ADS has entered into a marketing agreement with Parkway Advisors, L.P., whereby
Parkway will advisors will market ADS trust services to their existing and
potential clients. Parkway would share in fees generated by ADS's services. It
is the hope that this agreement will generate additional revenue for ADS
although to date no revenues have been generated from this relationship.
There can be no assurance that we will achieve successful and profitable results
from our distribution and marketing efforts or that we will be able to complete
acquisitions within the worksite marketing and employee benefit sectors.
We intend any acquisitions to be accomplished through issuances of stock, debt
and cash, or a combination of such forms of consideration. Accordingly, any
future merger or acquisition may have a dilutive effect on our stockholders as
of the time of such mergers and acquisitions.
23
Additionally, our ability to accomplish any future acquisitions may depend on
our cash position, our ability to raise capital, the stock price of our common
stock, and our ability to service any debt we may incur.
We believe that our operating results may fluctuate greatly quarter to quarter
due to several factors, including the success of our merger and acquisition
strategy and the impact of any increases in our results of operations as we
pursue new business outside of the death care services industry.
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
24
that is purchased from a funeral home directly. National Preplanning will not
receive any revenues from its relationship with Stewart Enterprises
On June 1, 2004, NPI entered into a strategic pre-need sales and marketing
agreement with Hilb Rogal & Hobbs Insurance Services of Northern California
which will allow NPI to begin marketing funeral pre-arrangement to the employees
and affiliates of businesses belonging to the California Chamber of Commerce.
The California Chamber of Commerce represents approximately 12,000 businesses
having over 2.3 million employees. NPI has been told that HRH will commence
marketing NPI products in the near future. There is no minimum cash commitment
relating to this agreement. This agreement calls for the marketing of the
insurance products that NPI seeks to market through HRH's internet portal to
service the employees of the companies that belong to the California Chamber of
Commerce. It does not appear that these firms are actively marketing our
products. As a result, we may be required to market directly to potential
clients in addition to seeking to acquire other agencies that market other
products to its clients base which we then can add our products to their product
lineup.
On June 15, 2004, NPI received the approval to market its products to the
members of the Benefit Marketing Association, an organization of over 3,200
corporate and individual members engaged in the marketing of benefits that
involve the relationship between an employer and their employees, a business and
their customers and an organization and their members. NPI's marketing to the
members of the Benefit Marketing Association commenced in the third quarter of
2004 and is expected to continue for at least the following three fiscal
quarters. There is no minimum cash commitment relating to this agreement. No
sales have resulted from this agreement and there can be no assurance that any
sales will result from this agreement.
On August 16, 2004, NPI entered into a pre-need sales and marketing agreement
with L.F.A. Insurance Services, Inc., an insurance agency specializing in group
benefits having over 200 clients with over 5,000 total members. LFA will
commence marketing NPI's products in the second quarter of 2005. There is no
minimum cash commitment relating to this agreement. No sales have resulted from
this agreement and there can be no assurance that any sales will result from
this agreement and no sales have resulted from this agreement to date.
On October 6, 2004, NPI entered into a Supplier Agreement with Motivano, Inc.
Motivano is a technology -based seller of voluntary benefits to approximately
1,000,000 employees of companies that offer Motivano's products. Under this
agreement, commencing in April 2005, NPI's products will be included in
Motivano's offerings to such employees. There is no minimum cash commitment
relating to this agreement.
On December 8, 2004, we established an advisory board that will be composed of
distinguished professionals from the insurance, employee benefit and investment
banking communities. The advisory board will serve as a resource to our
executive team and will provide input relating to strategic direction, the
development of key strategic relationships and the company's future growth
plans. The term of the advisory board members is for one year and each member
receives six thousand options and an additional 1,000 options for each advisory
meeting attended.
On December 15, 2004, NPI entered into a pre-need sales and marketing agreement
with The Parker Group Insurance Services, an independent enrollment firm
assisting brokers and their clients in developing, educating, communication and
delivering employee benefit packages. There is no minimum cash commitment
relating to this agreement and no sales have resulted from this agreement to
date.
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.
26
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.
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.
27
OTHER COMPETITORS
To the extent that third party marketers, insurance agencies, banks, trust
companies, administrators and/or software companies enter the prearrangement
market, we expect some competition from these arenas. However, we believe our
structure, product mix, marketing strategy, and business partners will enable us
to gain market traction more quickly.
REGULATION
State insurance laws grant supervisory agencies, including state insurance
departments, broad regulatory authority. These supervisory agencies regulate,
among other things, the licensing of insurance brokers and agents, regulation of
the handling and investment of third-party funds held in a fiduciary capacity
and the marketing practices of insurance brokers and agents, in the context of
curbing unfair trade practices. This continual reexamination may result in the
enactment of laws and regulations, or the issuance of interpretations of
existing laws and regulations, that adversely affect our business. More
restrictive laws, rules or regulations may be adopted in the future that could
make compliance more difficult and expensive. We are required to be licensed to
engage in the insurance agency and brokerage business in most of the
jurisdictions where we do business. We currently have been licensed in the
following jurisdictions:
o California,
o Florida,
o Illinois and
o New Jersey.
The insurance laws and regulations of all United States jurisdictions also
require individuals who engage in agency, brokerage and certain other insurance
service activities to be licensed personally. These laws and regulations also
govern the sharing of insurance commissions with third parties. We believe that
any payments made by or received by us are in compliance with applicable laws
and regulations. However, should any regulatory authority take the position, and
prevail, that certain payments by us violate the insurance laws and regulations
relating to the payment or sharing of commissions, that regulatory authority
could require that we stop making or receiving those payments or that the
entities receiving or making those payments become licensed. In addition, if
this were to occur, the regulatory authority could impose fines or penalties on
us. We believe, however, that we could continue to operate our business by
requiring that these entities be licensed or by making payments directly to
licensed individuals.
EMPLOYEES
We currently have seven full time employees, with two in management, one 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 Principal Positions and Offices with Our Company
- ---- --- ------------------------------------------------
James N. Lucas, Sr. 58 Chairman of the Board of Directors
Mitchell S. Segal 46 President, Chief Executive Officer and 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 N. 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 has 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.
BOARD COMMITTEES
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.S.
Mr. Kwicien is the founder of Rewards Plus, a national employee benefits company
that leverages internet technology and work-site marketing strategies to deliver
core and voluntary benefits to employers and employees. We will grant 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 will grant 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.
As of December 31, 2005, We have not had any Advisory Board meetings nor have we
granted any options to the above individuals. The advisory board is not part of
our board of directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5 and amendments to these forms
furnished to us, together with written representations received by us from
applicable parties that no Form 5 was required to be filed by such parties, all
parties subject to the reporting requirements of Section 16(a) of the Exchange
Act filed all such required reports during and with respect to our 2005 fiscal
year.
CODE OF ETHICS
Our board of directors has established a code of ethics that applies to our
principal executive, financial and accounting officer(s). A copy of our code of
ethics has been made Exhibit 14 to our Annual Report on Form 10-KSB for our
fiscal year ended December 31, 2003, filed with the SEC on April 14, 2004.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or paid
for all services rendered to us during our 2005, 2004 and 2003 fiscal years by
those persons who served as chief executive officer during our 2005 fiscal year
and any executive officer at December 31, 2005 who received compensation in
excess of $100,000 during such years.
30
SUMMARY COMPENSATION TABLE
Annual Compensation
Fiscal ------------------------ All Other
Name and Principal Positions Year Salary Bonus Compensation (1)
- ---------------------------- --------- ----------- ---------- --------------------
Mitchell S. Segal 2005 $ 230,000 $ 0 $ 0
President, Chief Executive Officer and 2004 $ 220,000 $ 0 $ 0
Chief Financial Officer (2) 2003 $ 210,000 $ 0 $ 0
Peter Walker
Vice President and Secretary (3)(4) 2005 $ 100,000 $ 0 $ 0
2004 $ 100,000 $ 0 $ 0
2003 $ 100,000 $ 0 $ 0
<FN>
(1) The above compensation figures do not include the cost for the use of
automobiles leased by us, the cost of benefits, including premiums for life
insurance, and any other perquisites provided by us to such persons in
connection with our business, all of which does not exceed the lesser of $50,000
or 10% of such person's annual salary and bonus for the subject fiscal year.
(2) Mr. Segal became our president and chief executive officer in March 2002 and
our chief financial officer in October 2002.
(3) Mr. Walker resigned as our president and chief executive officer in
connection with our acquisitions of ADS and NPI in March 2001.
(4) Mr. Walker no longer serves as president of Kelly Color Laboratories, Inc.,
our former wholly-owned subsidiary, pursuant to the Company discontinuing the
operations of Kelly Color Laboratories in February 2004.
Option Grants in Last Fiscal Year; Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year End Option Values
None.
EMPLOYMENT AGREEMENTS
EMPLOYMENT AGREEMENT WITH MITCHELL S. SEGAL
We had 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
$230,000 for 2005, 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.
It is the intention of the Company to enter into a similar employment agreement
with Mr. Segal within the next month.
EMPLOYMENT AGREEMENT WITH PETER WALKER
We have 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
31
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, 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
During the year ended December 31, 2005, certain officers and stockholders
advanced the Company $98,221 for working capital purposes. The advances are
non-interest bearing and have no definitive repayment terms. During the year
ended December 31, 2005, the Company repaid $27,000 of the advances. As of
December 31, 2005, the total amount due to the officers-stockholders was
$128,371.
As of December 31, 2005, the Company was in arrears in payment of Mr. Segal's
salary in the amount of $109,000 which is included on the consolidated balance
sheet as part of accounts payable and accrued expenses.
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
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 information with respect to the beneficial
ownership of shares of our common stock as of January 6, 2006 by:
o each person who is known by us to beneficially own 5% or more of our common
stock;
o each of our officers and directors; and
o all of our officers and directors as a group.
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.
Except as otherwise indicated in the notes to the following table,
o we believe that all shares are beneficially owned, and investment and voting
power is held by, the persons named as owners, and
o the address for each beneficial owner listed in the table, except where
otherwise noted, is c/o Walker Financial Corporation, 990 Stewart Avenue - Suite
650, Garden City, New York 11530.
o Based upon 13,837,220 shares issued and outstanding on March 15, 2006.
Amount and Nature of Percentage of
Name and Address of Stockholder Beneficial Ownership Outstanding Shares
- ------------------------------------------------- --------------------- ------------------
Mitchell S. Segal (1) 1,839,670 13.30%
James M. Lucas, Sr. (9) 459,960 3.32%
Peter Walker (4) 1,052,390 (5) 7.61%
James M. Lucas, Jr. (7) 689,940 4.99%
Fusion Capital Fund II, LLC (6) 854,702 (4) 6.18%
David L. Cohen (2) 1,263,841 (3) 8.94%
All Officers and Directors as a group (3) persons 3,353,020 24.20%
<FN>
(1) Mr. Segal became a director, president and chief executive officer of our company upon completion of our
acquisition of National Preplanning, Inc. in March 2002. Mr. Segal remains the president of our NPI subsidiary.
(2) The address for Dr. Cohen is 1800 Rockaway Avenue, Hewlett, New York 11557.
(3) 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.
(4) Mr. Walker is a director of our company which he has been since March 2002. Between 2002 and February 2004,
Mr. Walker served as president of Kelly Color Laboratories, Inc., our wholly-owned subsidiary.
(5) 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.
(6) The address for Fusion Capital Fund II, LLC is 222 Merchandise Mart Plaza - Suite 9-112, Chicago, Illinois
60654. Steven Martin and Joshua Scheinfeld retain voting and investment control over the shares held by Fusion
Capital Fund.
(7) Mr. James N. Lucas, Jr. is an adult son of James N. Lucas, Sr., our chairman of the board of directors. The
mailing address for Mr. Lucas is c/o American DataSource, Inc., 517 North Sylvania Avenue, Fort Worth, Texas
76111.
(8) Includes 22,998 shares of our common stock held by the James N. Lucas and Theresa Lucas Irrevocable Trust for
the benefit of this individual.
(9) Mr. Lucas became chairman of the board of our company upon completion of our acquisition of ADS Inc. in March
2002. Mr. Lucas served as president of our ADS subsidiary until 2003. The mailing address for Mr. Lucas is c/o
Ensure, Inc., 517 North Sylvania Avenue, Fort Worth, Texas 76111.
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 March 17, 2006, there were 13,837,220 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.
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 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.
We have 100,000 warrants outstanding exerciseable at $ .30 per share, which
expire in August, 2008. We have 45,000 warrants outstanding exerciseable at $
..50 per share which expire in January, 2008. We have 550,500 warrants
outstanding exerciseable at $ .10, which expire in December, 2010 and we have
412,500 warrants outstanding exerciseable at $ .10, which expire in February,
2011.
CONVERTIBLE SECURITIES
There are currently $866,000 worth of convertible securities outstanding.
$50,000 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.
$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.
$221,000 consists of convertible debentures. On February 20, 2006 we entered
into an agreement providing for the sale of $221,000 in principal amount of its
five-year convertible debentures to Dutchess. The convertible debenture bears
interest at 10% per annum. Dutchess may convert the convertible debenture into
shares of our common stock at any time at a fixed conversion price at $.10. Our
obligation to repay the amounts outstanding under the convertible debenture is
secured by substantially all of our assets. If not converted, the debentures are
to be repaid in mostly installments until paid in full by September 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. Although we have not been advised how the securityholders will
dispose of their securities, they 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
35
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.
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. In addition, J.P. Turner &
Associates is a registered broker-dealer and therefore considered an underwriter
within the meaning of the Securities Act with respect to the shares that it
owns. 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 712,958(5) 4.99% 55,372,500(6) 55,372,500 -0- 0.0%
Fund II, LLP (4)
J.P. Turner & Associates 187,500(7) 1.4% 187,500 187,500 -0-
Anthony & Jacqueline Towell 82,924(8) .6 82,924 82,924 -0-
Flavio Marquez 124,385(8) .9 124,385 124,385 -0-
Adrian Kimberly 41,461(8) .3 41,461 41,461 -0-
Roy Bento 41,461(8) .3 41,461 41,461 -0-
Mickey Robinson 41,461(8) .3 41,461 41,461 -0-
Ben Manny 41,461(8) .3 41,461 41,461 -0-
Patrick Decavaignac 41,461(8) .3 41,461 41,461 -0-
Daniel Decavaignac 41,461(8) .3 41,461 41,461 -0-
Deanna Decavaignac 41,461(8) .3 41,461 41,461 -0-
David Rosen 41,461(8) .3 41,461 41,461 -0-
Patrick & Virginia Lavelle 41,461(8) .3 41,461 41,461 -0-
Jason Halpern 41,461(8) .3 41,461 41,461 -0-
Total 1,522,377 56,181,919 56,181,919 -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) 4,410,000 shares of common stock that may be issued upon conversion of $ 441,00 convertible debenture at a fixed
conversion price of $.10 per share, and (iii) 962,500 shares issuable upon exercise of 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 Agreements contain contractual restrictions on beneficial share ownership limiting Dutchess' beneficial
ownership to 4.99%.
(7) Represents (i) 187,500 shares issuable upon exercise of warrants. All of these securities and the securities described in
footnote 8 were issued in February 2005 pursuant to a transaction in which we raised $375,000 through the issuance 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 Rule 506 promulgated under the Securities of 1933, as amended.
Tim McAfee and William L. Mello share voting and investment control over the shares held by J.P. Turner & Associates, a registered
broker-dealer.
(8) Represents shares issuable upon exercise of warrants and shares issuable upon conversion of convertible promissory notes at a
conversion price ogf $ .71.
38
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 as of December 31, 2005 and for the years ended December
31, 2005 and 2004 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.
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.
39
INDEX TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------
Report of independent registered public accounting firm F-1
- -----------------------------------------------------------------------------------------------
Consolidated balance sheet at December 31, 2005 F-2
- -----------------------------------------------------------------------------------------------
Consolidated statements of operations for the years ended December 31, 2005
and 2004 F-3
- -----------------------------------------------------------------------------------------------
Consolidated statements of stockholders' equity (deficiency) for the years
ended December 31, 2005 and 2004 F-4
- -----------------------------------------------------------------------------------------------
Consolidated statements of cash flows for the years ended December 31, 2005
and 2004 F-5
- -----------------------------------------------------------------------------------------------
Notes to consolidated financial statements F-7 to F-21
- -----------------------------------------------------------------------------------------------
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Board of Directors and Stockholders of Walker Financial Corporation
We have audited the accompanying consolidated balance sheet of Walker Financial
Corporation (the "Company") as of December 31, 2005, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for the years ended December 31, 2005 and 2004. 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 audits 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 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated 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 as of December 31, 2005. These
conditions raise substantial doubt about its ability to continue as going
concern. Management's plans regarding those matters also are described in Note
2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
- -----------------------------
New York, New York
March 17, 2006
F-2
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005
ASSETS
------
Current assets -
Cash $ 36,692
Accounts receivable 27,032
Prepaid expenses and other current assets 1,499
-----------
Total current assets 65,223
-----------
Deferred financing costs, net 50,075
Property and equipment, net 166,859
-----------
Total assets $ 282,157
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities -
Line of credit, bank $ 147,704
Accounts payable and accrued expenses 521,211
Notes payable 205,000
Bridge notes payable, net of debt
discount of $26,470 348,530
Convertible bridge notes payable 375,000
Advance on 12% convertible debentures 95,000
10% Senior subordinated secured convertible promissory notes 50,000
Due to officer-stockholder 128,371
Accrued interest 92,597
Discontinued liabilities 15,440
-----------
Total current liabilities 1,978,853
-----------
Commitments and Contingencies --
Stockholders' deficiency -
Common stock, par value $.10 per share, 100,000,000
authorized, 13,922,220 shares issued and outstanding 1,392,222
Additional paid-in capital 6,349,976
Accumulated deficit (9,408,894)
Financing fee deposit (30,000)
-----------
Total stockholders' deficiency (1,696,696)
-----------
Total liabilities and stockholders' deficiency $ 282,157
===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements
F-2
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
----------- -----------
Net revenues $ 327,657 $ 240,808
----------- -----------
Operating expenses
Compensation 673,772 850,941
Professional Fees 280,062 189,196
Consulting Fees 459,401 222,200
Depreciation and amortization 91,614 106,093
Costs related to abandoned offering 476,821 --
General and Administrative 288,489 423,453
----------- -----------
Total Operating Expenses 2,270,159 1,791,883
----------- -----------
Operating loss (1,942,502) (1,551,075)
Debt conversion charge (933,793) -
Write down of assets (20,806) -
Interest expense, net (399,217) (311,149)
----------- -----------
Loss before discontinued operations (3,296,318) (1,862,224)
Discontinued operations -- (61,995)
----------- -----------
Net loss $(3,296,318) $(1,924,219)
=========== ===========
Per Share Information:
Weighted average number of common shares outstanding 13,545,089 8,006,798
=========== ===========
Net loss per common share from continuing operations $ (0.24) $ (0.23)
Net loss per common share from discontinued operations $ -- $ (0.01)
----------- -----------
Basic and diluted net loss per common share $ (0.24) $ (0.24)
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements
F-3
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Total
Common Additional Stockholders'
------------------------ Paid-in Accumulated Deferred Financing Equity
Shares Par Capital Deficit Compensation Fee Deposit [Deficiency]
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance - January 1, 2004 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)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Issuance of common stock for
settlement of debt 1,380,568 138,057 842,146 - - - 980,203
Debt conversion charge 1,556,322 155,632 778,161 - - - 933,793
Issuance of common stock for
financing services 794,702 79,470 397,351 - (476,821) - -
Issuance of common stock for
termination of consulting agreement 150,000 15,000 90,000 - - - 105,000
Granting of 187,500 warrants to agent in
Connection with bridge notes - - 57,600 - - - 57,600
Granting of 93,750 warrants attached
with bridge loan debt of $375,000 - - 28,500 - - - 28,500
Issuance of common stock for cash proceeds 294,118 29,412 70,588 - - - 100,000
Granting of 175,000 warrants in connection
with the sale of $125,000 of bridge notes - - 36,100 - - - 36,100
Granting of 17,500 warrants in connection with
the extension of $250,000 of bridge notes - - 3,600 - - - 3,600
Issuance of common stock for services 150,000 15,000 30,000 - - - 45,000
Issuance of common stock for a deposit 85,000 8,500 21,500 - - (30,000) -
Amortization of deferred compensation - - - - 280,000 - 280,000
Costs related to abandoned offering - - - - 476,821 - 476,821
Net Loss - - - (3,296,318) - - (3,296,318)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance - December 31, 2005 13,922,220 $ 1,392,222 $ 6,349,976 $(9,408,894) $ - $ (30,000) $(1,696,696)
=========== =========== =========== =========== =========== =========== ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements
F-4
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $(3,296,318) $(1,862,224)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 91,614 106,093
Compensatory element of stock issuances 150,000 162,200
Amortization of deferred compensation 280,000 --
Costs related to abandoned offering 476,821 --
Debt conversion charge 933,793 --
Write-down of assets 20,806 --
Amortization of deferred financing cost 250,001 71,824
Accretion of debt discount 51,730 42,917
Changes in operating assets and liabilities:
Accounts receivable (6,520) 7,970
Prepaid expenses and other current assets 4,201 15,133
Other assets 9,949 (12,044)
Accounts payable and accrued expenses 300,515 135,708
Accrued interest 91,350 196,408
----------- -----------
Net cash used in operating activities (642,058) (1,136,015)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (61,995)
Change in -
Assets from discontinued operations -- 31,121
Liabilities from discontinued operations -- 5,970
----------- -----------
Net cash used in operating activities
of discontinued operations -- (24,904)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (803) (14,806)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase, net proceeds from line of credit, bank 6,829 8,315
Advances from officers-stockholders 98,220 50,000
Repayment of advances from officers- stockholders (27,000) --
Proceeds from sale of bridge notes and
convertible bridge notes 326,000 424,000
Financing fees paid in connection with borrowings (98,825) --
Proceeds from issuance of notes payable 100,000 --
Advances for 12% convertible debentures 95,000 --
Principal repayment of notes payable -- (25,000)
Proceeds from sale of common stock 100,000 200,000
----------- -----------
Net cash provided by financing activities 600,224 657,315
----------- -----------
Net decrease in cash (42,637) (518,410)
Cash - beginning of year 79,329 597,739
----------- -----------
Cash - end of year $ 36,692 $ 79,329
=========== ===========
<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, 2005 AND 2004
CONTINUED
2005 2004
------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ -- $ 2,257
=========== ===========
Income taxes $ -- $ --
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 1,308,568 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 $ --
=========== ===========
Issuance of 85,000 shares of common stock
as a finance fee deposit. $ 30,000 $ --
=========== ===========
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 consolidated financial statements
F-6
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
Walker Financial Corporation (collectively with its subsidiaries, the "Company")
markets various insurance and trust administration services products through two
of its wholly-owned subsidiaries, National Preplanning, Inc. ("NPI") and
American DataSource ("ADS"). NPI is a managing general insurance agency and
third party marketer of insurance products, primarily final expense insurance,
to corporations, unions and affinity groups. ADS provides trust administration
services to independent funeral homes, state master trusts and companies that
own funeral homes or cemetery for pre-need funeral and cemetery trust accounts.
Through its wholly owned subsidiary, Kelly Color, Inc. ("Kelly Color"), the
Company operated in the film processing business through February 2004. As
further discussed in Note 18, the operations of Kelly Color have been included
in these consolidated financial statements as discontinued operations.
NOTE 2 - GOING CONCERN UNCERTAINTY
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United Sates of
America, which contemplate continuation of the Company as a going concern.
However, for the year ended December 31, 2005, the Company incurred a net loss
of $3,296,318 and, for the year ended December 30, 2004, the Company incurred a
net loss of $1,924,219. The Company had a working capital deficiency at December
31, 2005 of $1,913,630.
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, 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. The Company's ability to raise capital may be
affected by several factors including but not limited to default of its
outstanding debt and a lack of liquidity of the Company's common stock.
As discussed further in Note 9 to the financial statements, the Company has
entered into an agreement with Dutchess Private Equities Fund.
("Dutchess" and "Dutchess Transaction") that provides for the sale to Dutchess
of up to $10,000,000 of the common stock of the Company. The agreement limits
the percentage of stock Dutchess will hold at any particular times to 4.99% of
the Company's outstanding shares. Consequently, if Dutchess cannot sell the
shares of the Company due to the lack of liquidity in the common stock of the
Company, the Company's ability to be able to obtain money from Dutchess for
acquisitions or to pay down the Company's current debt may be hindered or
limited. Additionally, the Company's ability to raise capital outside of the
Dutchess transaction may be affected by minimal revenues, the losses that we
incur and our stockholders deficiency.
There can be no assurance that the Company will be successful in any of its
plans as discussed in this Note 2. To the extent that the Company is
unsuccessful in its plans to increase its cash position, the Company may find it
necessary to further curtail its operations and possible future acquisitions.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. However, the accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of the liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the recovery of
assets or the classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Walker and its
wholly-owned subsidiaries NPI, Kelly Color and ADS collectively referred to as
the "Company". All significant inter-company transactions and balances have been
eliminated in consolidation.
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.
F-7
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
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, 2005, the Company has not established an
allowance for doubtful accounts.
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, 2005, 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, 2005, the Company did not have a credit exposure.
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.
STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS
At December 31, 2005, the Company had a Equity Incentive Plan, which is
described more fully in Note 14. 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.
The Company did not incur stock-based employee compensation for issuance of
options during the years ended December 31, 2005 and 2004, as such the proforma
net loss is identical to the net loss as reported in the consolidated statements
of operations.
F-8
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
LOSS PER SHARE
SFAS No. 128, "Earnings per Share." requires the presentation of basic and
diluted earnings per share ("EPS"). Basic EPS is computed by dividing loss
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS includes the potential dilution that
could occur if options or other contracts to issue common stock were exercised
or converted. The Company's outstanding options, warrants and convertible
securities, as set forth below, are not reflected in diluted earnings per share
because their effects would be anti-dilutive. Accordingly, basic and diluted
earnings per share are identical.
December 31,
--------------------------------------
2005 2004
------------------ ------------------
Options -- 52,170
Warrants 1,643,656 1,169,906
Convertible debt 568,169 2,936,890
------------------ ------------------
2,211,825 4,158,966
================== ==================
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 $2,175 and
$3,549 for the years ended December 31, 2005 and 2004, 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.
F-9
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
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, 2005, the Company has net operating loss carryforwards of
approximately $8,800,000 which expire through 2025. 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, 2005, the deferred
tax asset of approximately $3,400,000 has been offset by a valuation allowance
of a like amount, which increased by $1,200,000 in 2005.
The effective tax rate differs from the statutory rate of 34% due to the
increase of the valuation allowance for each of the years ended December 31,
2005 and 2004.
NEW ACCOUNTING PRONOUNCEMENTS
- - In December 2004, the Financial Accounting Standards Board ("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 annual
reporting period that begins after December 15, 2005. Management believes the
adoption of this pronouncement will have a material impact on the Company's
financial statements, whereby the Company upon adoption expects to record a
charge for the granting of future employee stock options.
- - In June 2005, the FASB published SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 establishes new standards on accounting for
changes in accounting principles. Pursuant to the new rules, all such changes
must be accounted for by retrospective application to the financial statements
of prior periods unless it is impracticable to do so. SFAS 154 completely
replaces APB No. 20 and SFAS 3, though it carries forward the guidance in those
pronouncements with respect to accounting for changes in estimates, changes in
the reporting entity, and the correction of errors. The requirements in SFAS 154
are effective for accounting changes made in fiscal years beginning after
December 15, 2005. The Company will apply these requirements to any accounting
changes after the implementation date. The application of this pronouncement is
not expected to have an impact on the Company's consolidated financial position,
results of operations, or cash flows.
- - The Emerging Issues Task Force ("EITF") reached a tentative conclusion on EITF
No. 05-1, "Accounting for the Conversion of an Instrument That Becomes
Convertible upon the Issuer's Exercise of a Call Option" ("EITF No. 05-1") that
no gain or loss should be recognized upon the conversion of an instrument that
becomes convertible as a result of an issuer's exercise of a call option
pursuant to the original terms of the instrument. The consensus for EITF No.
05-1 has not been finalized. The Company is evaluating the financial impact of
this pronouncement.
- - In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered "conventional" for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19 for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date may qualify for
the exemption provided under EITF No. 00-19 for conventional convertible debt if
the instrument's economic characteristics are more similar to debt than equity.
EITF No. 05-2 is effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005. The Company is evaluating the
financial impact of this pronouncement.
F-10
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
- - EITF Issue No. 05-4 "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19, `Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 05-4") addresses financial instruments, such as
stock purchase warrants, which are accounted for under EITF 00-19 that may be
issued at the same time and in contemplation of a registration rights agreement
that includes a liquidated damages clause. The consensus for EITF No. 05-4 has
not been finalized. In connection with the Dutchess Transaction [See Note 9],
the adoption of this pronouncement will have an impact on the Company's
consolidated financial statements as the Company will be required to calculate
the fair value of the financial instruments, and account for the instruments as
liabilities marked to market through earnings at the end of each reporting
period.
- - In June 2005, the EITF reached consensus on Issue No. 05-6, "Determining the
Amortization Period for Leasehold Improvements" (EITF 05-6). EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. EITF 05-6 is not expected to have a
material impact on the Company's consolidated financial position or results of
operations.
- - In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues" ("EITF No. 05-7"), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). EITF
No. 05-7 is effective for the first interim or annual reporting period beginning
after December 15, 2005. The Company is currently in the process of evaluating
the effect that the adoption of this pronouncement will have on its financial
statements.
- - 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's
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.
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.
F-11
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 2005:
Estimated
2005 Useful Life
------------------ --------------
Equipment $ 66,651 3-5 years
Developed software 432,938 5 years
------------------
499,589
Less: accumulated depreciation (332,730)
------------------
Property and equipment, net $ 166,859
==================
Depreciation and amortization expense for the years ended December 31, 2005 and
2004 was $91,614 and $106,093, respectively.
Accumulated amortization for developed software as of December 31, 2005 was
$281,409. Amortization expense for developed software for each of the years
ended December 31, 2005 and 2004 was $86,587.
Expected amortization is as follows:
Year Amount
- ----- ---------
2006 $ 86,587
2007 64,942
---------
Total $ 151,529
=========
NOTE 5 - LINE OF CREDIT, BANK
In July 2002, the Company entered into a credit facility with a bank consisting
of a $150,000 secured line of credit (the "Line of Credit"), with interest
payable monthly at the bank's prime rate plus 1.25%, originally expiring on July
3, 2004. The Line of Credit was modified in June 2004. The Line of Credit was
again modified in June 2005 and, as modified, requires monthly payments of
$1,510 and a final payment of the outstanding balance and all accrued interest
due on July 3, 2006. There was approximately $147,700 outstanding under the Line
of Credit as of December 31, 2005. The Line of Credit is collateralized by a
building located in North Carolina, which as of December 31, 2005, has been
fully depreciated.
NOTE 6 - NOTES PAYABLE
On March 15, 2000, the Company issued a 6% promissory note for $150,000. Due to
insufficient operating capital, the Company has not been able to meet this
commitment and currently is not in compliance with the terms of this note.
During the year ended December 31, 2005, the Company did not make any payments
under this note. As of December 31, 2005, the principal balance due under this
note was $105,000.
On July 11, 2005, the Company sold and issued a note payable in the aggregate
principal amount of $100,000. The maturity date of the note was November 30,
2005 and has a stated interest rate of 10% per annum. Due to insufficient
operating capital, the Company has not been able to meet this commitment and
currently is not in compliance with the terms of this note.
F-12
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
NOTE 7 - 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, 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 were valued
at $35,000 using the Black-Scholes option pricing model and recorded as a
deferred debt discount which has been fully accreted to interest expense.
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 has been fully accreted to interest expense.
On September 20, 2005 the Company entered into an agreement which modified
certain terms of the 6% promissory notes outstanding. Pursuant to this
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
the exercise price of 175,000 warrants that were previously issued was reduced
from $ .45 to $ .30. Using the Black-Scholes option pricing model an additional
charge was not required for the modification of the 175,000 previously issued
warrants because the change in the fair value of the modification was deemed
immaterial. 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 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
========
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 the above mentioned $125,000 bridge note dated
September 20, 2005, and the extension of the due date of the above mentioned
$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 had a
value of $3,600 which will be accreted to interest expense over nine months.
Subsequent to the year ended December 31, 2005, the Company is not in compliance
with the repayment terms of the Bridge Notes
F-13
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
NOTE 8 - CONVERTIBLE BRIDGE NOTES
In December 2004 and February 2005, the Company issued 10% convertible
promissory notes in the aggregate principal amount of $375,000 (the "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 has been fully accreted to interest expense. The convertible promissory
notes mature in January 2006 due to insufficient operating capital, the Company
has not been able to meet this commitment and currently is not in compliance
with the terms of this note.
In connection with the sale of and issuance of the $375,000 of notes due January
2006, 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 a deferred financing fees and has been fully
amortized to interest expense. The notes are convertible into common stock of
the Company at $0.71 per share.
NOTE 9- DUTCHESS TRANSACTION
On December 23, 2005, the Company entered into two definitive agreements with
Dutchess Private Equities Fund, L.P. ["Dutchess"]. The agreements were
subsequently amended on February 20, 2006. Both agreements require the Company
to file a registration statement to register the shares of common stock
underlying such agreements.
CONVERTIBLE DEBENTURES:
On December 23, 2005, the Company entered into an agreement providing for the
sale of $220,000 in principal amount of five-year convertible debentures. The
convertible debentures bear interest at 12% per annum and mature in December
2010.
The convertible debentures are convertible into shares of the Company's common
stock, at any time at the lesser of the lowest closing bid price of the common
stock between December 12, 2005 and the date of filing of the registration
statement, or $0.15. The Company filed the required registration statement on
January 11, 2006 and therefore the conversion price of the convertible
debentures is $0.13.
The first $95,000 was funded immediately with an additional $125,000 to be
funded subsequently upon filing of the registration statement; the Company filed
the registration statement on January 11, 2006. The $95,000 has been included in
the consolidated balance sheet as an advance from 12% convertible debentures.
The Company's obligation to repay the amounts outstanding under the convertible
debentures is secured by substantially all of the Company's assets, and common
stock owned by the president of the Company.
Under accounting guidance provided by EITF 00-19 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" and EITF 05-4, view A "The effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument". Due to certain factors and the liquidated
damage provision in the registration rights agreement, the Company determined
that the embedded conversion option and the warrants are derivative liabilities.
Accordingly the warrants and the embedded conversion option will be marked to
market through earnings at the end of each reporting period. The warrants and
the embedded conversion features of the convertible debentures are accounted for
as liabilities.
As of the closing date of January 11, 2006, the Company recorded the gross
proceeds of $220,000 net of debt discount of $219,200. The debt discount was
calculated using the Black Scholes option valuation model of approximately
$175,600 for the embedded conversion option and approximately $43,600 for the
423,077 warrants granted.
INVESTMENT AGREEMENT:
December 23, 2005, the Company entered into an investment agreement providing
for the sale and issuance from time to time of up to $10,000,000 in shares of
Common Stock for a period of up to 36 months from the date the registration
statement is declared effective. The maximum number of shares that the Company
may put to Dutchess at any one time shall be equal to, at the Company's
election, either:
(a) 200% of the average daily volume in the U.S. market of the Common Stock for
the ten trading days prior to the date the Company notifies its intent to sell
shares, multiplied by the average of the three daily closing bid prices
immediately preceding the date a put notice is delivered, or
(b) a number of shares having a value of $200,000. The Company may not submit a
new put notice until after the completion of a previous sale under the
investment agreement. The purchase price for the common stock to be sold shall
be equal to 93% of the lowest closing best bid price of the common stock during
the five-day period following the date the Company delivers a put notice.
F-14
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
Under the Investment Agreement, the Company is obligated to file a registration
statement by January 13, 2006 for the registration of the shares of common stock
issuable upon conversion of the convertible debentures, exercise of the warrants
and upon a sale under the Investment Agreement. The Company is further obligated
to use its best efforts to cause the SEC to declare the registration statement
effective within 90 days after the filing date of the registration statement.
The Company filed the registration agreement on January 11, 2006.
- - 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.
Subsequent to the year ended December 31, 2005, the Company amended the Dutchess
Transaction as follows:
AMENDED CONVERTIBLE DEBENTURE:
On February 20, 2006, the Company modified the December 23, 2005 Debenture
Agreement that provided for the sale of $220,000 of five-year convertible
debentures to Dutchess.
The amendment changes the following terms:
Convertible at any time at the lesser of (i) the lowest closing bid price of the
Common Stock between December 12, 2005 and the date of filing of the
Registration Statement, or (ii) $0.10. Additionally, the amendment removes the
ability of Dutchess to switch the conversion price of the Debenture from a fixed
price to one that is based on the market price of the Company's stock in the
event of default and removes the right to use proceeds from the Investment
Agreement to redeem the Convertible Debenture.
Under accounting guidance enumerated in EITF Issue No. 96-19 "Debtor's
Accounting for a Modification or Exchange of Debt Instruments." EITF 96-19
provides that a substantial modification of terms in an existing debt instrument
should be accounted for like, and reported in the same manner as, an
extinguishment of debt. Further, EITF 96-19 indicates that the modification of a
debt instrument by a debtor and a creditor in a non-troubled debt situation is
deemed to have been accomplished with debt instruments that are substantially
different if the present value of the cash flows under the terms of the new debt
instrument is at least 10 percent different from the present value of the
remaining cash flows under the terms of the original instrument at the date of
the modification.
Upon the effective debt modification date of February 20, 2006, the Company
recorded a debt extinguishment gain of approximately $4,000 which will be
recorded for the 1st quarter ended March 31, 2006 and a charge for approximately
$36,000, which represents the change in the fair value of the warrants and
embedded conversion option.
AMENDED INVESTMENT AGREEMENT :
Also on February 20, 2006, the Company amended its Investment Agreement with
Dutchess providing for the sale and issuance to Dutchess from time to time of up
to $10,000,000 in shares of common stock for a period of up to 36 months from
the date the registration statement is declared effective.
The amendment removes Dutchess's obligation under the investment agreement to
take the shares under the agreement on the condition that the shares be free
trading under the cover provisions of the Investment Agreement.
F-15
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
The Company is obligated to file a registration statement within 10 days after
filing the Company's annual report under Form 10-KSB for the year ended December
31, 2005, but in no event later than March 31, 2006 for the registration of the
shares of common stock issuable upon conversion of the convertible debentures,
exercise of the warrants and upon a sale under the investment agreement.
- - The Company is further obligated to use its best efforts to cause the SEC to
declare the registration statement effective within 90 days after the filing
date of the registration statement. If the Company does not file the
registration statement with the SEC by the Filing Date, it is obligated to pay
liquidated damages to the Investor in an amount equal to 2% of the principal
amount of the debenture outstanding, pro rata, for every month which such
registration statement has not been filed.
- - 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 21 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.
CONVERTIBLE DEBENTURE:
On February 20, 2006, the Company entered into a second agreement providing for
the sale of and issuance of $221,000 in principal amount of its five-year
convertible debenture to Dutchess. The convertible debentures bear interest at
10% per annum. The debenture is convertible into shares of the Company's Common
Stock, at any time at the lesser of
(i) the lowest closing bid price of the common stock between February 20, 2006
and the date of filing of a registration statement covering the resale of the
shares underlying this convertible debenture, or
(ii) $0.10
The Company's obligation to repay the amounts outstanding under the Convertible
Debentures is secured by substantially all of the Company's assets, and common
stock owned by the president of the Company.
In connection with the Convertible Debentures, the Company also granted warrants
to purchase 412,500 shares of common stock. The warrants may be exercised for a
period of five years at an exercise price of $0.10.
Under accounting guidance provided by EITF 00-19 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" and EITF 05-4, view A "The effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument". Due to certain factors and the liquidated
damage provision in the registration rights agreement, the Company determined
that the embedded conversion option and the warrants are derivative liabilities.
Accordingly the warrants and the embedded conversion option will be marked to
market through earnings at the end of each reporting period. The warrants and
the embedded conversion features of the convertible debentures are accounted for
as liabilities.
As of the closing date of February 20, 2006, the Company recorded the gross
proceeds of $221,000 net of debt discount of $221,000. The debt discount was
calculated using the Black Scholes option valuation model of approximately
$190,800 for the embedded conversion option, approximately $35,600 for the
412,500 warrants granted for and a charge to the statement of operations for
$5,400 for the fair value of the remaining fair value not attributable to the
debt discount.
F-16
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
NOTE 10 - ISSUANCE OF WARRANTS
The following is a summary of warrants outstanding at December 31, 2005:
Weighted Weighted
Average Average
Exercise Remaining
Warrants Price Life
--------- ---------- -------
Balance, January 1, 2004 994,906 $ 0.45 1.37
Issued 175,000 $ 0.49 1.59
--------- --------- -------
Balance, December 31, 2004 1,169,906 $ 0.46 0.64
Issued 473,750 $ 0.48 3.78
--------- --------- -------
Balance, December 31, 2005 1,643,656 $ 0.47 0.82
========= ========= =======
<FN>
As of December 31, 2005 and 2004, 1,643,656 and 1,169,906 were exercisable, respectively.
NOTE 11 - RELATED PARTY TRANSACTIONS
ADVANCES FROM OFFICERS AND STOCKHOLDERS
During the year ended December 31, 2005, certain officers and stockholders
advanced the Company $98,220 for working capital purposes. The advances are
non-interest bearing and have no definitive repayment terms. During the year
ended December 31, 2005, the Company repaid $27,000 of the advances. As of
December 31, 2005, the total amount due to the officers-stockholders was
$128,371.
NOTE 12 - 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. 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.
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.
F-17
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
NOTE 13 - 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. For the years
ended December 31, 2005 and 2004, the Company has taken charge of $280,000 and
$56,000, respectively, which has been included in the accompanying consolidated
statements of operations as part of consulting fees. As of December 31, 2005,
the Company has fully amortized the deferred compensation. The Company issued
the 300,000 shares under its equity compensation plan [Note 17].
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. During the fourth quarter and as a result of the
Dutchess Investment Agreement (See Note 9), the Company no longer intends to
draw down on the equity line with Fusion Capital and as such the Company has
expensed the $476,821 commitment fee which is included as costs related to
abandoned offering in the consolidated statements of operations for the year
ended December 31, 2005.
On January 15, 2005, Company issued 150,000 shares of Company's common stock to
a consultant as a settlement of terminating its agreement with the consultant.
The shares were valued at $105,000, or $0.70 per share. The Company issued the
150,000 shares under its equity compensation plan [Note 17].
On November 30, 2005, the Company entered into a consulting agreement for
business development services. As consideration the Company will pay to the
Consultant up to $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. The Company has incurred a stock-based compensation charge of $45,000
which is the fair value of the stock. The Company issued the 150,000 shares
under its equity compensation plan [Note 17]. Subsequent to December 31, 2005,
both parties have verbally agreed to defer the start date of the consulting
agreement.
NOTE 14 - ECONOMIC DEPENDENCY
MAJOR CUSTOMER
The following table sets forth the percentages of revenue derived by the Company
from those customers which accounted for at least 10% of revenues during the
applicable periods
DECEMBER 31,
2005 % 2004 %
-------- --- -------- ---
Customer A $220,408 67% $103,857 44%
Customer B $ 48,622 15% $ 60,791 25%
Customer C $ 37,009 11% $ 44,371 19%
As of December 31, 2005, the Company's total accounts receivable, was due from
two customers represented by the following table which sets forth balances owed
from customers which accounted for at least 10% of accounts receivable.
AMOUNT %
------- ---
Customer A $19,750 73%
Customer B $ 5,200 19%
NOTE 15 - 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-18
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
COMMITMENTS
The Company has an employment agreement with Mitchell Segal to serve as the
Company's president and chief executive officer through December 31, 2010. Under
Mr. Segal's employment agreement, the Company will pay Mr. Segal an annual base
salary of $200,000 for 2005, with annual increases of not less than $10,000,
plus a bonus equal to a minimum of 3% to a maximum of 5% of the gross proceeds
received from equity financings and a minimum of 3% to a maximum of 7.5% of the
Company's net income, provided the Company's net income is at least $500,000.
The bonus is payable through 2008, even if Mr. Segal's employment with the
Company is terminated by the Company except in the event the termination is for
cause. In no event may the bonuses due Mr. Segal exceed an aggregate of
$304,025. Mr. Segal also is entitled to discretionary bonuses, if any, awarded
by the Company's board of directors. The Company has not awarded Mr. Segal a
bonus for each of the years ended December 31, 2005 and 2004. As of December 31,
2005, the Company was in arrears in payment of Mr. Segal's salary in the amount
of $109,000 which is included on the consolidated balance sheet as part of
accounts payable and accrued expenses.
The Company has an employment agreement with Peter Walker through March 18,
2012. 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 provides for him to be paid his salary:
- - for a two year period following his termination due to a disability and
- - 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
- - in the seventh year, 150% of his salary at the time of termination,
- - 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
- - in the tenth year, 300% of his salary at the time of termination.
As of December 31, 2005, the Company was in arrears under Mr. Walker's
employment agreement in the amount of approximately $129,000 which is included
on the consolidated balance sheet as part of accounts payable and accrued
expenses
OPERATING LEASE ARRANGEMENTS
In January 2005, ADS entered into a non-cancelable operating lease for its
facilities located in Houston, Texas expiring in June 2006.
In November 2005, NPI entered into a non-cancelable operating lease for its
facilities located in Garden City, New York. The term of the lease is 36 months.
Future minimum rental payments under the above non-cancelable operating leases
as of December 31, 2005 are as follows:
Year Ending
December 31, Amount
- ------------------ --------------
2006 $ 51,600
2007 $ 53,400
2008 $ 50,400
--------------
$ 155,400
==============
Rent expense for the years ended December 31, 2005 and 2004 was approximately
$67,000 and $133,000, respectively.
F-19
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
NOTE 16 - CAPITAL STOCK/STOCKHOLDERS' DEFICIENCY
In April 2004, the Company entered into a consulting agreement pursuant to which
the Company agreed to issue to the consultant 150,000 shares of Company common
stock and an option to purchase an additional 50,000 shares of Company common
stock, exercisable at $0.20 per share, in consideration for the consultant's
agreement to provide specified services. The Company issued the common stock to
the consultant in connection with the execution of the consulting agreement.
Subsequently, the Company terminated the consultant and refused to deliver the
option due to the Company's belief that the consultant was unable to perform the
agreed-upon services. The consultant retained such 150,000 shares, which were
issued pursuant to the Company's 2002 Equity Incentive Plan. Accordingly, the
Company recorded an expense of $75,000 which represents the fair value of the
common stock issued. The Company issued the 150,000 shares under its equity
compensation plan [Note 17].
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.
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.
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 December 20, 2005, in connection with the Dutchess Transaction, the Company
was required to remit payment of $15,000 for due diligence fees. The Company
opted to issue 85,000 shares of its common stock valued at approximately $30,000
as a deposit. The deposit is included as a contra equity account under financing
fee deposit in the consolidated balance sheet as of December 31, 2005.
Subsequent to the year end the shares have been returned to the Company and the
$15,000 fee was settled with the proceeds received from the convertible
debentures.
NOTE 17 - EQUITY INCENTIVE PLAN
On September 18, 2002, the stockholders of the Company approved the 2002 Equity
Incentive Plan. The plan upon adoption reserved 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).
The Company's Equity Incentive Plan authorizes additional shares on the 1st of
each year by 10% of the amount of shares issued by the company not pursuant to
the plan.
F-20
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONTINUED
The following is a summary of the activity under the plan in the year ended
December 31, 2005 and 2004 are as follows:
Shares
Under Plan
---------
Plan share balance at January 1, 2004 70,000
Plan share increase 750,151
Shares issued under the plan during the year (450,000)
---------
Plan share balance at December 31, 2004 370,151
Plan share increase 156,000
Shares issued under the plan during the year (300,000)
---------
Plan share balance at December 31, 2005 226,151
=========
NOTE 18 - DISCONTINUED OPERATIONS
As discussed in Note 2 to these financial statements, on February 4, 2004, the
Company sold certain assets of Kelly Color and discontinued operating in the
film processing segment 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 reported Kelly Color
as discontinued operations effective January 1, 2004. Any remaining assets and
liabilities of Kelly Color are shown as assets and liabilities of discontinued
operations until such assets are and liabilities are either sold or otherwise
disposed of. 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 consolidated financial statements, the
operations of Kelly Color are reported as discontinued operations. At December
31, 2005, the discontinued liabilities of Kelly Color are Accounts payable and
accrued expenses of $ 15,440 and the discontinued assets consisted of a fully
depreciated building that has been collateralized by the terms of the credit
line [See Note 5].
The results of discontinued operations for the years ended December 31, 2005 and
2004 were:
Years Ended
December 31,
--------------------
2005 2004
--------- ---------
Revenues $ -- $ 47,286
Cost of revenues -- (61,410)
--------- ---------
Operating expenses -- 47,871
--------- ---------
Net loss $ -- $(61,995)
========= =========
F-21
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.
In December 2004 and February 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 January 17, 2006 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
In December 2004 and February 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.
On November 30, 2005 we entered into a consulting agreement with Terrence Byrne
to proide business development services to the Company and to look for potential
acquisitions for the Company to make. The agreement is for a term of nine (9)
months and calls for the Company to pay the Consultant $ 340,000 which is
payable in common stock of the company. The Company has issued 150,000 shares
of its common stock to Consultant under this agreement. The issuance of these
shares was exempt from registration pursuant to Section 4(2) under 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, which was amended on February 20, 2006 increasing the warrant to
allow the purchase of 550,000 shares of our common stock at $.10 per share. 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.
In February 2006, we issued convertible debentures in the principal amount of
$221,000 and warrants to purchase 412,500 shares of common stock at $.10 per
share 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).
II-5
4.13 Warrant certificate evidencing 187,500 warrants registered in
the name of J.P Turner & Co. issued in connection with the
sale of the 10% Convertible Senior Subordinated Promissory
Notes (incorporated by reference to the Quarterly Report on
Form 10-QSB, dated May 26, 2005).
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)
10.19 Amended Debenture Agreement dated as of February 20, 2006
amending the Debenture Agreement dated December 23, 2005 by
and between the Company and the Investor. [Incorporated by
reference to Exhibit 10.1 to the registrant's Current Report
on Form 8-K (Date of Report: February 20, 2006), filed with
the Securities and Exchange Commission on February 24, 2005.]
10.20 Debenture Agreement dated as of February 20, 2006 by and
between the Company and the Investor. [Incorporated by
reference to Exhibit 10.2 to the registrant's Current Report
on Form 8-K (Date of Report: February 20, 2006), filed with
the Securities and Exchange Commission on February 24, 2005.]
10.21 Warrant Agreement dated as of February 20, 2006 by and between
the Company and the Investor. [Incorporated by reference to
Exhibit 10.3 to the registrant's Current Report on Form 8-K
(Date of Report: February 20, 2006), filed with the Securities
and Exchange Commission on February 24, 2005.]
10.22 Investment Agreement dated as of February 20, 2006 by and
between the Company and the Investor. [Incorporated by
reference to Exhibit 10.4 to the registrant's Current Report
on Form 8-K Date of Report: February 20, 2006), filed with the
Securities and Exchange Commission on February 24, 2005.]
10.23 Registration Rights Agreement dated as of February 20, 2006 by
and between the Company and Investor. [Incorporated by
reference to Exhibit 10.5 to the registrant's Current Report
on Form 8-K (Date of Report: February 20, 2006), filed with
the Securities and Exchange Commission on February 24, 2005.]
10.24 Debenture Registration Rights Agreement dated as of February
20, 2006 by and between the Company and Investor.
[Incorporated by reference to Exhibit 10.6 to the registrant's
Current Report on Form 8-K (Date of Report: February 20,
2006), filed with the Securities and Exchange Commission on
February 24, 2005.]
10.25 Security Agreement dated as of February 20, 2006 by and
between the Company and Investor. [Incorporated by reference
to Exhibit 10.7 to the registrant's Current Report on Form 8-K
(Date of Report: February 20, 2006), filed with the Securities
and Exchange Commission on February 24, 2005.]
10.26 Subscription Agreement dated as of February 20, 2006 by and
between the Company and Investor. [Incorporated by reference
to Exhibit 10.8 to the registrant's Current Report on Form 8-K
(Date of Report: Date of Report: February 20, 2006), filed
with the Securities and Exchange Commission on February 24,
2005.]
10.27 Placement Agent Agreement dated as of February 20, 2006 by and
between the Company and US Euro Securities, Inc.
[Incorporated by reference to Exhibit 10.9 to the registrant's
Current Report on Form 8-K (Date of Report: February 20, 2006,
filed with the Securities and Exchange Commission on February
24, 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 March 31, 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 March 31, 2006
- ---------------------- Financial Officer and Director
Mitchell S. Segal (Principal Accounting Officer)
/s/ PETER WALKER Secretary and Director March 31, 2006
- ----------------------
Peter Walker
James Lucas Chairman March ___, 2006
- --------------------------
James Lucas