As filed with the Securities and Exchange Commission on October 25, 2004
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PENGE CORP.
(Exact Name of Small Business Issuer in its Charter)
NEVADA 100 71-0895709
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
11231 WINTER COTTAGE PLACE
LAS VEGAS, NEVADA 89135
TELEPHONE: (702) 562-3176
(Address and telephone number of principal executive offices and
principal place of business)
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KIRK FISCHER
11231 WINTER COTTAGE PLACE
LAS VEGAS, NEVADA 89135
TELEPHONE: (702) 562-3176
(Name, address and telephone number of agent for service)
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COPIES TO:
BRYAN T. ALLEN
SCOTT F. YOUNG
P. JUSTIN JUDD
STOEL RIVES LLP
201 SOUTH MAIN STREET, SUITE 1100
SALT LAKE CITY, UTAH 84111
TELEPHONE: (801) 328-3131
FACSIMILE: (801) 578-6999
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this form are to be
offered on a delayed or continued basis pursuant to Rule 415 under the
Securities Act of 1933, 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, please 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. |_|
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CALCULATION OF REGISTRATION FEE
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE REGISTRATION FEE
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Common Stock 14,925,978 $0.30 $4,477,793 $567
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(1) In addition, pursuant to Rule 416 of the Securities Act, this
Registration Statement covers a presently indeterminate number
of shares of common stock issuable upon the occurrence of a
stock split, stock dividend or other similar transaction.
(2) Estimated for the purpose of calculating the registration fee
based upon the most recent price at which shares of common
stock were sold in private placements by the Registrant.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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SUBJECT TO COMPLETION DATED OCTOBER 25, 2004
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 IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PENGE CORP.
14,925,978 SHARES OF COMMON STOCK
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This prospectus relates to the offering and sale of 14,925,978 shares
of common stock, $.001 par value, of Penge Corp. We are a holding company that
acquires other companies or parts of other companies in the tree production and
nursery industry, with target companies having between $100,000 and $10 million
in annual revenues. To date, we have acquired a 272-acre tree and shrub farm in
Arizona and a 17-acre tree and shrub farm in Texas and are currently pursuing a
rollup strategy in nursery assets.
All of the offered shares are to be sold by persons who are existing
security holders and identified in the section of this prospectus entitled
"SELLING STOCKHOLDERS." All of the shares of common stock offered pursuant to
this prospectus are currently owned by the selling stockholders. In addition,
pursuant to Rule 416 of the Securities Act, this prospectus, and the
registration statement of which it is a part, covers a presently indeterminate
number of shares of common stock issuable upon the occurrence of a stock split,
stock dividend or other similar transaction.
We will not receive any of the proceeds from the sale of the shares
offered pursuant to this prospectus. There is no established public market for
our common stock. There can be no assurance that our common stock will ever be
quoted on any quotation service or that any market for our common stock will
ever develop. The selling stockholders may sell the offered shares in privately
negotiated transactions or otherwise at negotiated or market prices. If our
shares of common stock are quoted on any quotation service or traded on any
market in the future, the selling stockholders may sell the offered shares
through such quotation service or market at market prices or negotiated prices.
All shares will be sold in exchange for cash.
Our principal office is located at 11231 Winter Cottage Place, Las
Vegas, Nevada 89135, and our telephone number is (702) 562-3176.
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CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 5 IN THIS PROSPECTUS
BEFORE INVESTING IN THE OFFERED SHARES BEING SOLD WITH THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Dated October 25, 2004
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................2
RISK FACTORS...................................................................5
FORWARD-LOOKING STATEMENTS....................................................12
SELLING STOCKHOLDERS..........................................................13
PLAN OF DISTRIBUTION..........................................................21
USE OF PROCEEDS...............................................................24
DILUTION......................................................................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.........................................................25
OUR BUSINESS..................................................................31
MANAGEMENT....................................................................36
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................40
DESCRIPTION OF OUR CAPITAL STOCK..............................................41
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................43
LEGAL MATTERS.................................................................44
EXPERTS.......................................................................44
INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS.................................44
WHERE YOU CAN FIND MORE INFORMATION...........................................46
INDEX TO FINANCIAL STATEMENTS.................................................47
PROSPECTUS SUMMARY
In addition to the following summary, you should read the more detailed
information about us, our common stock and our financial statements and notes
appearing elsewhere in this prospectus.
OUR COMPANY
Penge Corp. was incorporated in August 2002 as a Nevada corporation and
maintains its principal offices at 11231 Winter Cottage Place, Las Vegas, Nevada
89135. Our telephone number is (702) 562-3176. We are a holding company that
acquires other companies or parts of other companies in the tree production and
nursery industry. The target companies are small to mid-size companies with
$100,000 to $10 million in annual revenues. We acquire these companies using a
combination of cash, bank loans, common stock and seller financing.
At the end of September 2002, we purchased Major Trees, a 272-acre tree
and shrub farm near Tucson, Arizona. In May of 2004, we acquired a 17-acre tree
and shrub farm near Houston, Texas. We now have approximately 215,000 trees and
large shrubs planted on the two farms. The average selling price of the
approximately 28,600 trees that were sold from the Major Trees farm last year
was approximately $27 per tree.
Since purchasing Major Trees in late September 2002, we have become
very familiar with tree farms and tree and shrub nurseries. We have found the
tree and nursery business to be a high-margin business that can be run with a
minimum number of employees and few liabilities and headaches. It is a very
straightforward business with great economics and localized competition. As a
result, during the last 24 months, we have continued to plow all available
capital into improving the existing nursery operation, planting additional trees
and other plants on the Tucson farm, and purchasing an additional farm in Texas
in order to facilitate future growth.
We have continued to look for additional acquisitions across a broad
range of industries, but have been unable to find anything available at a
reasonable price with economics better than those of the tree and nursery
business. After looking at dozens of businesses in varied industries and
different parts of the country, we have decided to focus our efforts in the
nursery industry and to buy additional tree and shrub farms and assets in this
industry in the foreseeable future.
THE OFFERING
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Securities offered by the selling stockholders 14,925,978 shares of common stock
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Shares of our common stock outstanding prior to this 12,952,332 (1)
offering
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Use of Proceeds All proceeds of the offering will be received by the Selling
Stockholders. None of the proceeds will be received
by Penge.
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Risk Factors You should read the "Risk Factors" beginning on page 5 as
well as other cautionary statements throughout this
prospectus before investing in any shares offered
hereunder.
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(1) Excludes up to 4,500,000 shares of common stock authorized for issuance upon
exercise of outstanding options granted pursuant to our stock option plans,
3,500,000 shares of our common stock reserved for the future grant of stock
options under those plans, 50,000 shares of our common stock issuable upon the
exercise of outstanding options and 1,973,646 shares issuable upon conversion of
convertible notes payable.
2
SELLING STOCKHOLDERS
All of the offered shares are to be offered and sold by our existing
security holders. The selling stockholders acquired their shares in private
placements of (i) 7,340,000 shares of common stock at the price of $0.00004 per
share in connection with the founding of our company in August 2002 (ii)
2,295,000 shares of common stock at the price of $0.10 per share during
September 2002 and October 2002, (iii) 770,000 shares of common stock at the
price of $0.20 per share between January 2003 and June 2003, (iv) 680,000 shares
of common stock at the price of $0.25 per share between June 2003 and September
2003, (v) 717,332 shares of common stock at the price of $0.30 per share between
August 2003 and August 2004, (vi) notes convertible into up to 1,973,646 shares
of common stock issued between March 2004 and July 2004, (vii) 750,000 shares of
our common stock as partial payment on a note issued in connection with our
acquisition of Major Trees, Inc. on September 27, 2002, and (viii) 400,000
shares of common stock in connection with our purchase of certain assets of
Sampres Tree Farm LLC in May 2004. Certain of the selling stockholders acquired
their shares as part of estate planning and other permitted transfers from
purchasers in the above-referenced offerings.
Of the shares of our common stock offered hereby, 12,952,332 shares of
common stock are currently owned by the selling stockholders and 1,973,646
shares are issuable upon the conversion of convertible notes payable.
In addition, pursuant to Rule 416 of the Securities Act, this
prospectus, and the registration statement of which it is a part, covers a
presently indeterminate number of shares of common stock issuable upon the
occurrence of a stock split, stock dividend or other similar transaction.
SUMMARY FINANCIAL INFORMATION
YEARS ENDED
JUNE 30,
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2004 2003
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STATEMENT OF OPERATIONS DATA:
Sales................................... $ 806,977 $ 669,721
Cost of goods sold...................... 445,365 420,561
Gross profit (loss)..................... 361,612 249,160
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Operating expenses...................... 666,337 581,478
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Income (loss) from operations........... (304,725) (332,318)
Other income (expense):
Interest income (expense),............ (116,163) (68,057)
Loss on sale of available-for-sale
securities............................ (13,456) (8,997)
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Other income (expense) (129,619) (77,054)
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Net income (loss)....................... $ (430,634) $ (409,372)
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Net loss per share...................... $ (.04) $ (.04)
Weighted average shares used in
computing net loss per share.......... 12,179,860 9,653,338
3
JUNE 30, 2004
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BALANCE SHEET DATA:
Cash and cash equivalents...................... $2,237
Working capital (deficit)...................... (272,551)
Total assets................................... 1,986,866
Retained deficit............................... (783,724)
Stockholders' equity........................... 301,770
4
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider the following discussion of risks in addition to the other
information in this prospectus before purchasing any shares of our common stock.
In addition to historical information, the information in this prospectus
contains "forward-looking" statements about our future business and performance.
Our actual operating results and financial performance may be very different
from what we expect as of the date of this prospectus. The risks below address
some of the factors that may affect our future operating results and financial
performance.
Risks Regarding Our Company and Our Business
--------------------------------------------
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
PERFORMANCE AND FORECAST OUR FUTURE.
We were formed and began operations in 2002. Our limited operating
history makes it difficult for you to evaluate our ability to generate revenues,
manage costs, create profits and generate cash from operations. Our limited
operating history also makes it difficult to analyze our ability to compete in
the marketplace. Before investing in our common stock, you should consider the
risks and difficulties we may encounter as a relatively new business, including
risks related to our ability to
o implement our business plan;
o build alliances with financing sources;
o anticipate and adapt to changes in the market;
o find and acquire new businesses; and
o administer and manage our operations.
If we fail to successfully manage these risks, our business will suffer
or fail. We cannot assure you that we will successfully address these risks or
that our business strategy will be successful.
WE MAY NOT BE ABLE TO RAISE SUFFICIENT CAPITAL TO IMPLEMENT OUR BUSINESS PLAN.
As of June 30, 2004, we had $2,237 in cash and cash equivalents and a
working capital deficit of $(272,551). We need to obtain significant additional
working capital to implement our business plan of acquiring businesses and to be
able to meet our financial obligations as they become due so as to support our
current operations. We will receive no proceeds from the sale of the common
stock pursuant to this prospectus, so we must find other sources of financing.
We may not be able to raise the additional capital needed, or we may be forced
to pay an extremely high price for capital. Factors affecting the availability
and price of capital may include the following:
o the availability and cost of capital generally;
o our financial results;
o market interest, or lack of interest, in our industry and
business plan;
5
o the success of our business;
o the amount of our capital needs; and
o the amount of debt, options, warrants and convertible
securities we have outstanding.
If we cannot raise sufficient capital or are forced to pay a high price
for capital, we may be unable to meet current or future obligations or
adequately exploit existing or future opportunities. If we are unable to obtain
capital for an extended period of time, we may be forced to discontinue
operations.
WE HAVE PLEDGED A SIGNIFICANT PORTION OF OUR ASSETS TO SECURE FINANCING
AGREEMENTS.
We have pledged substantially all of our assets to secure notes payable
funding our purchase of Major Trees and the Sampres Tree Farm and to secure
other short-term financing. These financings require that we afford rights and
remedies that are commonly provided a secured creditor. If we default under such
arrangements, subject to laws restricting the remedies of creditors, such
creditors may immediately foreclose on, and seize and dispose of, all pledged
assets.
WE HAVE ISSUED CONVERTIBLE NOTES TO FUND OUR OPERATIONS; PRINCIPAL PAYMENTS
TOTALING APPROXIMATELY $275,000 ON SUCH NOTES WILL BECOME DUE AND PAYABLE IN
MARCH 2005.
To date, we have issued $555,000 of convertible notes payable to fund
our operations at an interest rate of 10%, $200,000 of which is secured by
50,000 trees contained in our inventory. These notes require periodic payments
of interest and principal. In addition, principal payments totaling
approximately $275,000 are scheduled to become due and payable on March 31,
2005. If we fail to make the required payments on the notes, the holders have
those rights and remedies available at law. If this should occur, it could have
a material adverse effect on our operations and financial condition.
WE HAVE ISSUED NOTES PAYABLE; PRINCIPAL PAYMENTS TOTALING APPROXIMATELY $530,000
ON SUCH NOTES WILL BECOME DUE AND PAYABLE BEFORE JUNE 30, 2005.
As of June 30, 2004, we had outstanding notes payable totaling
$1,086,627, $318,728 of which is secured by all of the assets we acquired from
M7 Farms, $117,899 of which is secured by all of the outstanding shares of our
subsidiary, Major Trees, Inc., and $400,000 of which is secured by all of the
assets we acquired from Sampres Tree Farm LLC. These notes require periodic
payments of principal and interest. Principal payments totaling approximately
$530,000 will be due and payable under such notes between June 30, 2004 and June
30, 2005. If we fail to make the required payments on these notes, the holders
have those rights and remedies available at law. If this should occur, it could
have a material adverse effect on our operations and financial condition.
WE MAY BE UNABLE TO CONTINUE TO IDENTIFY APPROPRIATE ACQUISITION TARGETS OR
CONSUMMATE ACQUISITIONS OF THOSE TARGETS.
Our business plan anticipates growth primarily through the acquisition
of small businesses primarily in the tree production and nursery industry. We
may be unable to implement that acquisition strategy for several reasons,
including the following:
o We may be unable to continue to locate suitable businesses for
acquisition for various reasons, including:
6
o the absence of such businesses;
o our lack of knowledge of such businesses or the fact that they
are for sale;
o our lack of sufficient working capital to conduct an adequate
search for potential acquisition targets and to conduct the
due diligence necessary to evaluate the appropriateness of a
potential target; and
o our lack of expertise or experience in evaluating or operating
the types of businesses that are for sale.
o Businesses that we are interested in acquiring may be unwilling to sell
to us for various reasons, including:
o an unwillingness to accept our securities as consideration;
o a desire to receive cash and a lack of confidence in our
ability to obtain the cash necessary to close;
o concerns with our ability to operate the business profitably
or appropriately, particularly for targets that are not
agricultural companies; and
o a desire to be acquired by a larger company for strategic or
personal reasons (including the desire to be employed by a
larger, more stable acquirer).
o We may be unable to raise the capital necessary to purchase those
businesses that we identify as potential acquisition targets quickly
enough or at all in order to be able to consummate desired
acquisitions.
If we cannot continue to identify appropriate acquisition targets and
consummate acquisitions, our business will not continue to grow as planned.
WE HAVE INCURRED SUBSTANTIAL LOSSES SINCE OUR INCEPTION AND MAY CONTINUE TO
INCUR LOSSES IN THE FUTURE.
We have experienced net losses in each twelve-month period since
inception, with a retained deficit of approximately $(783,724) as of June 30,
2004. To the extent we have projected that we will generate a net profit at any
time in the future, such projections are based on cost and revenue assumptions
that may prove to be materially inaccurate. We may never generate a net profit.
Even if we do become profitable, we may not be able to maintain profitability or
to increase profitability in the future.
OUR ACCOUNTANTS HAVE INCLUDED AN EXPLANATORY PARAGRAPH ON OUR FINANCIAL
STATEMENTS REGARDING OUR STATUS AS A "GOING CONCERN."
Our consolidated financial statements included in this report have been
prepared on the assumption that we will continue as a going concern. Our
independent public accountants have issued their report dated July 9, 2004 that
includes an explanatory paragraph stating that our having only recently been
formed, our lack of success in establishing profitable operations and the fact
that our current liabilities exceed our current assets raise substantial doubt
about our ability to continue as a going concern.
7
OUR COMPETITORS HAVE GREATER RESOURCES THAN WE DO.
The markets for trees and shrubs are highly competitive, and we must
compete with companies that possess greater financial, production and marketing
resources than we do, as well as numerous sole proprietorships with very low
overhead. These advantages may enable them to respond more quickly to new or
emerging market developments and changes in customer preferences. These
advantages may also allow them to engage in more extensive research and
development, undertake extensive far-reaching marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to potential
employees and strategic partners. In addition, competition may result in price
reductions, reduced gross margin and loss of market share. We may not be able to
compete successfully, and competitive pressures may adversely affect our
business, results of operations and financial condition.
WE MAY BE UNABLE TO MANAGE SIGNIFICANT GROWTH.
To successfully implement our business strategy, we must establish and
achieve substantial growth in our customer base through sales, business
acquisitions or a combination thereof. If achieved, significant growth would
place significant demands on our management and systems of financial and
internal controls, and will almost certainly require an increase in the
capacity, efficiency and accuracy of our management and distribution support
systems. Moreover, significant growth would require an increase in the number of
our personnel, particularly within sales, production and management. The market
for such personnel remains highly competitive, and we may not be able to attract
and retain the qualified personnel required by our business strategy. If
successful in expanding our business, we may outgrow our present facilities
and/or management capacity, placing additional strains on our human resources in
trying to locate, manage and staff multiple locations.
OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS HAVE EFFECTIVE
CONTROL OF PENGE.
Our directors, officers, affiliates and their affiliates control
approximately 68% of the outstanding shares of our common stock. These
directors, officers and affiliates effectively control all matters requiring
approval by the stockholders of Penge, including any determination with respect
to the acquisition or disposition of assets, future issuances of securities,
declaration of dividends and the election of directors. This concentration of
ownership may also delay, defer or prevent a change in control of Penge and
otherwise prevent you and stockholders other than our affiliates from
influencing the direction and future of Penge.
WE ARE DEPENDENT UPON KEY PERSONNEL, AND THE LOSS OF SUCH PERSONNEL COULD
SIGNIFICANTLY IMPAIR OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN.
We are highly dependent upon the efforts of management, particularly
Kirk Fischer, our Chief Executive Officer and Chief Financial Officer, and Jim
Fischer, our Vice President of Operations. Competition for management personnel
is intense, and the number of qualified managers knowledgeable about, and
interested in, the nursery industry is limited. As a result, we may be unable to
retain our key management employees or attract other highly qualified employees
in the future. In addition, the large number of shares of common stock issued to
our officers and directors at inception are not subject to repurchase rights if
such persons terminate employment with us. The loss of the services of any of
our management personnel or the failure to attract and retain additional key
employees could have a material adverse effect on our business, financial
condition and results of operations.
8
OUR FARMS ARE CURRENTLY OUR SOLE SOURCE OF REVENUE AND ARE VULNERABLE TO
INSECTS, DISEASE, WEATHER, DROUGHT, FIRE AND OTHER NATURAL HAZARDS THAT COULD
CAUSE SIGNIFICANT DAMAGE TO THOSE FARMS.
Our tree and shrub farms are our main assets and currently our sole
source of revenue. The Eldarica Pine and the other plant varieties that we grow
on the farms are subject to risks associated with disease, insects, weather,
drought, fire and other natural hazards. We cannot prevent or predict the impact
of disease, insects, weather, drought, fire or other natural hazards on the
trees and other shrubs, but if the trees and other shrubs are damaged or
destroyed by any of those elements, we could suffer a significant loss of
assets, profits and cash. As a result, the farms could fail and your investment
could be significantly impaired or lost.
SALES OF ELDARICA PINE TREES ACCOUNT FOR MOST OF OUR SALES REVENUE.
Sales of Eldarica Pine Trees accounted for approximately 97% of our
tree and shrub sales revenue during the fiscal year ended June 30, 2004. The
Eldarica Pine is subject to risks associated with disease, insects, weather,
drought, fire and other natural hazards. We cannot prevent or predict the impact
of disease, insects, weather, drought, fire or other natural hazards on the
Eldarica Pine Trees on our farms or in our target markets. If the Eldarica Pines
on our farms or in our target markets were damaged or destroyed by any of those
elements, our ability to supply Eldarica Pine Trees and demand for Eldarica Pine
Trees could be diminished. This could result in a significant loss of assets,
sales and cash. As a result, the farms could fail and your investment could be
significantly impaired or lost.
OUR TREE AND NURSERY BUSINESS IS LARGELY DEPENDENT ON A SINGLE CUSTOMER.
During the fiscal year ended June 30, 2004, a single customer, Home
Depot, accounted for approximately 75% of our revenue. Home Depot has been a key
customer of Major Trees since approximately 1990; however, we have no long-term
contract with Home Depot, and Home Depot could discontinue purchasing from Major
Trees at any time. The loss of Home Depot as a customer, or a decrease in the
number of trees and shrubs purchased by Home Depot, would likely have a material
adverse effect on our operating results.
OUR OPERATIONS ARE AND WILL BE SUBJECT TO GOVERNMENT REGULATION.
Our operations are and will be subject to a number of federal, state
and local laws and regulations. Of most importance to our present operations are
laws concerning environmental protection, employment, labor and immigration.
Relevant environmental laws include, without limitation, the Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act and the
Comprehensive Environmental Response, Compensation, and Liability Act. Such
environmental laws require that we take steps to, among other things, maintain
air and water quality standards; protect threatened, endangered and other
species of wildlife and vegetation; and preserve certain cultural resources.
These laws are continually changing and, as a general matter, are becoming more
restrictive.
Relevant immigration and employment laws include laws limiting our
ability to employ legal and illegal aliens, laws granting certain minimum wage
and other rights to employees and laws designed to facilitate the organization
of labor. We may from time to time employ persons who are not citizens of the
United States and may inadvertently employ persons who are in the United States
illegally or whose visa does not permit them to be employed. We may also, at
some time in the future, be forced to deal with organized (or organizing) labor
and/or be subject to lawsuits for alleged violation of discrimination and other
employment laws. Compliance with employment, labor and immigration laws may be
complicated and costly.
9
Compliance with federal, state or local laws or regulations represents
a small part of our present budget; nevertheless, continued compliance may be
extremely costly. If we fail to comply with any such laws or regulations, we may
be forced to pay fines, incur significant legal costs and/or take costly
measures to ensure compliance. Any such fine or expenditure may adversely affect
our development.
Risks Specific to the Purchase of Common Stock in This Offering
---------------------------------------------------------------
THERE IS NO PUBLIC MARKET FOR OUR STOCK, AND EVEN IF A MARKET DEVELOPS, IT WILL
LIKELY BE THIN AND SUBJECT TO MANIPULATION.
There is no public market for our common stock, and we can provide no
assurance that a public market for our common stock will develop in the future.
Even if a public market does develop, the volume of trading in our common stock
will presumably be limited and likely dominated by a few individuals. The
limited volume, if any, will make the price of our common stock subject to
manipulation by one or more stockholders and will significantly limit the number
of shares that one can purchase or sell in a short period of time. An investor
may find it difficult to dispose of shares of our common stock or obtain a fair
price for our common stock in the market.
IF A MARKET FOR OUR COMMON STOCK DEVELOPS, THE MARKET PRICE FOR OUR COMMON STOCK
WILL LIKELY BE VOLATILE AND MAY CHANGE DRAMATICALLY AT ANY TIME.
If a market for our common stock develops, the market price of our
common stock, like that of the securities of other early-stage companies, may be
highly volatile. Our stock price may change dramatically as the result of
announcements of our quarterly results, the execution or termination of
significant customer contracts, significant litigation or other factors or
events that would be expected to affect our business or financial condition,
results of operations and other factors specific to our business and future
prospects. In addition, the market price for our common stock may be affected by
various factors not directly related to our business, including the following:
o intentional manipulation of our stock price by existing or
future stockholders;
o short selling of our common stock or related derivative
securities;
o a single acquisition or disposition, or several related
acquisitions or dispositions, of a large number of our shares;
o the interest, or lack of interest, of the market in our
business sector, without regard to our financial condition or
results of operations;
o the adoption of governmental regulations and similar
developments in the United States or abroad that may affect
our ability to offer our products and services or affect our
cost structure;
o developments in the businesses of companies that purchase our
products (such as Home Depot); and
o economic and other external market factors, such as a general
decline in market prices due to poor economic indicators or
investor distrust.
10
THE OFFERING PRICE OF THE COMMON STOCK IS BEING DETERMINED BY THE SELLING
STOCKHOLDERS AND MAY NOT CORRELATE WITH ACTUAL VALUE.
The offering price of the shares of common stock offered by this
prospectus is being determined by each of the selling stockholders on a
transaction-by-transaction basis based upon factors that the applicable selling
stockholder considers appropriate. The offering price determined by selling
stockholders may or may not relate to a current market price but should not, in
any case, be considered an indication of the actual value of the common stock.
We do not have any influence over the price at which any selling stockholder
offers or sells the common stock offered by this prospectus and cannot assure
you that any such price is reasonable.
OBTAINING ADDITIONAL CAPITAL THROUGH THE SALE OF COMMON STOCK WILL RESULT IN
DILUTION OF STOCKHOLDER INTERESTS.
We plan to raise additional funds in the future by issuing additional
shares of common stock, or securities such as convertible notes, options,
warrants or preferred stock that are convertible into common stock. Any such
sale of common stock or other securities will lead to further dilution of the
equity ownership of existing holders of our common stock.
WE ARE UNLIKELY TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have never declared or paid dividends on our stock. We currently
intend to retain all available funds and any future earnings for use in the
operation and expansion of our business. We do not anticipate paying any cash
dividends in the foreseeable future, and it is unlikely that investors will
derive any current income from ownership of our stock. This means that your
potential for economic gain from ownership of our stock depends on appreciation
of our stock price and will only be realized by a sale of the stock at a price
higher than your purchase price. Because there presently is no public market for
our common stock, you may be unable to realize a gain on your investment.
OUR COMMON STOCK IS A "LOW-PRICED STOCK" AND SUBJECT TO REGULATION THAT LIMITS
OR RESTRICTS THE POTENTIAL MARKET FOR OUR STOCK.
Shares of our common stock may be deemed to be "penny stock," resulting
in increased risks to our investors and certain requirements being imposed on
some brokers who execute transactions in our common stock. In general, a penny
stock is an equity security that:
o Is priced under five dollars;
o Is not traded on a national stock exchange, the Nasdaq
National Market or the Nasdaq SmallCap Market;
o May be listed in the "pink sheets" or the OTC Bulletin Board;
o Is issued by a company that has less than $5 million in net
tangible assets (if it has been in business less than three
years) or has less than $2 million in net tangible assets (if
it has been in business for at least three years); and
o Is issued by a company that has average revenues of less than
$6 million for the past three years.
11
We believe that our common stock is presently a "penny stock." At any
time the common stock qualifies as a penny stock, the following requirements,
among others, will generally apply:
o Certain broker-dealers who recommend penny stock to persons
other than established customers and accredited investors must
make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a
transaction prior to sale.
o Prior to executing any transaction involving a penny stock,
certain broker-dealers must deliver to certain purchasers a
disclosure schedule explaining the risks involved in owning
penny stock, the broker-dealer's duties to the customer, a
toll-free telephone number for inquiries about the
broker-dealer's disciplinary history and the customer's rights
and remedies in case of fraud or abuse in the sale.
o In connection with the execution of any transaction involving
a penny stock, certain broker-dealers must deliver to certain
purchasers the following:
o bid and offer price quotes and volume information;
o the broker-dealer's compensation for the trade;
o the compensation received by certain salespersons for
the trade;
o monthly accounts statements; and
o a written statement of the customer's financial
situation and investment goals.
These requirements significantly add to the burden of the broker-dealer
and limit the market for penny stocks. These regulatory burdens may severely
affect our ability to create a market for our stock and the liquidity and market
price for our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus, including, without limitation, "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Our Business," contains statements that constitute
"forward-looking statements" within the meaning of section 27A of the Securities
Act and section 21E of the Securities Exchange Act. Such statements can be
identified by the use of the forward-looking words "anticipate," "estimate,"
"project," "likely," "believe," "intend" or "expect" or similar words. When
considering such forward-looking statements, you should keep in mind the risk
factors noted above and other cautionary statements throughout this prospectus.
You should also keep in mind that all forward-looking statements are based on
management's existing beliefs about present and future events outside of
management's control and on assumptions that may prove to be incorrect. These
forward-looking statements involve a number of risks and uncertainties.
12
SELLING STOCKHOLDERS
All of the offered shares are to be offered and sold by our existing
security holders. The selling stockholders acquired their shares in private
placements of (i) 7,340,000 shares of common stock at the price of $0.00004 per
share in connection with the founding of our company in August 2002 (ii)
2,295,000 shares of common stock at the price of $0.10 per share during
September 2002 and October 2002, (iii) 770,000 shares of common stock at the
price of $0.20 per share between January 2003 and June 2003, (iv) 680,000 shares
of common stock at the price of $0.25 per share between June 2003 and September
2003, (v) 717,332 shares of common stock at the price of $0.30 per share between
August 2003 and August 2004, (vi) notes convertible into up to 1,973,646 shares
of common stock issued between March 2004 and July 2004, (vii) 750,000 shares of
our common stock as partial payment on a note issued in connection with our
acquisition of Major Trees, Inc. on September 27, 2002, and (viii) 400,000
shares of common stock in connection with our purchase of certain assets of
Sampres Tree Farm LLC in May 2004. Certain of the selling stockholders acquired
their shares as part of estate planning and other permitted transfers from
purchasers in the above-referenced offerings.
Of the shares of our common stock offered hereby, 12,952,332 shares of
common stock are currently owned by the selling stockholders and 1,973,646
shares are issuable upon the conversion of convertible notes payable.
In addition, pursuant to Rule 416 of the Securities Act, this
prospectus, and the registration statement of which it is a part, covers a
presently indeterminate number of shares of common stock issuable upon the
occurrence of a stock split, stock dividend or other similar transaction.
BENEFICIAL OWNERSHIP OF SELLING STOCKHOLDERS
The table that follows sets forth, as of October 7, 2004:
o the name of each selling stockholder;
o certain beneficial ownership information with respect to the
selling stockholders;
o the number of shares that may be sold from time to time by
each selling stockholder pursuant to this prospectus; and
o the amount (and, if one percent or more, the percentage) of
common shares to be owned by each selling stockholder if all
offered shares are sold.
Beneficial ownership is determined in accordance with SEC rules and
generally includes voting or investment power with respect to securities. Common
shares that are issuable upon the exercise of outstanding options, warrants or
other purchase or conversion rights, to the extent exercisable within 60 days of
the date of this table, are treated as outstanding for purposes of computing
each selling stockholder's percentage ownership of outstanding common shares.
13
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP UPON COMPLETION OF THE
BEFORE OFFERING OFFERING(1)
---------------------------- ---------------------------
NUMBER OF
NUMBER OF SHARES BEING NUMBER OF
BENEFICIAL OWNER SHARES PERCENT(2) OFFERED SHARES PERCENT(2)
---------------------------- -------------- ------------ ------------ --------- ----------
John T. Alexander 83,333 (3) * 83,333 (3) Nil *
Gary Allen & Sheila Allen 340,000 2.63% 340,000 Nil *
Stan Beagley 63,716 * 63,716 Nil *
Doug Bean 400,000 (4) 3.00% 400,000 (4) 3.00%
Robert S. Bean 33,333 (5) * 33,333 (5) Nil *
Robert Bohacek 70,000 * 70,000 Nil *
Teri Bolf 125,000 * 125,000 Nil *
Rebecca Boone 50,000 * 50,000 Nil *
Aaron R. Boone 85,000 * 85,000 Nil *
Jonathan and Sarah Boone 80,000 * 80,000 Nil *
Ray Bori 15,000 * 15,000 Nil
Tamara Bourne 50,000 * 50,000 Nil *
Erron Scott Brady 20,000 * 20,000 Nil *
Eugene H. Bramhall 116,666 * 116,666 Nil *
Larry L. Bramhall & Lois
T. Bramhall 80,000 (6) * 80,000 (6) Nil *
Scott & Chieko Bramhall 100,000 * 100,000 Nil *
Donna Brown 33,000 * 33,000 Nil *
Twayne O. Buhler 216,666 1.67% 216,666 Nil *
Jeanine Buhler 50,000 * 50,000 Nil *
Randy Burnham 120,000 * 120,000 Nil *
Connie Chandler 160,000 1.24% 160,000 Nil *
Pete Chandler 100,000 * 100,000 Nil *
14
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP UPON COMPLETION OF THE
BEFORE OFFERING OFFERING(1)
---------------------------- ---------------------------
NUMBER OF
NUMBER OF SHARES BEING NUMBER OF
BENEFICIAL OWNER SHARES PERCENT(2) OFFERED SHARES PERCENT(2)
---------------------------- -------------- ------------ ------------ --------- ----------
Thomas L. & Ruby Chandler 300,000 2.32% 300,000 Nil *
Scott M Chandler 100,000 * 100,000 Nil *
Emory Christensen 100,000 (7) * 100,000 (7) Nil *
Wendy Davis 10,000 * 10,000 Nil *
Dennis Dayley 400,000 (8) 3.09% 400,000 (8) Nil *
Diana Rhea Deen 50,000 * 50,000 Nil *
Amy Duncliffe 50,000 * 50,000 Nil *
Jason Dunnam 7,5000 * 7,5000 Nil *
Troy Dunnam 22,500 * 22,500 Nil *
Angie Fischer 33,000 * 33,000 Nil *
Delores M. Fischer 50,000 * 50,000 Nil *
Kirk J. & Lori L. Fischer
Quinn J. Fischer
London C. Fischer
Britton K. Fischer 4,000,000 (9) 28.67% 3,000,000 (10) 1,000,000 (11) 7.17%
Jim & Ellen Fischer 1,190,000 (12) 8.53% 190,000 (13) 1,000,000 (14) 7.17%
Rocky & Janalen Fischer and
Affiliated Entities
Abby Nursery LLC
Abigail Paige Fischer 1,399,000 (15) 9.96% 299,000 (16) 1,100,000 (17) 7.83%
BJ Flores 20,000 (18) * 20,000 (18) Nil *
H. Preston & Shirley Franks 400,000 3.09% 400,000 Nil *
Richard Fritzler 100,000 (19) * 100,000 (19) Nil *
Russell R. Froats 25,000 * 25,000 Nil *
Cynthia J. Froats 25,000 * 25,000 Nil *
15
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP UPON COMPLETION OF THE
BEFORE OFFERING OFFERING(1)
---------------------------- ---------------------------
NUMBER OF
NUMBER OF SHARES BEING NUMBER OF
BENEFICIAL OWNER SHARES PERCENT(2) OFFERED SHARES PERCENT(2)
---------------------------- -------------- ------------ ------------ --------- ----------
Danette Fullmer 16,667 * 16,667 Nil *
Winston B. Gaffron III 50,000 * 50,000 Nil *
Don R. Geyer 20,000 * 20,000 Nil *
Stanford and Barbara Goulding 277,273 (20) 2.13% 227,273 (21) 50,000 (22) *
Donald R. & Laurie A. Groth 66,666 * 66,666 Nil *
John I. Hall 40,000 * 40,000 Nil *
Katrina O. Hall 40,000 * 40,000 Nil *
Matthew Haney 6,666 * 6,666 Nil *
Mary & Jeff Hill 133,333 1.03% 133,333 Nil *
KC & Michelle Holmes and
Affiliated Entities
5th Genki LLC
Alecia Monet Holmes
Chance Jaxon Holmes
Brooklyn Elaine Holmes
Rian Michelle Holmes 2,748,727 (23) 19.70% 1,748,727 (24) 1,000,000 (25) 7.17%
Steve Holmes 5,000 * 5,000 Nil *
Morris Howell 33,334 * 33,334 Nil *
Kelvin L. Hyatt 50,000 * 50,000 Nil *
Dodd Hyer 33,333 * 33,333 Nil *
William W. Jacobsen Sr. 20,000 * 20,000 Nil *
Marla Kamerath 10,000 * 10,000 Nil *
Eric Keith 50,000 * 50,000 Nil *
Marty Lloyd 50,000 * 50,000 Nil *
16
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP UPON COMPLETION OF THE
BEFORE OFFERING OFFERING(1)
---------------------------- ---------------------------
NUMBER OF
NUMBER OF SHARES BEING NUMBER OF
BENEFICIAL OWNER SHARES PERCENT(2) OFFERED SHARES PERCENT(2)
---------------------------- -------------- ------------ ------------ --------- ----------
Roger and Barbara Major and
Affiliated Entities
Robert Major
Brett Major
Ryan Major 1,020,000 (26) 7.88% 1,020,000 (26) Nil *
Rex Major 15,000 * 15,000 Nil *
Cheri Marx 33,000 * 33,000 Nil *
Edward F. May 166,667 1.29% 166,667 Nil *
Linda McClurg 10,000 * 10,000 Nil *
Joe or Karyn Natella 10,000 * 10,000 Nil *
Philip Oleson 125,000 * 125,000 Nil *
Linda Olinyk 50,000 * 50,000 Nil *
Joe Ollivier & Affiliated
Entities
First Capital Funding LC
A&J Investments
Aaron Ollivier 541,663 (27) 4.03% 541,663 (27) Nil *
Trevor Olsen 20,000 * 20,000 Nil *
Daniel A. Olson 100,000 * 100,000 Nil *
Michael and Kimberley Osborn 50,000 * 50,000 Nil *
Luis G. N. Panuncialman 100,000 * 100,000 Nil *
Kathleen B. Pigott 16,667 * 16,667 Nil *
Miles C. Pitcher
Monitor Finance LC 523,329 (28) 3.90% 523,329 (28) Nil *
Jeff Poore 41,008 (29) * 41,008 (29) Nil *
Robert G. and Juanita C.
Purcell 854,167 (30) 6.19% 854,167 (30) Nil *
17
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP UPON COMPLETION OF THE
BEFORE OFFERING OFFERING(1)
---------------------------- ---------------------------
NUMBER OF
NUMBER OF SHARES BEING NUMBER OF
BENEFICIAL OWNER SHARES PERCENT(2) OFFERED SHARES PERCENT(2)
---------------------------- -------------- ------------ ------------ --------- ----------
Johanna B. & Britta B.
Quisumbing 83,333 * 83,333 Nil *
Meredith A. H. Raymond 16,667 * 16,667 Nil *
Shawn & Andrea Rowbotham 116,667 (31) * 116,667 (31) Nil *
Feliciano M Sanchez 12,500 * 12,500 Nil *
Angela Sanchez 12,500 * 12,500 Nil *
Lon or LaRae Saxton 16,666 * 16,666 Nil *
Omer W. Schmidt 100,000 * 100,000 Nil *
Tim Schwartz 160,000 1.24% 160,000 Nil *
Curtis and Amy Sessions 105,000 * 105,000 Nil *
Jon Shute 80,000 * 80,000 Nil *
Ronald L. Spencer 162,500 1.25% 162,500 Nil *
Alan D. Spencer 62,500 * 62,500 Nil *
Lorenzo M. Spencer 125,000 * 125,000 Nil *
Glen K. Stephenson 25,000 * 25,000 Nil *
Sylvia Surrett 15,000 * 15,000 Nil *
Matt Swan 33,334 * 33,334 Nil *
Michael Tempest
High Desert Value LP 102,521 (32) * 102,521 (32) Nil *
Matthew J. & Ann Thomas 50,000 * 50,000 Nil *
Peter Vanderhooft 29,292 (33) * 29,292 (33) Nil *
Mandy Weider 10,000 * 10,000 Nil *
Darla Wenger 33,000 * 33,000 Nil *
18
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP UPON COMPLETION OF THE
BEFORE OFFERING OFFERING(1)
---------------------------- ---------------------------
NUMBER OF
NUMBER OF SHARES BEING NUMBER OF
BENEFICIAL OWNER SHARES PERCENT(2) OFFERED SHARES PERCENT(2)
---------------------------- -------------- ------------ ------------ --------- ----------
Richard L. Wenger 31,284 * 31,284 Nil *
Richard Wenger 33,000 * 33,000 Nil *
Richard A. Westin 59,000 (34) * 59,000 (34) Nil *
---------------------
* Represents less than one percent of the outstanding shares of common stock.
(1) Assuming the sale by each selling stockholder of all of the shares
offered hereunder by such selling stockholder. There can be no
assurance that any of the shares offered hereby will be sold.
(2) The percentages set forth above have been computed assuming the number
of shares of common stock outstanding equals the sum of (a) 12,952,332,
which is the number of shares of common stock actually outstanding on
October 7, 2004, and (b) shares of common stock subject to options,
convertible notes and similar securities exercisable to purchase common
stock within 60 days of such date by the selling stockholder with
respect to which such percentage is calculated.
(3) Shares held of record by First Regional Bank FBO John T. Alexander II
Roth #002227.
(4) Includes 400,000 shares of common stock issuable by us upon the
exercise of options held by the selling stockholder.
(5) Shares held of record by APS Inc., FUB Custodian for Robert S. Bean
IRA.
(6) Shares held of record by Larry L. Bramhall & Lois T. Bramhall Living
Trust.
(7) Shares held of record by Lincoln Trust Company, Custodian FBO Emory
Christensen.
(8) Shares held of record by Dayley Family Trust.
(9) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by Kirk J. Fischer, our Chief Executive
Officer, Chief Financial Officer and Chairman of the Board. Also
includes 1,200,000 shares held of record by Lori L. Fischer, our
Controller and a director, 250,000 shares held of record by Quinn J.
Fischer, 250,000 shares held of record by London C. Fischer and 250,000
shares held of record by Britton K. Fischer, each a dependent son of
Kirk and Lori Fischer.
(10) Includes 1,200,000 shares held of record by Lori L. Fischer, our
Controller and a director, 250,000 shares held of record by Quinn J.
Fischer, 250,000 shares held of record by London C. Fischer and 250,000
shares held of record by Britton K. Fischer, each a dependent son of
Kirk and Lori Fischer.
(11) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by Kirk J. Fischer, our Chief Executive
Officer, Chief Financial Officer and Chairman of the Board.
(12) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by Jim Fischer, our Vice President of
Operations and a director. Also includes 75,000 shares held of record
by Jim Fischer and 115,000 shares held of record by Ellen Fischer, Jim
Fischer's wife.
(13) Includes 75,000 shares held of record by Jim Fischer and 115,000 shares
held of record by Ellen Fischer, Jim Fischer's wife.
(14) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by Jim Fischer, our Vice President of
Operations and a director.
(15) Includes 1,100,000 shares of common stock issuable by us upon the
exercise of options held by Rocky Fischer. Also includes 200,000 shares
held of record by Rocky Fischer, 33,000 shares held of record by
Janalen Fischer, the wife of Rocky Fischer, 33,000 shares held of
record by Abigail Paige Fischer, a dependent daughter of Rocky and
Janalen Fischer, and 33,000 shares held of record by Abby Nursery LLC,
an entity over which Rocky and Janalen Fischer exercise voting and
investment control.
19
(16) Includes 200,000 shares held of record by Rocky Fischer, 33,000 shares
held of record by Janalen Fischer, the wife of Rocky Fischer, 33,000
shares held of record by Abigail Paige Fischer, a dependent daughter of
Rocky and Janalen Fischer, and 33,000 shares held of record by Abby
Nursery LLC, an entity over which Rocky and Janalen Fischer exercise
voting and investment control.
(17) Includes 1,100,000 shares of common stock issuable by us upon the
exercise of options held by Rocky Fischer.
(18) Shares held of record by Flores Management Inc.
(19) Shares held of record by Bradford Marketing Services.
(20) Includes 50,000 shares of common stock issuable by us upon the exercise
of options held of record by Stanford and Barbara Goulding as Joint
Tenants with Rights of Survivorship. Also includes 227,273 shares of
common stock held of record by Stanford and Barbara Goulding as Joint
Tenants with Rights of Survivorship.
(21) Includes 227,273 shares of common stock held of record by Stanford and
Barbara Goulding as Joint Tenants with Rights of Survivorship.
(22) Includes 50,000 shares of common stock issuable by us upon the exercise
of options held of record by Stanford and Barbara Goulding as Joint
Tenants with Rights of Survivorship.
(23) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by KC Holmes, our Mergers & Acquisitions. Also
includes 148,727 shares held of record by 5th Genki LLC, an entity over
which Michelle Holmes exercises voting and investment control, 400,000
shares held of record by Alecia Monet Holmes, a dependent daughter of
KC and Michelle Holmes, 400,000 shares held of record by Chance Jaxon
Holmes, a dependent son of KC and Michelle Holmes, 400,000 shares held
of record by Brooklyn Elaine Holmes, a dependent daughter of KC and
Michelle Holmes and 400,000 shares held of record by Rian Michelle
Holmes, a dependent daughter of KC and Michelle Holmes.
(24) Includes 148,727 shares held of record by 5th Genki LLC, an entity over
which KC and Michelle Holmes exercise voting and investment control,
400,000 shares held of record by Alecia Monet Holmes, a dependent
daughter of KC and Michelle Holmes, 400,000 shares held of record by
Chance Jaxon Holmes, a dependent son of KC and Michelle Holmes, 400,000
shares held of record by Brooklyn Elaine Holmes, a dependent daughter
of KC and Michelle Holmes and 400,000 shares held of record by Rian
Michelle Holmes, a dependent daughter of KC and Michelle Holmes.
(25) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by KC Holmes, our Mergers & Acquisitions.
Includes 168,597 shares of common stock issuable by us upon the
exercise of warrants and options held by the selling stockholder.
(26) Includes 15,000 shares held of record by Robert Major, a dependent son
of Roger and Barbara Major, 15,000 shares held of record by Brett
Major, a dependent son of Roger and Barbara Major and 40,000 shares
held of record by Ryan Major, a dependent son of Roger and Barbara
Major.
(27) Includes 473,329 shares of common stock issuable by us upon the
conversion of convertible notes held by First Capital Funding LC, an
entity over which Joe Ollivier exercises voting and investment control,
56,668 shares held of record by A&J Investments, an entity over which
Joe Ollivier exercises voting and investment control and 6,666 shares
held by Aaron Ollivier, a dependent son of Joe Ollivier.
(28) Includes 473,329 shares of common stock issuable by us upon the
conversion of convertible notes held by Monitor Finance LC, an entity
over which Miles Pitcher exercises voting and investment control.
(29) Includes 41,008 shares of common stock issuable by us upon the
conversion of convertible notes held by the selling stockholder.
(30) Includes 854,167 shares of common stock issuable by us upon the
conversion of convertible notes held by the Robert G. Purcell Revocable
Trust and the Juanita C. Purcell Revocable Trust as Tenants in Common.
(31) Includes 100,000 shares held of record by APS Inc., FUB Custodian for
Shawn A. Rowbotham IRA.
(32) Includes 73,229 shares of common stock issuable by us upon the
conversion of convertible notes held by High Desert Value LP, an entity
over which Michael Tempest exercises voting and investment control, and
29,292 shares of common stock issuable by us upon the conversion of
convertible notes held by Michael Tempest.
(33) Includes 29,292 shares of common stock issuable by us upon the
conversion of convertible notes held by the selling stockholder.
(34) Shares held of record by Richard Westin Consulting, Inc.
20
We believe that the selling stockholders who are individuals have sole
voting and investment power with respect to all shares shown as beneficially
owned by them. We believe that voting and investment power with respect to
shares shown as beneficially owned by selling stockholders who are entities
resides with the individuals identified in the preceding table or the notes
thereto. There can be no assurance that any of the shares offered pursuant to
this prospectus will be sold.
RELATIONSHIPS WITH SELLING STOCKHOLDERS
Certain of the selling stockholders are officers, directors or
affiliates of our company. Kirk Fischer is the Chairman of the Board, Chief
Executive Officer and Chief Financial Officer. Jim Fischer, our Vice President
of Operations and a director, is the father of Kirk Fischer. Lori Fischer, our
Controller and a director, is the wife of Kirk Fischer. Rocky Fischer has been a
consultant for us and is the brother of Kirk Fischer (and son of Jim Fischer).
KC Holmes is a significant stockholder and also an employee of our company.
PLAN OF DISTRIBUTION
METHODS OF DISTRIBUTION
The selling stockholders, which as used herein includes donees,
pledgees, transferees or other successors-in-interest selling shares of common
stock or interests in shares of common stock received after the date of this
prospectus from a selling stockholder as a gift, pledge, partnership
distribution or other transfer, may, from time to time, sell, transfer or
otherwise dispose of any or all of their shares of common stock or interests in
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These dispositions may
be at fixed prices, at prevailing market prices at the time of sale, at prices
related to the prevailing market price, at varying prices determined at the time
of sale or at negotiated prices.
The selling stockholders may use any one or more of the following
methods when disposing of shares or interests therein:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or
otherwise;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
21
o any other method permitted pursuant to applicable law.
The selling stockholders may, from time to time, pledge or grant a
security interest in some or all of the shares of common stock owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock, from
time to time, under this prospectus, or under an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act
amending the list of selling stockholders to include the pledgee, transferee or
other successors in interest as selling stockholders under this prospectus. The
selling stockholders may also transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholders may also sell shares by means of short sales
to the extent permitted by United States securities laws. Short sales involve
the sale by a selling shareholder, usually with a future delivery date, of
shares of common stock that the seller does not own. Covered short sales are
sales made in an amount not greater than the number of shares subject to the
short seller's warrant, exchange right or other right to acquire shares of
common stock. A selling shareholder may close out any covered short position by
either exercising its warrants or exchange rights to acquire shares of common
stock or purchasing shares in the open market. In determining the source of
shares to close out the covered short position, a selling shareholder will
likely consider, among other things, the price of shares of common stock
available for purchase in the open market as compared to the price at which it
may purchase shares of common stock pursuant to its warrants or exchange rights.
Naked short sales are any sales in excess of the number of shares
subject to the short seller's warrant, exchange right or other right to acquire
shares of common stock. A selling shareholder must close out any naked position
by purchasing shares. A naked short position is more likely to be created if a
selling shareholder is concerned that there may be downward pressure on the
price of the shares of common stock in the open market.
The existence of a significant number of short sales generally causes
the price of the shares of common stock to decline, in part because it indicates
that a number of market participants are taking a position that will be
profitable only if the price of the shares of common stock declines. Purchases
to cover naked short sales may, however, increase the demand for the shares of
common stock and have the effect of raising or maintaining the price of the
shares of common stock.
The selling stockholders may also enter into option or other
transactions with broker-dealers or other financial institutions or the creation
of one or more derivative securities that require the delivery to such
broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The selling stockholders also may resell all or a portion of the shares
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided that they meet the criteria and conform to the requirements of that
rule.
The selling stockholders and any underwriters, broker-dealers or agents
that participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling stockholders who are "underwriters" within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements of
the Securities Act.
22
To the extent required, the shares of our common stock to be sold, the
names of the selling stockholders, the respective purchase prices and public
offering prices, the names of any agents, dealers or underwriters, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying prospectus supplement or, if appropriate, a
post-effective amendment to the registration statement that includes this
prospectus.
DETERMINATION OF OFFERING PRICE
The offering price of the shares of common stock offered by this
prospectus is being determined by each of the selling stockholders on a
transaction-by-transaction basis based upon factors that the selling stockholder
considers appropriate. The offering prices determined by the selling
stockholders may, or may not, relate to a current market price but should not,
in any case, be considered an indication of the actual value of the common
stock. We do not have any influence over the price at which any selling
stockholders offer or sell the common stock offered by this prospectus.
PASSIVE MARKET MAKING
We have advised the selling stockholders that while they are engaged in
a distribution of the shares offered pursuant to this prospectus, they are
required to comply with Regulation M promulgated under the Securities Exchange
Act. With certain exceptions, Regulation M precludes the selling stockholders,
any affiliate purchasers and any broker-dealer or other person who participates
in the distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase, any security that is subject to the distribution
until the entire distribution is complete. Regulation M also restricts bids or
purchases made in order to stabilize the price of a security in connection with
the distribution of that security. We do not intend to engage in any passive
market making or stabilization transactions during the course of the
distribution described in this prospectus. All of the foregoing may affect the
marketability of the shares offered pursuant to this prospectus.
LIMITATIONS
We have advised the selling stockholders that, to the extent necessary
to comply with governing state securities laws, the offered securities should be
offered and sold in such jurisdictions only through registered or licensed
brokers or dealers. In addition, we have advised the selling stockholders that
the offered securities may not be offered or sold in any state unless they have
been registered or qualified for sale in the applicable state or an exemption
from the registration or qualification requirement is available with respect to
such offers or sales.
Additionally, we have advised the selling stockholders that the
registration statement of which this prospectus is a part may not be used in
connection with share exchanges or business combination transactions.
GENERAL
We are paying the expenses incurred in connection with preparing and
filing this prospectus and the registration statement to which it relates, other
than selling commissions.
23
We have not retained any underwriter, broker or dealer to facilitate
the offer or sale of the offered shares offered pursuant to this prospectus. We
will pay no underwriting commissions or discounts in connection with this
offering, and we will not receive any proceeds from the sale of the offered
shares.
USE OF PROCEEDS
All proceeds from any sale of offered shares, less commissions and
other customary fees and expenses, will be paid directly to the selling
stockholders selling the offered shares. We will not receive any proceeds from
the sale of any of the offered shares.
DILUTION
Our net tangible book value (tangible assets less total liabilities) at
June 30, 2004 was $167,556 or approximately $0.013 per each of the 12,852,331
shares of common stock then outstanding. Accordingly, new investors who purchase
shares may suffer an immediate dilution of the difference between the purchase
price per share and approximately $0.013 per share.
As of June 30, 2004, there were outstanding options to purchase up to
4,300,000 shares of our common stock as well as notes payable convertible into
1,202,084 shares of our common stock. The existence of those options and
conversion rights may hinder future equity offerings by us, and the exercise of
those options and conversion rights may have an adverse effect on the value of
shares of our common stock. Furthermore, the holders of those options and
conversion rights may exercise them at a time when we would otherwise be able to
obtain additional equity capital on terms more favorable to us.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
OUR BUSINESS AND STRATEGY. We were incorporated in August 2002 in order
to acquire and operate various businesses with between $100,000 and $10 million
in annual revenues. We did not have an industry focus at inception. Since
entering the tree farm and nursery business in late September 2002, we have
become familiar with tree nurseries and nurseries in general. We have found the
tree farm and nursery business to be a high-margin business that can be run with
a minimum number of employees and manageable liabilities. It is a very
straightforward business with good economics and localized competition. As a
result, during the last 24 months, we have continued to invest all available
capital into improving our existing nursery operation and into planting
additional plants to prepare for the future. We have determined to initially
focus our acquisition and operating activities in the tree farm and nursery
industry, with a current focus on the wholesale side of the industry. Unless
otherwise specified or evident from the context, "we," "us," the "Company" and
similar terms refer to Penge Corp. and its consolidated subsidiaries.
We target a smaller revenue market in order to find individual
owner/operators who, for one reason or another (retirement, employee headaches
or personal cash flow), would like to sell their business and find a way to cash
out on their years of hard work. The number of companies seeking to acquire and
operate smaller businesses, particularly in our industry, are limited and, as a
result, we expect to be able to negotiate favorable acquisition terms. In
addition, businesses with revenue of $10 million or less are usually small
enough to integrate easily without complex infrastructure or management issues
that come with acquiring larger companies. We are creating management economies
of scale in finance, operations, human resources and accounting, which we
believe will allow us to create greater value from these acquired assets.
We are building our business model to be the low-cost producer in the
regions that we serve. We believe that by providing a high-quality product that
is always the lowest price available, we will be able to steadily grow sales and
market share in the regions that we service. We accomplish this with a constant,
relentless focus on the cost structure of our business. In the 24 months that we
have run Major Trees, Inc. ("Major Trees"), we have been able to reduce the
direct cost of producing a tree on average by over 50%. This can give us a
significant competitive advantage as we begin harvesting those trees.
OUR ACQUISITIONS. To date, we have acquired two farms. In September
2002, we purchased Major Trees, a 272-acre tree farm near Tucson, Arizona. This
farm was, we believe, an exceptional value that included inexpensive land,
unlimited water rights, moderate growing climate, access to inexpensive labor, a
relationship with a major retailer dating back 15 years and many of the
necessary buildings, equipment, pivots and wells to substantially expand
operations. In the past 24 months, we have been able to use these advantages to
expand from 61,000 trees in inventory when we bought the farm to around 178,000
trees in inventory as of June 2004 at a much lower cost than we expected. With
less than $750,000 in capital, we have planted trees that we expect to harvest
over the next three years with an estimated wholesale value of approximately
$4.7 million.
In May 2004, we acquired a 17-acre tree farm near Houston, Texas (the
"Sampres Farm"). The purchase of this farm is strategic to us in several ways.
First, Texas is one of the largest nursery markets in the country, with over 20
million people in a localized selling area. Tree prices are high, and
competition is not entrenched, giving us a great opportunity for growth in this
region. Some of our best current customers, including 50% of our large retailer
sales, currently come from this region, causing us to plan to further localize
our sales and growing efforts in order to increase our margins and reduce our
shipping expenses.
25
Second, Texas growers have exceptional experience in many of the latest
state-of-the-art pot-in-pot and drip irrigation systems that we plan to use on
all of our tree operations as we continue to grow. The general manager whom we
hired in connection with the acquisition of the Sampres Farm brings an in-depth
knowledge of established and cutting-edge farming techniques regarding a variety
of trees.
We anticipate buying additional assets in the nursery industry again in
2005, with a focus on growing our core business lines and increasing our
position in Texas.
GENERAL OUTLOOK. We experienced a net loss of $(409,372) in the partial
fiscal year ended June 30, 2003 ("Fiscal 2003") and a net loss of $(430,634) in
the fiscal year ended June 30, 2004 ("Fiscal 2004"). Much of the net losses
experienced in Fiscal 2003 and Fiscal 2004 is a result of expenses that we do
not expect to recur with the same magnitude or regularity in the future. These
include such expenses as, for the two fiscal years combined, $150,000 in
non-cash expenses associated with options issued to non-employees. We expect
such expenses to be reduced or eliminated in the fiscal year ended June 30, 2005
("Fiscal 2005"). With the reduction or elimination of such expenses, a moderate
increase in other expenses and a significant increase in revenue projected for
Fiscal 2005, we expect a smaller net loss, and possibly net income, for Fiscal
2005.
Our business plan does, however, contemplate engaging in acquisitions,
financings and other transactions. If one or more of these transactions were to
occur, our net loss may continue as a result of associated expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management is basing this discussion and analysis of our financial
condition and results of operations on our consolidated financial statements.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our critical accounting policies and estimates,
including those related to revenue recognition, valuation of accounts
receivable, property, plant and equipment, long-lived assets, intangible assets
and contingencies. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. These judgments and estimates affect the reported amounts
of assets and liabilities and the reported amounts of revenues and expenses
during the reporting periods. Changes to these judgments and estimates could
adversely affect our future results of operations and cash flows.
o Inventory Valuation. We record inventories at the lower of
cost or the market value of such inventory. For inventory
acquired as part of a business combination, cost is the
estimated selling price, less the estimated costs associated
with selling such inventory. Our average production cost for
inventory is generally lower than the average wholesale price
for our trees, so the cost of acquired inventory is typically
greater than the cost of inventory grown from seed. A majority
of the inventory that was sold in Fiscal 2003 and Fiscal 2004
was inventory acquired as part of our acquisition of Major
Trees.
26
o Cost of Goods Sold. As explained in "Inventory Valuation"
above, we record inventories at the lower of cost or market
value of such inventory, and our average production cost for
inventory is generally lower than its market value. For
inventories acquired in connection with our acquisition of a
business, we record inventory at the estimated selling price,
less the estimated costs of selling such inventory. Because a
majority of the inventory that we sold in Fiscal 2003 and
Fiscal 2004 was inventory acquired as part of our acquisition
of Major Trees, the cost of goods sold for Fiscal 2003 and
Fiscal 2004 is a greater percent of sales than we estimate for
future years. In Fiscal 2005 and thereafter, we expect our
per-unit cost of goods sold to decrease as we begin selling
trees and other products that we have grown from seed.
o Revenue Recognition. Our revenue comes primarily from the sale
of agricultural products. We recognize revenue from the sale
of agricultural products when rights and risk of ownership
have passed to the customer, there is persuasive evidence of a
sales arrangement, product has been shipped or delivered to
the customer, the price and terms are finalized and collection
of the resulting receivable is reasonably assured. We
recognize revenue from business consulting services over the
term of the underlying consulting agreement.
o Property, Plant and Equipment. A significant portion of our
assets consists of property and equipment, including real
property, farm buildings and farming equipment. We record
property and equipment at cost (and capitalize expenditures
for major renewals and betterments that extend the useful life
of property and equipment). The appraised value of real
property and buildings in the regions in which our farms are
located has increased steadily over the last decade; however,
the market for agricultural property is thin, especially in
areas remote from large cities. Our properties are remote from
any large cities. As a result, there is no certainty that we
would be able to sell any property or building at its book
value, or at all. The absence of an active market for
agricultural properties in the region may inhibit our ability
to determine accurately the fair market value of our real
property and building assets.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2004 COMPARED WITH YEAR ENDED JUNE 30, 2003
The following table reflects selected operational results for fiscal
years ended June 30, 2004 and June 30, 2003:
27
YEARS ENDED
JUNE 30,
--------
2004 2003
---- ----
STATEMENT OF OPERATIONS DATA:
REVENUE $ 806,977 $ 669,721
COST OF GOODS SOLD 445,365 420,561
GROSS PROFIT (LOSS) 361,612 249,160
---------- ----------
EXPENSES
General and Administrative 656,337 576,478
Unsuccessful Acquisitions 10,000 5,000
---------- ----------
Operating expenses 666,337 581,478
---------- ----------
INCOME (LOSS) FROM OPERATIONS (304,725) (332,318)
OTHER INCOME (EXPENSE):
Interest income (expense), net (116,163) (68,057)
Loss on sale of available-for-sale
securities (13,456) (8,997)
---------- ----------
Other income (expense), net (129,619) (77,054)
---------- ----------
NET INCOME (LOSS) $(430,634) $(353,090)
---------- ----------
Penge Corp. was organized on August 6, 2002 under the laws of the state
of Nevada. Penge acquired Major Trees on September 27, 2002. Our results of
operations reflect the operations of Major Trees from that date. On January 27,
2003, Penge organized Anglewood Advisors, Inc., an advisory firm, which was
abandoned on October 2, 2003. Our results of operations reflect the operations
of Anglewood Advisors during that time period. In May 2004, Penge acquired the
assets of the Sampres Farm. Our results of operations for Fiscal 2004 reflect
minimal revenue from the Sampres Farm.
REVENUE. Our revenues are derived primarily from the sale of trees and
other nursery products, but also include limited consulting fees. Revenues
increased from $669,721 for Fiscal 2003 to $806,977 for Fiscal 2004, an increase
of approximately 20%. This increase is primarily the result of our increasing
the number of trees sold by Major Trees from approximately 22,100 trees in
Fiscal 2003, generating approximately $655,000 in revenue, to approximately
28,600 in Fiscal 2004, generating approximately $758,000 in revenue. Most of the
trees we grow can be sold within three years of being planted. During the last
24 months, we have significantly increased our tree inventory by planting or
acquiring additional trees. In addition, we recently acquired the Sampres Farm.
We expect annual revenue growth to accelerate in Fiscal 2005, primarily as a
result of new revenue associated with the Sampres Farm, but in part because we
expect to begin selling a small part of the additional inventory we planted at
Major Trees.
COST OF GOODS SOLD. Cost of goods sold includes all operational
expenses associated with the operation of our two farms, including all
farm-related salaries, planting, maintenance and harvesting costs, equipment and
any depreciation related to the foregoing. Cost of goods sold increased from
$420,561 for Fiscal 2003 to $445,365 for Fiscal 2004, an increase of
approximately 6%. This increase is primarily the result of inventory costs
associated with increased sales. Costs of goods sold as a percentage of revenue
decreased, from approximately 63% in Fiscal 2003 to approximately 55% in Fiscal
2004. This decrease in costs of goods sold as a percentage of revenue is a
result of the spreading of certain fixed (or relatively fixed) costs across
increasing revenue.
During Fiscal 2003 and Fiscal 2004, we primarily sold acquired
inventory. In the coming year, we expect to decrease the percentage of acquired
inventory we sell and, as a result, expect our cost of goods sold to decrease or
remain flat in absolute terms, and to decrease significantly as a percentage of
revenue.
28
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
primarily of personnel expense associated with management, consulting fees,
travel expenses, professional fees, general overhead and depreciation. General
and administrative expense increased from $576,478 for Fiscal 2003 to $656,337
for Fiscal 2004, an increase of approximately 14%. This increase is a result of
increases in salaries of our management and travel expenses. General and
administrative expense as a percentage of revenue decreased slightly, from
approximately 86% in Fiscal 2003 to approximately 81% in Fiscal 2004. This
decrease in general and administrative expense as a percentage of revenue is a
result of spreading increasing costs over more rapidly increasing revenue. A
factor contributing to the relatively high general and administrative expense
was the $120,000 we expensed in Fiscal 2003 and the $30,000 we expensed in
Fiscal 2004 for equity-based compensation. We expect general and administrative
expense to increase in Fiscal 2005 in absolute terms but decrease as a
percentage of revenue, as we experience increased legal, accounting and other
costs associated with becoming a public company, but also experience increasing
revenue.
LOSS ON UNSUCCESSFUL ACQUISITIONS. Losses on unsuccessful operations
consist of non-refundable deposits or due-diligence expenses associated with
acquisitions contemplated by us but abandoned after due diligence. As we
continue to look for acquisition opportunities in Fiscal 2005, we may, but do
not plan to, incur similar expenses.
INTEREST EXPENSE. Interest expense consists primarily of interest paid
on outstanding notes payable and amortization of deferred loan costs. Interest
expense increased from $68,057 for Fiscal 2003 to $116,163 for Fiscal 2004, an
increase of approximately 71%. This increase is a result of an increase in
indebtedness primarily in order to fund our expansion of inventory and our
acquisition costs. Interest expense also increased as a percentage of revenue,
from approximately 10% in Fiscal 2003 to approximately 14% in Fiscal 2004. We
expect interest expense to increase in Fiscal 2005 as a result of additional
debt incurred in order to fund operations and harvesting in early Fiscal 2005,
but expect our debt to grow slower than our revenue and, as a result, to
decrease as a percentage of revenue.
NET LOSS. Our net loss increased from $353,090, for Fiscal 2003 to
$430,634 for Fiscal 2004. We believe that much of the net loss attributable to
Fiscal 2003 and Fiscal 2004 is a result of expenses that we do not expect to
recur with the same magnitude or regularity in the future. These include such
expenses as, for the two fiscal years combined, $150,000 in non-cash expenses
associated with options issued to non-employees. However, our net loss increased
from Fiscal 2003 to Fiscal 2004 because certain expenses, such as personnel
expenses, travel expenses and interest expense increased faster than our revenue
increased. We expect equity-based compensation expenses and per-unit cost of
goods sold to be reduced in Fiscal Year 2005. With the reduction of such
expenses, a moderate increase in other expenses, and a more significant increase
in revenue projected for Fiscal 2005, we expect a smaller net loss, and possibly
net income, for Fiscal 2005. Our business plan does, however, contemplate
engaging in acquisitions, financings and other transactions. If one or more of
these transactions were to occur, our net loss may actually increase as a result
of associated expenses.
LIQUIDITY AND CAPITAL RESOURCES
The following table discloses aggregate information about our
contractual obligations including long-term debt, operating and capital lease
payments, office lease payments, contractual service agreements and the periods
in which payments are due as of June 30, 2004:
29
LESS THAN
1 YEAR 2-3 YEARS 4-5 YEARS AFTER
(7/1/04 TO (7/1/05 TO (7/1/07 TO 5 YEARS
CONTRACTUAL OBLIGATIONS TOTAL 6/30/05) 6/30/07) 6/30/09) (AFTER 7/1/09)
------------------------------------ ------------ ---------- ---------- ---------- --------------
Operating leases -- -- -- -- --
Capital leases -- -- -- -- --
Office lease -- -- -- -- --
Contractual service agreements -- -- -- -- --
Notes payable 1,432,646 821,022 335,940 275,684 --
--------- ------- ------- ------- ------
Total contractual cash obligations 1,432,646 821,022 335,940 275,684 --
--------- ------- ------- ------- ------
The following table reflects selected balance sheet data as of June 30,
2004:
JUNE 30, 2004
-------------
BALANCE SHEET DATA:
Cash and cash equivalents............ $2,237
Working capital (deficit)............ (272,551)
Total assets......................... 1,986,866
Retained deficit..................... (783,724)
Stockholders' equity................. 301,770
At June 30, 2004, we had cash and cash equivalents of $2,237. Between
June 30, 2004 and September 30, 2004, we raised an additional $300,000 through
the issuance of convertible and non-convertible notes and options. Our revenues
are seasonal, with most of our revenue being recognized in November and December
of each year. The amount of cash or cash equivalents on hand, plus available
short-term loans from management and inventory-based financing, is expected to
be sufficient to fund our basic operations until our harvest (and revenue
generating) season begins. After that date, we expect our revenue from
operations to equal or exceed associated costs. We will, however, require
additional financing to pay off past indebtedness, fund the planned expansion of
inventory in Fiscal 2005 and pay expenses of, and any cash portion of the
purchase price associated with, any future acquisitions.
We expect to obtain such additional financing through the private
placement of equity securities, derivative securities and convertible or
non-convertible debt instruments. We do not have any specific commitments from
third parties to provide such financing, and we caution that, particularly in
light of the current instability in the equity markets, such financing may not
be available on favorable terms, or at all.
Our consolidated financial statements have been prepared on the
assumption that our Company will continue as a going concern. Our independent
public accountants have issued their report dated July 9, 2004 that includes an
explanatory paragraph stating that our having only recently been formed, our
lack of success in establishing profitable operations and the fact that our
current liabilities exceed our current assets raise substantial doubt about our
ability to continue as a going concern. Our product line is limited, and it has
been necessary to rely upon financing from the sale of our equity securities to
sustain operations in the past. Additional financing will be required if we are
to continue as a going concern. If such additional funding cannot be obtained,
we may be required to scale back or discontinue our operations. Even if such
additional financing is available, there can be no assurance that it will be on
terms favorable to us. In any event, such financing will result in immediate and
possibly substantial dilution to existing shareholders.
30
OUR BUSINESS
OVERVIEW
Penge Corp. was incorporated in August 2002 as a Nevada corporation and
maintains its principal offices at 11231 Winter Cottage Place, Las Vegas, Nevada
89135. Our telephone number is (702) 562-3176. We are a holding company that
acquires other companies or parts of other companies in the tree production and
nursery industry. The target companies are small to mid-size companies with
$100,000 to $10 million in annual revenues in such industry. We acquire these
companies using a combination of cash, bank loans, common stock and seller
financing. Unless otherwise specified or evident from the context, "we," "us,"
the "Company" and similar terms refer to Penge Corp. and its consolidated
subsidiaries.
We target this smaller revenue market ($100,000 to $10 million of
revenue) in order to find individual owner/operators who, for one reason or
another (retirement, employee headaches or personal cash flow), would like to
sell their business and find a way to cash out on their years of hard work. In
addition, businesses with revenue of $10 million or less are usually small
enough to easily integrate without complex infrastructure or management issues
that come with acquiring larger companies. We are working to create management
economies of scale in finance, operations, human resources, accounting, etc.,
which we believe will allow us to create greater value from these acquired
assets.
At the end of September 2002, we purchased Major Trees, Inc. ("Major
Trees"), a 272-acre tree and shrub farm near Tucson, Arizona. In May of 2004, we
acquired a 17-acre tree and shrub farm near Houston, Texas. We now have
approximately 215,000 trees planted on the two farms. Most of the trees we grow
can be sold within three years of being planted. During the last 24 months, we
have significantly increased our tree inventory by planting or acquiring
additional trees. When this additional inventory becomes available for sale in
the fall of 2005, we anticipate substantial revenue growth from the sale of this
additional inventory. The average selling price of the approximately 28,600
trees that were sold from the Major Trees farm last year was approximately $27
per tree.
We generated approximately $655,000 in revenue from the sale of
approximately 21,000 trees from Major Trees during the first year we owned the
farm - fiscal year 2003. We generated approximately $758,000 in revenue in
fiscal year 2004 from the sale of approximately 28,600 trees from Major Trees.
We expect additional revenue growth in the coming twelve months resulting from
the acquisition of the Sampres Farm.
Since purchasing Major Trees in late September 2002, we have become
very familiar with tree farms and nurseries in general. We have found the tree
and nursery business to be a high margin business that can be run with a minimum
number of employees and few liabilities and headaches. It is a very
straightforward business with great economics and localized competition. As a
result, during the last 24 months, we have continued to plow all available
capital into improving the existing nursery operation and planting additional
trees and shrubs on the Tucson farm, and purchasing an additional farm in Texas
to prepare for the future.
We have continued to look for additional acquisitions across a broad
range of industries, but have been unable to find anything available at a
reasonable price with economics better than those of the tree business. So after
looking at dozens of businesses in varied industries and different parts of the
country, we have decided to focus our efforts in the tree and shrub industry and
to buy additional tree and shrub farms and assets in the foreseeable future.
31
Major Trees
-----------
In September 2002, we purchased a tree and shrub farm in southern
Arizona, 90 minutes southeast of Tucson, named Major Trees, Inc. Major Trees is
a 25-year old tree and shrub farm on 272 acres that grows and sells trees and
shrubs wholesale to retail outlets, such as Home Depot, and to retail nurseries
and landscape companies primarily in Arizona, New Mexico, Texas, and Nevada.
Major Trees sells a variety of trees and shrubs and is the largest
supplier of Eldarica Pine trees in the Southwest United States, selling these
pine trees as, among other things, living, potted Christmas trees. Major Trees
sold approximately 22,100 trees in Fiscal 2003 and generated approximately
$655,000 in revenue for Fiscal 2003. Major Trees sold approximately 28,600 trees
in Fiscal 2004 and generated approximately $758,000 in revenue for Fiscal 2004.
Sampres Tree Farm
-----------------
In May 2004, we acquired a 17-acre tree and shrub farm near Houston,
Texas. The Sampres Farm grows a variety of landscape trees and shrubs, which we
anticipate selling to retail nurseries and landscape companies in Arizona, New
Mexico, Texas and Nevada. We anticipate selling between approximately 10,000 and
30,000 trees grown at the Sampres Farm each year.
INDUSTRY BACKGROUND
Nursery and Landscape
---------------------
The market for landscape trees and shrubs is large and very diverse.
Major customer groups include retail nurseries, major retail outlets and
landscape companies. Due to the significant transportation and shipping costs as
well as varying local growing conditions and landscaping needs, the markets for
landscape trees and shrubs are very localized and highly specific to particular
geographic and climatological regions with the majority of landscape trees grown
in particular areas also ultimately being sold and planted in the same
geographic area. However, due to the existence of such a wide variety of
growers, growers are subject to significant price pressures.
Living Christmas Trees
----------------------
The market for Christmas trees is very large and diverse. According to
the National Christmas Tree Association, Christmas trees are displayed in
between 80 and 90 million homes in the United States each year. Of that number,
roughly 30 to 35 million are real Christmas trees, with the remainder being
artificial.
We compete in a very small niche of the larger Christmas tree market -
potted, living trees. In the American Southwest, unlike other regions of our
country, it is warm enough in the winter that consumers can buy living, rather
than cut trees, keep them indoors during the Christmas season and then plant
them out of doors later that season. Our Eldarica Pine trees are uniquely
suitable for sale as a potted, living tree in the Southwest because they are
robust enough to withstand Christmas-season abuse, need little water and are
able to withstand replanting in a warm, dry environment. Of our trees sold to
Home Depot and similar retailers, we believe that many are sold and used as
potted, living Christmas trees and then planted as landscaping trees.
32
TARGET MARKETS
Nurseries and Landscape Companies
---------------------------------
In Fiscal 2004, we generated approximately 19% of our tree and shrub
revenues through sales to retail nurseries and landscaping companies in Arizona,
New Mexico, Nevada and Texas. We have significantly increased our planting of
landscape trees in order to grow our sales in the retail nursery and landscape
markets and anticipate such sales to increase in the future as a percentage of
our total sales. Our purchase of the Sampres Farm in Texas added only landscape
trees and should significantly increase our percentage of trees sold to the
landscape market.
Major Retail Market
-------------------
In Fiscal 2004, we generated approximately 80% of our tree and shrub
revenues through sales of Eldarica Pine trees to Home Depot and other tree
retailers, which are often then re-sold as potted, living Christmas trees. We
anticipate these sales of Eldarica Pine trees decreasing as a percentage of our
total sales in the future as we increase our planting and sales of landscape
trees and shrubs.
OUR PRODUCTS
Our farms grow dozens of trees and shrubs native to the Southwest
region. These trees are primarily desert trees and shrubs that thrive in the dry
and arid regions common throughout the southwestern United States and are those
varieties most commonly sold by nurseries and utilized by landscape companies in
that area. The primary tree grown by Major Trees is the Eldarica Pine. The
Eldarica Pine is from the Middle East and Russia and is a desert tree with
growth of 1-6 feet a year depending on climate, water, and fertilizer. The tree
is highly disease resistant and hardy in warm climates.
The Eldarica Pine has been sold in the United States for decades and is
a proven commodity in both hardiness and marketability to the Christmas,
landscape and nursery markets in the southern United States and the region from
Texas to California in particular. The Eldarica Pine represented approximately
97% of our Fiscal 2004 tree and shrub sales. We anticipate this decreasing as a
percentage of our total sales in the future as we increase our production and
sales of trees and shrubs to the retail nursery and landscape markets.
We grow our trees from seed to harvest in 1-gallon to 100-gallon
plastic pots. The Eldarica Pine trees are sold at an average age of 3 years old,
with heights ranging from 3 feet to 11 feet, with the best selling trees being
6-7 feet tall.
SALES AND MARKETING
In Fiscal 2004, we generated approximately 80% of our tree and shrub
revenues through sales to Home Depot Centers located in Arizona, Nevada, New
Mexico, and Texas, which trees are often re-sold as potted, living Christmas
trees. The majority of these trees are sold during late autumn and early winter.
In Fiscal 2004, we generated approximately 19% of our tree and shrub revenue
through sales to nurseries and landscaping companies in Arizona, Nevada, New
Mexico, and Texas.
We plan to increase our production of trees through additional
acquisitions of farms such as the Sampres Farm and by planting additional
landscape trees on our current properties so as to be able to increase our sales
to landscape and nursery customers in order to generate additional revenues
during the spring and summer months. In the long run, we anticipate most of our
revenue growth to come from such sales.
33
COMPETITION
The market for landscape, living Christmas and nursery trees is very
large and diverse, and therefore, a grower must possess some form of sustainable
competitive advantage in order to be successful. This could take the form of
geographic proximity to a large number of purchasers, cultivation of a unique
species or variety of trees or access to affordable labor, natural resources or
capital. The large number of growers also results in highly competitive pricing
and pressures on profitability. In order to be competitive in this market, we
must effectively anticipate and respond to market demands and developments.
Our primary competitive advantage is price. We believe that we are able
to produce and sell Eldarica Pine and other trees and shrubs at a price that is
lower than most of our competitors. We also believe that the size of our
Eldarica Pine operation, which is the largest in the Southwest, gives us a
competitive advantage with larger retailers because of our perceived ability to
meet their growing demand more easily than smaller growers. With respect to
variety of species, geographic location, access to labor and other factors, we
do not have a significant advantage or disadvantage overall, and may be
perceived as having a competitive advantage or disadvantage, depending upon
which competitor we are being compared with.
SUBSIDIARY
Penge owns 100% of the outstanding shares of common stock of Major
Trees, Inc., an Arizona corporation.
INTELLECTUAL PROPERTY
We do not presently regard our intellectual property as critical to our
success. If we acquire any proprietary intellectual property rights that we
believe would benefit from patent, copyright, trademark or trade secret
protection, we intend to take appropriate steps in order to protect those
rights. This would likely include the filing of applications for appropriate
state and federal registrations of our intellectual property rights and
requiring any employees involved with the intellectual property to sign
confidentiality and invention agreements.
EMPLOYEES
In addition to our four full-time management team members, we currently
have a full-time foreman, two additional full-time employees and between ten and
fifteen seasonal employees at each of our two farms. None of our employees is
represented by a collective bargaining organization, and we consider our
relationship with all our employees to be satisfactory. We plan to hire
additional management and operational expertise as cash flow and business
execution dictate.
PROPERTY
We own a 272-acre tree and shrub farm that is located at 14660 South
Highway 191 in Elfrida, Arizona, which is an approximately 90 minute drive from
Tucson, Arizona. The tree and shrub farm is flat, desert landscape and is
surrounded by other agricultural land. Water for the farm is drawn from deep
wells.
34
We also own a 17-acre tree and shrub farm that is located at 19461 Mt.
Pleasant Road in Montgomery, Texas, which is an approximately 30 minute drive
from Houston, Texas. The tree and shrub farm is sloped and is surrounded by
rolling hills. The farm is surrounded by national forest, other agricultural
land and residential development. It is very wet and watered by both rainwater
and wells.
RESEARCH AND DEVELOPMENT
We have not incurred any research and development expenses in the past
and do not anticipate incurring any such expenses in the foreseeable future. All
research and development seeds, seedlings and trees have generated revenues in
excess of the expense of cultivating them, thus resulting in no research and
development net cost.
LEGAL PROCEEDINGS
We are not engaged in any legal proceedings, nor are we aware of any
pending or threatened legal proceedings that, singly or in the aggregate, will
have a material adverse effect on our business, financial condition or results
of operations.
35
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
NAME AGE POSITION
---- --- --------
Kirk Fischer 37 Chief Executive Officer, Chief
Financial Officer and Chairman of
the Board
Jim Fischer 55 Vice President of Operations and
Director
Lori Fischer 35 Controller and Director
KIRK FISCHER, CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND
CHAIRMAN OF THE BOARD. Mr. Fischer has served as Chief Executive Officer and
Chairman of the Board of Penge since it was founded in August 2002 and as Chief
Financial Officer since September 2004. Mr. Fischer's background covers a
variety of different businesses, serving primarily in senior management
positions. Between 1999 and 2000, Mr. Fischer started and served as chairman and
chief executive officer of Microcap Financial Services, a company specializing
in investor relations, corporate strategy and consulting services for newer
public companies, and Microcap Financial Group, a finance and investment
company. From 1996 to 1999, Mr. Fischer served as chief executive officer of a
fast-food holding company called FFG, Inc. with six locations, $2 million in
retail sales and over 100 employees. Mr. Fischer has also served in management
positions at Hart Scientific, Inc., as its assistant controller, and at its
subsidiary CSC, as its controller. Mr. Fischer earned a bachelor's degree in
accounting from Brigham Young University. Mr. Fischer is the husband of Lori
Fischer, our Controller and a director, and the son of Jim Fischer, our Vice
President of Operations and a director.
JIM FISCHER, VICE PRESIDENT OF OPERATIONS AND DIRECTOR. Mr. Fischer has
served as Vice President of Operations and a director of Penge since it was
founded in August 2002. Mr. Fischer has over 30 years' experience working with
Cenex-affiliated farm cooperatives and businesses. Starting as general manager
of the Wendell Grange Supply operation in 1978, Mr. Fischer grew the business
from one location to five locations with over $20 million in revenue and over
100 employees. Following his departure from Cenex, from 1996 to 1999, Mr.
Fischer served as president of a fast-food holding company called FFG, Inc. with
six locations, $2 million in retail sales and over 100 employees. Mr. Fischer is
the father of Kirk Fischer, our Chief Executive Officer, Chief Financial Officer
and Chairman of the Board, and father-in-law of Lori Fischer, our Controller and
a director.
LORI FISCHER, CONTROLLER AND DIRECTOR. Ms. Fischer has served as
Controller of Penge since it was founded in August 2002 and as a director of
Penge since September 2004. Between 1999 and 2000, Ms. Fischer served as
controller of Microcap Financial Services, a company specializing in investor
relations, corporate strategy and consulting services for newer public
companies, and Microcap Financial Group, a finance and investment company. From
1996 to 1999, Ms. Fischer served as controller of a fast-food holding company
called FFG, Inc. with six locations, $2 million in retail sales and over 100
employees. Ms. Fischer earned a bachelor's degree in accounting from Brigham
Young University. Ms. Fischer is the wife of Kirk Fischer, our Chief Executive
Officer, Chief Financial Officer and Chairman of the Board, and the
daughter-in-law of Jim Fischer, our Vice President of Operations and a director.
36
BOARD COMMITTEES
Our entire Board of Directors presently serves as our audit committee.
None of the members of the audit committee satisfy the independence requirements
applicable to audit committees of listed companies. In addition, the Board of
Directors has determined that the audit committee does not have a member
qualifying as an audit committee financial expert, as defined in Item 401(h) of
Regulation S-B. To save limited capital over the last several years, we have
chosen not to expand the size of our Board of Directors or offer cash
compensation to our directors. The absence of cash compensation makes recruiting
persons who are not otherwise interested in our company more difficult. For
these reasons, we do not have on our Board of Directors a person who would
qualify as an audit committee financial expert.
We do not presently have a standing nominating committee or
compensation committee, and we do not have a nominating committee charter or a
compensation committee charter.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the
aggregate compensation earned during the fiscal years ended June 30, 2004 and
June 30, 2003 by each person who served as our Chief Executive Officer during
the fiscal years ended June 30, 2004 and June 30, 2003 and each other executive
officer if that person received aggregate compensation in excess of $100,000
during the fiscal years ended June 30, 2004 or June 30, 2003 or is expected to
receive aggregate compensation in excess of $100,000 during fiscal year 2005
(the "named executive officers").
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ ------------------------- ----------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
NAME AND SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
------------------------------------------------------------------------------------------------------------------------------------
Kirk Fischer, 6/30/04 60,000 - - - - - -
Chief Executive Officer 6/30/03 5,500 - - - - - -
Lori Fischer, 6/30/04 106,075 - - - 1,000,000 - -
Controller 6/30/03 72,000 - - - - - -
KC Holmes, 6/30/04 112,250 - - - - - -
Mergers & Acquisitions 6/30/03 28,850 - - - 1,000,000 - -
OPTION/SAR GRANTS IN LAST FISCAL YEAR. No options to purchase common
stock were granted to the named executive officers during the fiscal year ended
June 30, 2004. We have never granted any stock appreciation rights. None of the
named executive officers exercised any options during the fiscal year ended June
30, 2004.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES. The following table sets forth the information concerning the
options to purchase capital stock of the named executive officers exercised
during the fiscal year ended June 30, 2004, and the value of unexercised options
held by the named executive officers as of June 30, 2004.
37
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES ACQUIRED JUNE 30, 2004 JUNE 30, 2004
ON EXERCISE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE (1)
----------------------------------------------------------------------------------------------------------------------
Kirk Fischer, Chief - - 1,000,000/0 $190,000/$0
Executive Officer
Lori Fischer, Controller - - - -
KC Holmes, Mergers &
Acquisitions - - 1,000,000/0 $190,000/$0
---------
(1) The price of a share of common stock issuable upon the exercise of an option
to purchase a share of common stock was assumed to be $0.30, the most recent
price at which shares of common stock were sold in private placements by Penge.
The value of the unexercised in-the-money options was then calculated as the
difference between that market price and the exercise price of the options,
which is $0.11.
COMPENSATION OF DIRECTORS. Directors are reimbursed for the expenses
they actually incur in attending board meetings. Directors are not paid a fee
for their service or attendance at board meetings. In fiscal year 2004 we
granted no options to directors. Directors, whether or not employees, are
permitted to participate in our stock incentive plan.
EXECUTIVE EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE
OF CONTROL ARRANGEMENTS. All employees are employed pursuant to "at will"
employment offer letters, governed according to the terms of our employee
manual. Employee stock option agreements are governed by the terms of our stock
incentive plan. No officers, directors or other key employees are entitled to
receive any compensation or other consideration as a result of a change of
control or termination of employment.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information, as of October 7, 2004 and as of
the closing of the offering, assuming all shares are sold, regarding the
ownership of our common stock by each person who beneficially owns of record
more than 5% of our outstanding common stock, by each person serving as a
director or executive officer and by all of our directors, director nominees and
executive officers as a group. Except as otherwise indicated in the footnotes to
this table, all shares will be owned directly, and the persons named in the
table will have sole voting and investment power with respect to shares shown as
being beneficially owned by them.
38
PRIOR TO OFFERING FOLLOWING OFFERING
AS OF OCTOBER 7, 2004 AS OF OCTOBER 7, 2004
-------------------------------------- ----------------------------------------
PERCENTAGE PERCENTAGE
OWNERSHIP OF OWNERSHIP OF COMMON OWNERSHIP OF OWNERSHIP OF COMMON
NAME AND ADDRESS COMMON STOCK(1) STOCK(2) COMMON STOCK(1) (3) STOCK(2) (3)
------------------------ --------------- ------------------- ------------------- -------------------
EXECUTIVE OFFICERS AND
DIRECTORS(4)
Kirk Fischer and
Lori Fischer 4,000,000(5) 28.67% 1,000,000(6) 7.17%
Jim Fischer 1,190,000(7) 8.53% 1,000,000(8) 7.17%
All Executive Officers
and Directors as a Group
(3 Persons) 5,190,000 34.71% 2,000,000 13.38%
5% STOCKHOLDERS
(WHO ARE NOT EXECUTIVE
OFFICERS OR DIRECTORS)
Rocky Fischer 1,399,000(9) 9.96% 1,100,000(10) 7.83%
KC Holmes 2,748,727(11) 19.70% 1,000,000(12) 7.17%
Roger Major (13) 1,020,000 7.88% Nil -
Robert G. and Juanita
Purcell(14) 854,167 6.19% Nil -
---------------
(1) Ownership numbers include shares of our common stock subject to options
and warrants that are exercisable within 60 days of October 7, 2004.
(2) The percentages set forth above have been computed assuming the number
of shares of common stock outstanding equals the sum of (a) 12,952,332,
which is the number of shares of common stock actually outstanding on
October 7, 2004, and (b) shares of common stock subject to options,
convertible notes and similar securities exercisable to purchase common
stock within 60 days of such date by the selling stockholder with
respect to which such percentage is calculated.
(3) Assuming the sale by each officer, director or 5% stockholder that is a
selling stockholder of all of the shares offered hereunder by such
person. There can be no assurance that any of the shares offered hereby
will be sold.
(4) Unless otherwise specified, the address of each stockholder is 11231
Winter Cottage Place, Las Vegas, NV 89135.
(5) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by Kirk J. Fischer, our Chief Executive
Officer, Chief Financial Officer and Chairman of the Board. Also
includes 1,200,000 shares held of record by Lori L. Fischer, our
Controller and a director, 250,000 shares held of record by Quinn J.
Fischer, 250,000 shares held of record by London C. Fischer and 250,000
shares held of record by Britton K. Fischer, each a dependent son of
Kirk and Lori Fischer.
(6) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by Kirk J. Fischer, our Chief Executive
Officer, Chief Financial Officer and Chairman of the Board.
(7) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by Jim Fischer, our Vice President of
Operations and a director. Also includes 75,000 shares held of record
by Jim Fischer and 115,000 shares held of record by Ellen Fischer, Jim
Fischer's wife.
(8) Includes 1,000,000 shares of our common stock issuable upon exercise of
options held by Jim Fischer, our Vice President of Operations and a
director.
39
(9) Includes 1,100,000 shares of common stock issuable upon exercise of
options held by Rocky Fischer. Also includes 200,000 shares of common
stock held of record by Rocky Fisher, 33,000 shares held of record by
Janalen Fischer, the wife of Rocky Fischer, 33,000 shares held of
record by Abigail Paige Fischer, a dependent daughter of Rocky and
Janalen Fischer, and 33,000 shares held of record by Abby Nursery LLC,
an entity over which Rocky and Janalen Fischer exercise voting and
investment control. Rocky Fischer's address is 1400 Graham, STE B401,
Tomball, TX 77375.
(10) Includes 1,100,000 shares of common stock issuable upon exercise of
options held by Rocky Fischer.
(11) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by KC Holmes, our Mergers & Acquisitions. Also
includes 148,727 shares held of record by 5th Genki LLC, an entity over
which KC and Michelle Holmes exercise voting and investment control,
400,000 shares held of record by Alecia Monet Holmes, a dependent
daughter of KC and Michelle Holmes, 400,000 shares held of record by
Chance Jaxon Holmes, a dependent son of KC and Michelle Holmes, 400,000
shares held of record by Brooklyn Elaine Holmes, a dependent daughter
of KC and Michelle Holmes and 400,000 shares held of record by Rian
Michelle Holmes, a dependent daughter of KC and Michelle Holmes.
(12) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by KC Holmes, our Mergers & Acquisitions.
(13) Roger Major's address is 806 W. Knox, Cochise, AZ 85606.
(14) Includes convertible notes convertible into 854,167 shares of our
common stock within 60 days of October 7, 2004. The address of Robert
G. and Juanita C. Purcell is P.O. Box 100, 301 N. Hall St., Potosi, MO
63664.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following discusses certain transactions between us and our
officers, directors, beneficial holders of 5% or more of our common stock and
certain others that may be deemed to be affiliates.
In connection with our founding, we issued the following number of
shares of our common stock to the following persons that may be deemed to be
affiliates, among others, in August 2002 in exchange for contributions
associated with the formation of the Company:
NAME OF PERSON NUMBER OF SHARES OF COMMON STOCK
---------------------------------------- -----------------------------------
Kirk Fischer 1,500,000
Jim Fischer 250,000
KC Holmes 500,000
Rocky Fischer 250,000
Lorien Investments, LLC (Lori Fischer) 2,000,000
5th Genki, LLC (KC Holmes) 2,500,000
In June 2003, we purchased property and equipment with a value of
$15,130 from KC Holmes, Mergers & Acquisitions, for $15,130.
During fiscal year 2003, Rocky Fischer, the brother of Kirk Fischer,
our Chief Executive Officer, Chief Financial Officer and Chairman of the Board,
provided consulting services valued at $14,500 to Penge, which amount we paid in
July 2003.
We issued 100,000 shares of common stock to Rocky Fischer, the brother
of Kirk Fischer, our Chief Executive Officer, Chief Financial Officer and
Chairman of the Board, for $10,000 cash in October 2002.
40
In September 2003, we granted options to purchase 100,000 shares of our
common stock to Rocky Fischer, the brother of Kirk Fischer, our Chief Executive
Officer, Chief Financial Officer and Chairman of the Board, for consulting
services.
In November 2002, we granted options to purchase the following number
of shares of our common stock to the following persons that may be deemed to be
affiliates, among others, under our 2002 Stock Incentive Plan:
NUMBER OF OPTIONS TO PURCHASE SHARES
NAME OF PERSON OF COMMON STOCK
---------------------------------------- ------------------------------------
Kirk Fischer 1,000,000
Jim Fischer 1,000,000
KC Holmes 1,000,000
Rocky Fischer 1,000,000
During fiscal years 2003 and 2004 respectively, we paid Rocky Fischer,
the brother of Kirk Fischer, our Chief Executive Officer, Chief Financial
Officer and Chairman of the Board, $24,020 and $25,875 for consulting services.
During fiscal years 2003 and 2004, we provided the compensation
described in the section entitled "Executive Compensation" to Kirk Fischer,
Chief Executive Officer, Chief Financial Officer and a director; Lori Fischer,
Controller and a director; and KC Holmes, Mergers & Acquisitions. In addition,
in fiscal years 2003 and 2004 respectively, we paid salary of $29,500 and
$77,000 to Jim Fischer, Vice President of Operations and a director.
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common
stock, $.001 par value and 10,000,000 shares of preferred stock, $.001 par
value. As of October 7, 2004, there were 12,952,332 shares of our common stock
outstanding, held of record by and beneficially owned by approximately 110
stockholders. As of October 7, 2004, there were no shares of preferred stock
issued or outstanding.
OUR COMMON STOCK
Holders of our common stock are entitled to receive any dividends
properly declared by our board. Holders of our common stock are entitled to one
vote per share on all matters on which the holders of our common stock are
entitled to vote. Holders of our common stock do not have any cumulative voting,
preemptive, conversion, redemption or sinking fund rights. If we are liquidated,
dissolved or wound up, holders of our common stock are entitled to share equally
and ratably in our remaining assets after the payment of all our liabilities and
the liquidation preference of any outstanding class or series of our preferred
stock. The outstanding shares of our common stock are fully paid and
nonassessable. The rights, preferences and privileges of our common stock are
subject to any series of our preferred stock that we may issue it the future, as
described below.
41
OUR PREFERRED STOCK
Our board of directors has the authority to issue preferred stock in
one or more series and to fix the number, designation, power, preferences and
relative, participating, optional and other rights, and the qualifications,
limitations and restrictions thereof, if any, of any series of preferred stock,
including, without limitation, the following, without any further vote or action
by our stockholders:
o the distinctive designation of, and the number of shares of
preferred stock that shall constitute the series, which number
may be increased (except as otherwise fixed by the board of
directors) or decreased (but not below the number of shares
thereof then outstanding) from time to time by action of the
board of directors;
o the rate and times at which, and the terms and conditions upon
which, dividends, if any, on shares of the series shall be
paid, the extent of preferences or relation, if any, of such
dividends to the dividends payable on any other class or
classes of our stock, or on any series of preferred stock or
of any other class or classes of our stock, and whether such
dividends shall be cumulative or non-cumulative;
o the right, if any, of the holders of shares of the series to
convert the same into, or exchange the same for, shares of any
other class or classes of our stock, or of any series of
preferred stock or of any other class or classes of our stock,
and the terms and conditions of such conversion of exchange;
o whether shares of the series shall be subject to redemption,
and the redemption price or prices including, without
limitation, a redemption price or prices payable in shares of
the common stock and the time or times at which, and the terms
and conditions upon which, shares of the series may be
redeemed;
o the rights, if any, of the holders of shares of the series
upon voluntary or involuntary liquidation, merger,
consolidation, distribution or sale of assets, dissolution or
winding-up of the company;
o the terms of the sinking fund or redemption or purchase
account, if any, to be provided for shares of the series; and
o the voting power, if any, of the holders of shares of the
series that may, without limiting the generality of the
foregoing, include the right to more or less than one vote per
share of any or all matters voted upon by the stockholders and
the right to vote, as a series by itself or together with
other series of preferred stock as a class, upon such matters,
under such circumstances and upon such conditions as the board
of directors may fix, including, without limitation, the
right, voting as a series by itself or together with other
series of preferred stock or together with all series of
preferred stock as a class, to elect one or more of our
directors in the event there shall have been a default in the
payment of dividends on any one or more series of preferred
stock or under such other circumstances and upon such
condition as the board of directors may determine.
The issuance of preferred stock by our board of directors could
adversely affect the rights of holders of our common stock. The potential
issuance of our preferred stock may:
o have the effect of delaying or preventing a change in control
of the company;
o discourage bids for our common stock at a premium over the
market price of our common stock; and
o adversely affect the market price of, and the voting,
dividend, liquidation and other rights of the holders of our
common stock.
42
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ABSENCE OF MARKET FOR COMMON STOCK
Our common stock is not listed on any exchange or quoted on any similar
quotation service, and there is currently no market for our common stock. We are
taking steps to enable our common stock to be quoted on the OTC Bulletin Board
but can provide no assurance that our common stock will ever be quoted on any
quotation service or that any market for our common stock will ever develop.
COMMON STOCK OUTSTANDING AND AVAILABLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public
market or the prospect of such sales could adversely affect market prices for
our common stock (to the extent that any such market develops).
As of September 30, 2004, there were 12,952,332 shares of our common
stock outstanding held by approximately 110 holders of record. In addition,
there were 4,500,000 shares of common stock authorized for issuance upon
exercise of outstanding options granted pursuant to our stock option plan,
3,500,000 shares of common stock reserved for the future grant of stock options
under that plan, 50,000 shares of our common stock issuable upon the exercise of
outstanding options, 1,202,084 (as of June 30, 2004) shares of common stock
issuable upon the conversion of convertible notes payable and no shares of
common stock subject to outstanding warrants to purchase common stock.
All outstanding shares of our common stock are "restricted securities,"
as defined in Rule 144 promulgated under the Securities Act, and may be sold in
the public market only if registered under the Securities Act or if they qualify
for an exemption from registration, including an exemption under Rule 144. The
resale of all such shares has been registered under the registration statement
of which this prospectus is a part and, subject to compliance with state
securities laws and the prospectus delivery requirements under the Securities
Act, may be sold pursuant to this prospectus at any time the registration
statement is effective.
In general under Rule 144, a person, including an "affiliate" of our
company, who has beneficially owned restricted shares for at least one year is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of one percent of the then outstanding shares of common stock
(approximately 129,523 shares of common stock as of the date hereof) or the
average weekly trading volume of the common stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are subject to manner-of-sale
restrictions, notice requirements and the availability of current public
information about us. Rule 144(k) provides that a person who is not an
"affiliate" of the issuer at any time during the three months preceding a sale
and who has beneficially owned shares for at least two years is entitled to sell
those shares at any time without compliance with the public information, volume
limitation, manner of sale and notice provisions of Rule 144.
DIVIDENDS
We have never declared or paid cash dividends on our shares of common
stock. We currently intend to retain future earnings for use in our business
and, therefore, do not anticipate paying any dividends on our shares of common
stock in the foreseeable future.
43
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Set forth below is certain information about the number of shares of
our common stock subject to options, warrants and other rights granted, or that
may be granted, under our compensation plans as of June 30, 2004. The equity
compensation plan that has been approved by security holders is the 2002 Stock
Incentive Plan. We have no equity compensation plans that have not been approved
by security holders.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
Number of securities to Weighted-average exercise future issuance under
be issued upon exercise price of outstanding equity compensation plans
of outstanding options, options, warrants and (excluding securities
Plan category warrants and rights rights reflected in column (a))
-------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders 4,300,000 $0.11 3,700,000
-------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders None None None
-------------------------------------------------------------------------------------------------------------
Total 4,300,000 $0.11 3,700,000
-------------------------------------------------------------------------------------------------------------
LEGAL MATTERS
The validity of the securities offered pursuant to this prospectus is
being passed upon for us by Stoel Rives LLP.
EXPERTS
Our financial statements included in this prospectus as of June 30,
2004 and 2003 and for each of the two years then ended have been audited by
Pritchett, Siler & Hardy, P.C., independent certified public accountants, as
stated in their report appearing elsewhere in this prospectus and in the
registration statement, and are included in reliance upon that report given upon
the authority of that firm as experts in accounting and auditing.
INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS
Our articles of incorporation provide that we shall indemnify and
advance expenses to our directors, officers, employees, fiduciaries or agents
and to any person who is or was serving at our request as a director, officer,
partner, trustee, employee, fiduciary or agent of another domestic or foreign
corporation or other person or of an employee benefit plan (and their respective
estates or personal representatives) to the fullest extent as from time to time
permitted by Nevada law.
44
Our bylaws provide that we shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of our company, by reason of
the fact that he or she is or was a director, officer, employee or agent of our
company, or is or was serving at the request of our company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him or her in connection with the action, suit or proceeding if he or she
acted in good faith and in a manner that he or she reasonably believed to be in
or not opposed to the best interests of our company and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
With respect to derivative actions, our bylaws provide that we shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of our
company to procure a judgment in its favor by reason of the fact that he or she
is or was a director, officer, employee or agent of our company, or is or was
serving at the request of our company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise
against expenses, including amounts paid in settlement and attorneys' fees
actually and reasonably incurred by him or her in connection with the defense or
settlement of the action or suit if he or she acted in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of our company. We may not indemnify any such person for any claim,
issue or matter as to which such person has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to our company or for amounts paid in settlement to our company, unless and only
to the extent that the court in which the action or suit was brought or other
court of competent jurisdiction determines upon application that in view of all
the circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
Any indemnification under the provisions described above, unless
ordered by a court, may be made by our company only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances. The determination
must be made:
o By the stockholders;
o By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit
or proceeding;
o If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by
independent legal counsel in a written opinion; or
o If a quorum consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent
legal counsel in a written opinion.
Our bylaws further provide that the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must be
paid by our company as they are incurred and in advance of the final disposition
of the action, suit or proceeding, upon receipt of an undertaking by or on
behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he or she is not entitled
to be indemnified by our company.
45
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, we have been informed
that in the opinion of the SEC such indemnification is contrary to public policy
as expressed in the Securities Act and is, therefore, unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act with respect to shares of common stock offered pursuant to
this prospectus. This prospectus omits some information contained in the
registration statement and its exhibits, as permitted by the rules and
regulations of the SEC. For further information about us and our securities, you
should review the registration statement and its exhibits, which may be
inspected, without charge, at the Public Reference Section of the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, DC 20549. Copies of all
or any portion of the registration statement may be obtained from the Public
Reference Section of the SEC upon payment of prescribed fees. The SEC maintains
a World Wide Web site that contains reports, proxy and information statements
and other information about registrants that file electronically with the SEC,
including the registration statement. The address of the SEC's World Wide Web
site is http://www.sec.gov.
Statements in this prospectus as to the contents of any contract or
other document referred to in this prospectus are not necessarily complete and,
in each instance, reference is made to the copy of that contract or other
document filed as an exhibit to the registration statement, each statement being
qualified in all respects by that reference.
46
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets, June 30, 2004 and 2003 F-2
Consolidated Statements of Operations, for the year
ended June 30, 2004 and for the period from
inception on August 6, 2002 through June 30, 2003 F-4
Consolidated Statements of Comprehensive Income (Loss), for the
year ended June 30, 2004 and for the period from
inception on August 6, 2002 through
June 30, 2003 F-5
Consolidated Statement of Stockholders' Equity, from
inception on August 6, 2002 through June 30, 2004 F-6
Consolidated Statements of Cash Flows, for the year
ended June 30, 2004 and for the period from
inception on August 6, 2002 through June 30, 2003 F-9
Notes to Consolidated Financial Statements F-11
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
PENGE CORP. AND SUBSIDIARY
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Penge Corp. and
Subsidiary as of June 30, 2004 and 2003 and the related consolidated statements
of operations, stockholders' equity and cash flows for the year ended June 30,
2004 and for the period from inception on August 6, 2002 through June 30, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Penge Corp. and
Subsidiary as of June 30, 2004 and 2003 and the consolidated results of their
operations and their cash flows for the year ended June 30, 2004 and for the
period from inception on August 6, 2002 through June 30, 2003, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 15 to the financial
statements, the Company was only recently formed and has not yet been successful
in establishing profitable operations. Further, the Company has current
liabilities in excess of current assets. These factors raise substantial doubt
about the ability of the Company to continue as a going concern. Management's
plans in regards to these matters are also described in Note 15. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
PRITCHETT, SILER & HARDY, P.C.
Salt Lake City, Utah
July 9, 2004, except for Note 18,
as to which the date is October 21, 2004
F-1
PENGE CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
--------------------------
2004 2003
---------- ----------
CURRENT ASSETS:
Cash $ 2,237 $ --
Available-for-sale securities -- 9,964
Accounts receivable, net of allowance for doubtful
accounts of $169 and $169, respectively 13,793 16,957
Inventories 792,566 355,430
Prepaid expenses 2,322 14,244
Deferred tax asset 18 1,234
---------- ----------
Total Current Assets 810,936 397,829
---------- ----------
PROPERTY AND EQUIPMENT, net 1,041,214 635,164
---------- ----------
OTHER ASSETS:
Definite-life intangible assets, net 36,616 48,178
Deferred loan costs 18,171 4,025
Refundable deposits 520 --
Goodwill 79,409 --
---------- ----------
Total Other Assets 134,716 52,203
---------- ----------
$1,986,866 $1,085,196
========== ==========
[CONTINUED]
F-2
PENGE CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
[CONTINUED]
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
------------------------------
2004 2003
------------ ------------
CURRENT LIABILITIES:
Bank overdraft $ -- $ 1,894
Current portion of convertible notes payable 291,019 --
Current portion of notes payable 530,003 238,735
Accounts payable 177,440 121,332
Related party advances 10,234 16,244
Accrued payroll and payroll taxes 50,134 1,298
Sales taxes payable 27 --
Warranty reserve 31 300
Accrued interest 24,599 10,923
------------ ------------
Total Current Liabilities 1,083,487 390,726
------------ ------------
LONG-TERM DEBT:
Convertible notes payable, net of discounts of
$10,033 and $0, respectively, less current portion 44,967 --
Notes payable, less current portion 556,624 436,628
Deferred tax liability 18 3,802
------------ ------------
Total Long-Term Debt 601,609 440,430
------------ ------------
Total Liabilities 1,685,096 831,156
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value, 50,000,000 shares
authorized, 12,852,331 and 11,615,000 shares
issued and outstanding, respectively 12,852 11,615
Additional paid-in capital 1,122,642 750,179
Unrealized gain (loss) on available-for-sale securities -- (4,664)
Retained earnings (deficit) (783,724) (353,090)
------------ ------------
351,770 404,040
Less stock subscription receivable (50,000) (150,000)
------------ ------------
Total Stockholders' Equity 301,770 254,040
------------ ------------
$ 1,986,866 $ 1,085,196
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
PENGE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
From Inception
For the on August 6,
Year Ended 2002 Through
June 30, 2004 June 30, 2003
------------- -------------
REVENUES:
Farm crop sales $ 777,559 $ 659,721
Consulting revenues 29,418 10,000
---------- ----------
Total Revenues 806,977 669,721
COST OF GOODS SOLD 445,365 420,561
---------- ----------
GROSS PROFIT 361,612 249,160
---------- ----------
EXPENSES:
General and administrative 656,337 576,478
Loss on unsuccessful acquisitions 10,000 5,000
---------- ----------
Total Expenses 666,337 581,478
---------- ----------
LOSS FROM OPERATIONS (304,725) (332,318)
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (116,163) (68,057)
Loss on sale of available-for-sale securities (13,456) (8,997)
---------- ----------
Total Other Income (Expense) (129,619) (77,054)
---------- ----------
LOSS BEFORE INCOME TAXES (434,344) (409,372)
CURRENT TAX EXPENSE (BENEFIT) -- --
DEFERRED TAX EXPENSE (BENEFIT) (3,710) (56,282)
---------- ----------
NET LOSS $(430,634) $(353,090)
---------- ----------
LOSS PER COMMON SHARE $ (.04) $ (.04)
---------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
PENGE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
From Inception
For the on August 6,
Year Ended 2002 Through
June 30, 2004 June 30, 2003
------------- -------------
NET LOSS $(430,634) $(353,090)
OTHER COMPREHENSIVE INCOME (LOSS):
Gain (loss) on available-for-sale securities arising
during the period (net of income taxes (benefit)
of $1,142 and $(1,142), respectively) (8,792) (13,661)
Plus reclassification adjustment for (gains)
losses included in net income 13,456 8,997
---------- ----------
COMPREHENSIVE INCOME (LOSS) $(425,970) $(357,754)
---------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
PENGE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON AUGUST 6, 2002
THROUGH JUNE 30, 2004
Unrealized
Gain (Loss) on
Preferred Stock Common Stock Additional Available- Retained
------------------- --------------------- Paid-in for-Sale Earnings Subscription
Shares Amount Shares Amount Capital Securities (Deficit) Receivable
-------- --------- ---------- --------- ----------- ------------ ----------- ------------
BALANCE, August 6, 2002 - $ - - $ - $ - $ - $ - $ -
Issuance of 7,340,000 shares
of common stock for cash of
$294, or $.00004 per share,
August 2002 - - 7,340,000 7,340 (7,046) - - -
Issuance of 1,570,000 shares of
common stock for cash of
$157,000, or $.10 per share,
September and October 2002 - - 1,570,000 1,570 155,430 - - -
Issuance of 150,000 shares of
common stock for services
valued at $15,000, or $.10
per share, September 2002 - - 150,000 150 14,850 - - -
Issuance of 450,000 shares of
common stock for subscription
receivable of $45,000, or
$.10 per share, October 2002 - - 450,000 450 44,550 - - (45,000)
Issuance of 125,000 shares of
common stock for available-
for- sale securities valued
at $12,500, or $.10 per
share, October 2002 - - 125,000 125 12,375 - - -
Grant of options to purchase
1,200,000 shares of common
stock for consulting services
rendered valued at $120,000,
November 2002 - - - - 120,000 - - -
Issuance of 20,000 shares of
common stock for services valued
at $4,000, or $.20 per share,
January 2003 - - 20,000 20 3,980 - - -
Issuance of 800,000 shares of
common stock to pay debt of
$160,000, or $.20 per share,
January 2003 - - 800,000 800 159,200 - - -
Issuance of 200,000 shares of
common stock to pay rent of
$40,000, or $.20 per share,
January 2003 - - 200,000 200 39,800 - - -
[CONTINUED]
F-6
PENGE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON AUGUST 6, 2002
THROUGH JUNE 30, 2004
[CONTINUED]
Unrealized
Gain (Loss) on
Preferred Stock Common Stock Additional Available- Retained
------------------- --------------------- Paid-in for-Sale Earnings Subscription
Shares Amount Shares Amount Capital Securities (Deficit) Receivable
-------- --------- ---------- --------- ----------- ------------ ----------- ------------
Issuance of 500,000 shares of
common stock for cash of
$100,000, or $.20 per
share, less offering costs
of $7,000, March through
June 2003 - - 500,000 500 92,500 - - -
Issuance of 40,000 shares of
common stock for cash of
$10,000, or $.25 per share,
June 2003 - - 40,000 40 9,960 - - -
Issuance of 420,000 shares of
common stock for subscription
receivable of $105,000, or
$.25 per share, June 2003 - - 420,000 420 104,580 - - (105,000)
Gain (loss) on available-for-
sale securities arising
during the period - - - - - (13,661) - -
Net loss for the period ended
June 30, 2003 - - - - - 8,997 (353,090) -
-------- --------- ---------- --------- ----------- ------------ ------------ ------------
BALANCE, June 30, 2003 - - 11,615,000 11,615 750,179 (4,664) (353,090) (150,000)
Issuance of 220,000 shares of
common stock for cash of
$55,000, or $.25 per share,
July through September 2003 - - 220,000 220 54,780 - - -
Collected stock subscription
receivable, July 2003 - - - - - - - 150,000
Issuance of 450,664 shares of
common stock for cash of
$135,200, or $.30 per share,
less offering costs of
$27,500, August 2003
through June 2004 - - 450,664 451 107,249 - - -
Grant of options to purchase
100,000 shares of common
stock for consulting services
rendered valued at $30,000,
September 2003 - - - - 30,000 - - -
Convertible note payable
proceeds of $9,000 allocated
to beneficial conversion
feature, March 2004 - - - - 9,000 - - -
[CONTINUED]
F-7
PENGE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION ON AUGUST 6, 2002
THROUGH JUNE 30, 2004
[CONTINUED]
Unrealized
Gain (Loss) on
Preferred Stock Common Stock Additional Available- Retained
------------------- --------------------- Paid-in for-Sale Earnings Subscription
Shares Amount Shares Amount Capital Securities (Deficit) Receivable
-------- --------- ---------- --------- ----------- ------------ ----------- ------------
Issuance of 400,000 shares of
common stock as part of an
asset acquisition valued at
$120,000, or $.30 per share,
May 2004 - - 400,000 400 119,600 - - -
Issuance of 166,667 shares of
common stock for subscription
receivable of $50,000, or
$.30 per share, June 2004 - - 166,667 166 49,834 - - (50,000)
Convertible note payable
proceeds of $2,000 allocated
to beneficial conversion
feature, June 2004 - - - - 2,000 - - -
Gain (loss) on available-
for-sale securities arising
during the period - - - - - (8,792) - -
Net loss for the year ended
June 30, 2004 - - - - - 13,456 (430,634) -
-------- --------- ---------- --------- ----------- ------------ ------------ ------------
BALANCE, June 30, 2004 - $ - 12,852,331 $ 12,852 $ 1,122,642 $ - $ (783,724) $ (50,000)
-------- --------- ---------- --------- ----------- ------------ ------------ ------------
The accompanying notes are an integral part of this
consolidated financial statement.
F-8
PENGE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
From Inception
For the on August 6,
Year Ended 2002 Through
June 30, 2004 June 30, 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (430,634) $ (353,090)
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization of deferred loan costs 25,288 19,295
Amortization of discounts on convertible notes payable 967 --
Bad debt expense 100 6,636
Depreciation and amortization 112,124 84,711
Loss on sale of available-for-sale securities 13,456 8,997
Non-cash expenses 30,000 179,000
Changes in assets and liabilities:
(Increase) in accounts receivable (26,354) (23,593)
(Increase) in inventories (304,085) (113,624)
Decrease in prepaid expenses 11,922 35,756
(Increase) decrease in deferred tax asset 74 (92)
(Increase) in refundable deposits (520) --
Increase in accounts payable 56,108 121,332
Increase in accrued payroll and payroll taxes 48,836 1,298
Increase in sales taxes payable 27 --
Increase (decrease) in warranty reserve (269) 300
Increase in accrued interest 13,676 10,923
(Decrease) in deferred tax liability (3,784) (56,190)
----------- -----------
Net Cash (Used) by Operating Activities (453,068) (78,341)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to purchase available-for-sale securities (2,456) (73,303)
Proceeds from sale of available-for-sale securities 34,188 61,036
Payments to purchase property and equipment (48,921) (42,438)
Acquisitions, net of cash acquired (150,151) (157,429)
----------- -----------
Net Cash (Used) by Investing Activities (167,340) (212,134)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank overdraft -- 1,894
Payments on bank overdraft (1,894) --
Related party advances 240,799 99,176
Payments on related party advances (246,809) (82,932)
Payments of loan costs (39,434) (23,320)
Proceeds from convertible notes payable 344,000 --
Payments on convertible notes payable (8,981) --
Proceeds from notes payable 526,468 224,520
Payments on notes payable (515,204) (189,157)
Proceeds allocated to beneficial conversion feature of
convertible notes payable 11,000 --
Proceeds from issuance of common stock 340,200 267,294
Payment of stock offering costs (27,500) (7,000)
----------- -----------
Net Cash Provided by Financing Activities 622,645 290,475
----------- -----------
NET INCREASE (DECREASE) IN CASH 2,237 --
CASH AT BEGINNING OF PERIOD -- --
----------- -----------
CASH AT END OF PERIOD $ 2,237 $ --
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 76,232 $ 37,839
Income taxes $ -- $ --
[CONTINUED]
F-9
PENGE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[CONTINUED]
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the year ended June 30, 2004:
In September 2003, the Company granted options to purchase 100,000 shares
of common stock for consulting services rendered valued at $30,000.
In March 2004, the Company issued $45,000 of convertible notes payable and
recorded a discount of $9,000 for the beneficial conversion feature of the
convertible notes payable. Through June 30, 2004, the Company has amortized
$900 of the discounts on these convertible notes payable.
In April 2004, the Company received marketable securities as collection of
accounts receivable totaling $29,418.
In May 2004, the Company issued 400,000 shares of common stock valued at
$120,000, issued a $400,000 note payable and paid $150,151 in cash to
acquire certain assets from Sampres Tree Farm LLC. Through the acquisition,
the Company acquired inventory of $133,051, property and equipment of
$457,691 and goodwill of $79,409.
In June 2004, the Company issued 166,667 shares of common stock for a
subscription receivable of $50,000.
In June 2004, the Company issued a $10,000 convertible note payable and
recorded a discount of $2,000 for the beneficial conversion feature of the
convertible note payable. Through June 30, 2004, the Company has amortized
$67 of the discount on this convertible note payable.
For the period from inception on August 6, 2002 through June 30, 2003:
In September 2002, the Company issued $800,000 of notes payable and paid
$157,429 in cash to acquire Major Trees, Inc. and certain assets from M7
Farms. Through the acquisition, the Company assumed a deferred tax
liability of $59,992 and the Company acquired inventory of $241,806,
prepaid expense of $50,000, property and equipment of $667,801 and
definite-life intangible assets of $57,814.
In September 2002, the Company issued 150,000 shares of common stock for
consulting services rendered valued at $15,000.
In October 2002, the Company issued 450,000 shares of common stock for a
subscription receivable of $45,000. The Company collected all of this
subscription receivable in July 2003.
In October 2002, the Company issued 125,000 shares of common stock for
available-for-sale securities valued at $12,500.
In November 2002, the Company granted options to purchase 1,200,000 shares
of common stock for consulting services rendered valued at $120,000.
In January 2003, the Company issued 20,000 shares of common stock for
consulting services rendered valued at $4,000.
In January 2003, the Company issued 800,000 shares of common stock to pay
debt of $160,000.
In January 2003, the Company issued 200,000 shares of common stock to pay
rent of $40,000.
In June 2003, the Company issued 420,000 shares of common stock for a
subscription receivable of $105,000. The Company collected all of this
subscription receivable in July 2003.
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Penge Corp. ("Parent") was organized under the laws of the
State of Nevada on August 6, 2002.
Major Trees, Inc. ("MT Subsidiary") was organized under the laws of the
State of Arizona on December 29, 1993. On September 27, 2002, Parent
acquired MT Subsidiary and certain assets of M7 Farms pursuant to a
Purchase Agreement signed August 14, 2002. Parent issued $800,000 of notes
payable and paid $157,429 in cash to acquire certain assets from M7 Farms
and 100% of the outstanding shares of MT Subsidiary's common stock wherein
MT Subsidiary became a wholly-owned subsidiary of Parent [SEE NOTE 2]. The
acquisition of MT Subsidiary has been accounted for as a purchase of MT
Subsidiary. The financial statements reflect the operations of MT
Subsidiary from September 27, 2002.
Anglewood Advisors, Inc. ("AA Subsidiary") was organized under the laws of
the State of Nevada on January 27, 2003 as a wholly-owned subsidiary of
Parent. On October 2, 2003, the Company's Board of Directors determined to
abandon AA Subsidiary. AA Subsidiary has been dissolved by the State of
Nevada. The financial statements reflect the operations of AA Subsidiary
from January 27, 2003 through October 2, 2003.
Parent and MT Subsidiary ("the Company") grows trees and other agricultural
products. Also, the Company has occasionally provided business consulting
services. The Company has, at the present time, not paid any dividends and
any dividends that may be paid in the future will depend upon the financial
requirements of the Company and other relevant factors.
CONSOLIDATION - The consolidated financial statements include the accounts
of Parent and Parent's wholly-owned MT Subsidiary. The consolidated
financial statements also include the accounts of Parent's formerly
wholly-owned AA Subsidiary for the period from January 27, 2003 through
October 2, 2003. All significant intercompany transactions have been
eliminated in consolidation.
FISCAL YEAR - The Company's fiscal year-end is June 30th.
AGRICULTURAL PRODUCTION - The Company accounts for their agricultural
activities in accordance with Statement of Position 85-3, "Accounting by
Agricultural Producers and Agricultural Cooperatives". All direct and
indirect costs of growing crops are either accumulated as inventory or
expensed as cost of goods sold. Permanent land development costs are
capitalized and not depreciated. Limited-life land development costs and
the development costs to bring long-life and intermediate-life plants into
production are capitalized and depreciated using the double declining
balance method over the estimated useful lives of the assets.
CASH AND CASH EQUIVALENTS - The Company considers all highly-liquid debt
investments purchased with a maturity of three months or less to be cash
equivalents.
F-11
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
INVESTMENTS - The Company's investments which are bought and held
principally for the purpose of selling them in the near term are classified
as trading securities. Trading securities are recorded at fair value with
changes in fair value being included in earnings. Investments for which the
Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are recorded at amortized cost.
Investments not classified as either held-to-maturity or trading securities
are classified as available-for-sale. Available-for-sale securities are
recorded at fair value with changes in fair value being excluded from
earnings and recorded net of tax as a separate component of equity in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The
cost of a security is determined using the average cost method.
ACCOUNTS RECEIVABLE - The Company records accounts receivable at the lower
of cost or fair value. The Company recognizes interest income on an account
receivable based on the stated interest rate for past-due accounts over the
period that the account is past due. The Company accumulates and defers
fees and costs associated with establishing a receivable to be amortized
over the estimated life of the related receivable. The Company estimates
allowances for doubtful accounts based on the aged receivable balances and
historical losses. The Company records interest income on delinquent
accounts receivable only when payment is received. The Company first
applies payments received on delinquent accounts receivable to eliminate
the outstanding principal. The Company charges off uncollectible accounts
receivable when management estimates no possibility of collecting the
related receivable. The Company considers accounts receivable to be past
due or delinquent based on contractual terms.
INVENTORIES - Inventories are stated at the lower of cost or market using
the retail method [SEE NOTE 5].
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized upon being placed in
service. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation is computed using the double declining balance
method over the estimated useful lives of the assets. In accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the Company periodically
reviews their property and equipment for impairment.
INTANGIBLE ASSETS - The Company accounts for their intangible assets in
accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 establishes three
classifications for intangible assets including definite-life intangible
assets, indefinite-life intangible assets and goodwill and requires
different accounting treatment and disclosures for each classification. In
accordance with SFAS No. 142, the Company periodically reviews their
intangible assets for impairment. No impairment was recorded during the
year ended June 30, 2004 and the period from inception on August 6, 2002
through June 30, 2003.
ACQUISITION COSTS - Costs related to proposed acquisitions are deferred and
will be included in the acquisition price upon completion of the related
acquisition. In the event an acquisition is unsuccessful, the costs related
to the acquisition are written off to expense.
F-12
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
STOCK OFFERING COSTS - Costs related to proposed stock offerings are
deferred and will be offset against the proceeds of the offering. In the
event a stock offering is unsuccessful, the costs related to the offering
are written off to expense.
PRODUCT WARRANTY - The Company warrants their agricultural products against
damage that may occur prior to delivery to the customer. At June 30, 2004
and 2003, the Company has established a reserve for future warranty expense
of $31 and $300, respectively.
REVENUE RECOGNITION - The Company's revenue comes primarily from the sale
of agricultural products. The Company recognizes revenue from the sale of
agricultural products when rights and risk of ownership have passed to the
customer, there is persuasive evidence of a sales arrangement, product has
been shipped or delivered to the customer, the price and terms are
finalized and collection of the resulting receivable is reasonably assured.
The Company also generates revenue from business consulting services. The
Company recognizes revenue from business consulting services over the term
of the underlying consulting agreement.
STOCK-BASED COMPENSATION - The Company has one stock-based employee
compensation plan [SEE NOTE 11]. The Company accounts for their plan under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. The following table illustrates the effect on net income
and loss per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", to the Company's stock-based
employee compensation.
From Inception
For the on August 6,
Year Ended 2002 Through
June 30, 2004 June 30, 2003
------------- -------------
Net loss, as reported $ (430,634) $ (353,090)
Add: Stock-based employee compensation
expense included in reported net income -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method -- (300,000)
----------- -----------
Pro forma net loss $ (430,634) $ (653,090)
----------- -----------
Loss per common share, as reported $ (.04) $ (.04)
Loss per common share, pro forma $ (.04) $ (.07)
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" [SEE NOTE 13].
LOSS PER SHARE - The computation of loss per share is based on the weighted
average number of common shares outstanding during the period presented, in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" [SEE NOTE 14].
F-13
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosures
of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reported period. Actual results could differ from those estimated.
RECENTLY ENACTED ACCOUNTING STANDARDS - Statement of Financial Accounting
Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", and SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", were recently issued. SFAS No. 149 and 150 have no current
applicability to the Company or their effect on the financial statements
would not have been significant.
RESTATEMENT - The financial statements have been restated for all periods
presented to reflect Parent's amended articles of incorporation which were
filed with the State of Nevada in October 2004 [SEE NOTES 11 AND 18].
NOTE 2 - ACQUISITION OF MT SUBSIDIARY AND CERTAIN ASSETS OF M7 FARMS
On September 27, 2002, Parent acquired MT Subsidiary and certain assets of
M7 Farms pursuant to a Purchase Agreement signed August 14, 2002. Parent
issued $800,000 of notes payable and paid $157,429 in cash to acquire
certain assets from M7 Farms and 100% of the outstanding shares of MT
Subsidiary's common stock wherein MT Subsidiary became a wholly-owned
subsidiary of Parent. The Company has accounted for the acquisition as a
purchase of MT Subsidiary. The financial statements reflect the operations
of MT Subsidiary from September 27, 2002.
The following is the unaudited condensed balance sheet of MT Subsidiary
including the assets acquired from M7 Farms at September 27, 2002, the date
the acquisition closed.
September 27,
2002
------------
Assets:
Inventory $ 241,806
Prepaid expense 50,000
Property and equipment 667,801
Definite-life intangible assets 57,814
------------
$ 1,017,421
------------
Liabilities and Stockholders' Equity:
Due to Parent $ 957,429
Deferred tax liability 59,992
Common stock 1,000
Additional paid-in capital (1,000)
------------
$ 1,017,421
------------
The acquired definite-life intangible assets, which are two 5-year
non-compete agreements with the former owners of MT Subsidiary and the M7
Farms assets [SEE NOTE 7], are being amortized over 5 years with no
residual value.
F-14
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITION OF CERTAIN ASSETS OF SAMPRES TREE FARM LLC
On May 26, 2004, Parent acquired certain assets of Sampres Tree Farm LLC
pursuant to an Asset Purchase Agreement signed May 20, 2004. Parent issued
400,000 shares of common stock, issued a $400,000 note payable and paid
$150,151 in cash to acquire the assets from Sampres Tree Farm LLC. The
Company has accounted for the acquisition as an asset purchase. The Company
recorded goodwill of $79,409 as a result of the acquisition.
The following shows how the acquisition purchase price was allocated to the
assets acquired from Sampres Tree Farm LLC at May 26, 2004, the date the
acquisition closed.
May 26,
2004
--------
Inventory $133,051
Property and equipment 457,691
Goodwill 79,409
--------
$670,151
--------
NOTE 4 - AVAILABLE-FOR-SALE SECURITIES
The amortized cost, net of unrealized gains and losses, and estimated fair
value of available-for-sale securities by major security type are as
follows at:
June 30,
-------------------------
2004 2003
---------- ----------
Publicly-traded corporations:
Amortized cost $ -- $ 15,770
Unrealized gains -- --
Unrealized losses -- (5,806)
---------- ----------
Estimated Fair Value $ -- $ 9,964
---------- ----------
NOTE 5 - INVENTORIES
Inventories consist of the following at:
June 30,
-------------------------
2004 2003
---------- ----------
Raw materials $ 177,390 $ 57,219
Growing crops 615,176 298,211
---------- ----------
Total Inventories $ 792,566 $ 355,430
---------- ----------
The Company has estimated that no allowance for slow moving or obsolete
inventory was necessary at June 30, 2004 and 2003. The Company's
inventories are collateral for certain notes payable [SEE NOTE 10].
F-15
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
June 30,
------------------------------
2004 2003
------------ ------------
Office furniture and equipment $ 36,797 $ 22,652
Farm equipment 327,500 154,532
Buildings 506,349 311,047
Land 346,205 222,008
------------ ------------
1,216,851 710,239
Less accumulated depreciation (175,637) (75,075)
------------ ------------
Net Property and Equipment $ 1,041,214 $ 635,164
------------ ------------
Estimated
Useful Lives of
Assets (Years)
---------------
Office furniture and equipment 3 - 10
Farm equipment 2 - 10
Buildings 20 - 30
Land Not applicable
For the year ended June 30, 2004 and the period from inception on August 6, 2002
through June 30, 2003, the Company had depreciation of $16,635 and $3,393,
respectively, which was expensed as general and administrative expense. For the
year ended June 30, 2004 and the period from inception on August 6, 2002 through
June 30, 2003, the Company had depreciation of $83,927 and $71,682,
respectively, which was included in the costs of producing inventory. The
Company's property and equipment are collateral for certain notes payable [SEE
NOTE 10].
NOTE 7 - DEFINITE-LIFE INTANGIBLE ASSETS
Definite-life intangible assets consist of the following at:
June 30,
------------------------
2004 2003
--------- ---------
5-year non-compete agreement with
Steven Sutherland $ 28,907 $ 28,907
5-year non-compete agreement with
Roger and Barbara Major 28,907 28,907
--------- ---------
57,814 57,814
Less accumulated amortization (21,198) (9,636)
--------- ---------
Net Definite-Life Intangible Assets $ 36,616 $ 48,178
--------- ---------
F-16
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEFINITE-LIFE INTANGIBLE ASSETS [CONTINUED]
The Company's definite-life intangible assets are being amortized over 5
years with no residual value. Amortization expense for the year ended June
30, 2004 and the period from inception on August 6, 2002 through June 30,
2003 was $11,562 and $9,636, respectively. The Company estimates that their
amortization expense will be approximately as follows for the twelve-month
periods ended:
Amortization
June 30, Expense
----------- -----------
2005 $ 11,563
2006 11,563
2007 11,563
2008 1,927
2009 -
-----------
$ 36,616
-----------
NOTE 8 - GOODWILL
The following is a summary of the transactions affecting the Company's goodwill.
From Inception
For the on August 6,
Year Ended 2002 Through
June 30, 2004 June 30, 2003
------------- -------------
Goodwill at beginning of period $ -- $ --
Goodwill from the acquisition of assets from
Sampres Tree Farm LLC 79,409 --
---------- ----------
Goodwill at end of period $ 79,409 $ --
---------- ----------
The Company has tested their goodwill for impairment using market prices
for the Company's common stock in accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets". At
June 30, 2004 and 2003, the Company's goodwill was not impaired.
NOTE 9 - CONVERTIBLE NOTES PAYABLE
The Company has sold convertible notes payable totaling $355,000 and
recorded discounts totaling $11,000 due to the beneficial conversion
feature of the notes. The discounts are being amortized over the term of
the respective notes. For the year ended June 30, 2004 and the period from
inception on August 6, 2002 through June 30, 2003, respectively, the
Company amortized $967 and $0 of the discounts on notes payable as interest
expense.
F-17
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - CONVERTIBLE NOTES PAYABLE [CONTINUED]
The Company has paid a total of $1,655 in loan fees and costs in order to
establish these convertible notes payable. These costs have been deferred
and are being amortized over the term of the respective notes. For the year
ended June 30, 2004 and the period from inception on August 6, 2002 through
June 30, 2003, respectively, the Company amortized $551 and $0 of the
deferred loan costs as interest expense.
The Company has the following convertible notes payable at:
June 30,
----------------------------
2004 2003
------------ ------------
$300,000 10% unsecured note payable maturing
in March 2005, convertible with accrued interest
into common stock at $.30 per share $ 291,019 $ -
$10,000 10% unsecured note payable maturing in
September 2006, convertible with accrued interest
into common stock at $.25 per share during the first
6 months, at $.35 per share during the second 6
months and at $.50 per share thereafter, net of
discounts of $1,800 and $0, respectively 8,200 -
$10,000 10% unsecured note payable maturing in
September 2006, convertible with accrued interest
into common stock at $.25 per share during the first
6 months, at $.35 per share during the second 6
months and at $.50 per share thereafter, net of
discounts of $1,800 and $0, respectively 8,200 -
$25,000 10% unsecured note payable maturing in
September 2006, convertible with accrued interest
into common stock at $.25 per share during the first
6 months, at $.35 per share during the second 6
months and at $.50 per share thereafter, net of
discounts of $4,500 and $0, respectively 20,500 -
$10,000 10% unsecured note payable maturing in
December 2006, convertible with accrued interest
into common stock at $.25 per share during the first
6 months, at $.35 per share during the second 6
months and at $.50 per share thereafter, net of
discounts of $1,933 and $0, respectively 8,067 -
------------ ------------
335,986 -
Less current portion (291,019) -
------------ ------------
$ 44,967 $ -
------------ ------------
F-18
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - CONVERTIBLE NOTES PAYABLE [CONTINUED]
The convertible notes payable mature as follows for the twelve-month
periods ended:
June 30, Principal Due
----------- --------------
2005 $ 291,019
2006 -
2007 55,000
2008 -
2009 -
--------------
$ 346,019
--------------
For the year ended June 30, 2004 and the period from inception on August 6,
2002 through June 30, 2003, respectively, interest expense on the
convertible notes payable amounted to $10,114 and $0.
NOTE 10 - NOTES PAYABLE
The Company has the following notes payable at:
June 30,
------------------------------
2004 2003
------------ ------------
$600,000 7% note payable maturing in March 2007,
secured by all of the assets acquired from M7 Farms $ 318,728 $ 410,405
$200,000 7% note payable maturing in March 2007,
secured by all of the outstanding shares of
MT Subsidiary 117,899 153,159
$400,000 note payable maturing in May 2009,
accruing interest at 7% during the first year,
at 8% during the second and third years and at 9% during
the fourth and fifth years, secured by all of the
assets acquired from Sampres Tree Farm LLC 400,000 --
$250,000 14% note payable maturing in March 2005 250,000 --
$112,250 18% note payable repaid in August 2003 -- 111,799
------------ ------------
1,086,627 675,363
Less current portion (530,003) (238,735)
------------ ------------
$ 556,624 $ 436,628
------------ ------------
F-19
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - NOTES PAYABLE [CONTINUED]
The notes payable mature as follows for the twelve-month periods ended:
June 30, Principal Due
----------- --------------
2005 $ 530,003
2006 188,388
2007 92,552
2008 5,337
2009 270,347
--------------
$ 1,086,627
--------------
In November 2003, the Company issued a $50,000 note payable. The note
accrued interest at 120% and was due in December 2003. In December 2003,
the Company repaid the note.
In August 2003, the Company issued a $226,469 note payable. The note
accrued interest at 18% and was due in March 2004. In March 2004, the
Company repaid the note.
In September 2002, the Company issued a $112,270 note payable. The note
accrued interest at 18% and was due in January 2003. In January 2003, the
Company repaid the note.
The Company has paid a total of $61,099 in loan fees and costs in order to
establish the notes payable. These costs have been deferred and are being
amortized over the term of the respective notes. For the year ended June
30, 2004 and the period from inception on August 6, 2002 through June 30,
2003, respectively, the Company amortized $24,737 and $19,295 of the
deferred loan costs as interest expense.
For the year ended June 30, 2004 and the period from inception on August 6,
2002 through June 30, 2003, respectively, interest expense on the notes
payable amounted to $103,301 and $68,057.
NOTE 11 - CAPITAL STOCK AND OPTIONS
PREFERRED STOCK - In October 2004, Parent amended its articles of
incorporation to authorize 10,000,000 shares of preferred stock, $.001 par
value, with such rights, preferences and designations and to be issued in
such series as determined by the Board of Directors [SEE NOTE 18]. No
shares are issued and outstanding at June 30, 2004 and 2003.
COMMON STOCK - In October 2004, Parent amended its articles of
incorporation to authorize 50,000,000 shares of common stock with $.001 par
value [SEE NOTE 18]. Previously, Parent had authorized 50,000,000 shares of
common stock with no par value. The financial statements have been restated
for all periods presented to reflect the change in par value.
In June 2004, the Company issued 166,667 shares of their previously
authorized but unissued common stock for a subscription receivable of
$50,000, or $.30 per share.
F-20
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CAPITAL STOCK AND OPTIONS [CONTINUED]
In May 2004, the Company issued 400,000 shares of their previously
authorized but unissued common stock as part of an asset acquisition [SEE
NOTE 3] valued at $120,000, or $.30 per share.
From August 2003 through June 2004, the Company issued 450,664 shares of
their previously authorized but unissued common stock for cash of $135,200,
or $.30 per share. Stock offering costs of $27,500 were netted against the
proceeds.
From July through September 2003, the Company issued 220,000 shares of
their previously authorized but unissued common stock for cash of $55,000,
or $.25 per share.
In June 2003, the Company issued 420,000 shares of their previously
authorized but unissued common stock for a subscription receivable of
$105,000, or $.25 per share. The Company received the $105,000 subscription
receivable in July 2003.
In June 2003, the Company issued 40,000 shares of their previously
authorized but unissued common stock for cash of $10,000, or $.25 per
share.
From March through June 2003, the Company issued 500,000 shares of their
previously authorized but unissued common stock for cash of $100,000, or
$.20 per share. Stock offering costs of $7,000 were netted against the
proceeds.
In January 2003, the Company issued 200,000 shares of their previously
authorized but unissued common stock to pay rent of $40,000, or $.20 per
share.
In January 2003, the Company issued 800,000 shares of their previously
authorized but unissued common stock to pay debt of $160,000, or $.20 per
share.
In January 2003, the Company issued 20,000 shares of their previously
authorized but unissued common stock for consulting services rendered
valued at $4,000, or $.20 per share.
In October 2002, the Company issued 125,000 shares of their previously
authorized but unissued common stock for available-for-sale securities
valued at $12,500, or $.10 per share.
In October 2002, the Company issued 450,000 shares of their previously
authorized but unissued common stock for a subscription receivable of
$45,000, or $.10 per share. The Company received the $45,000 subscription
receivable in July 2003.
In September 2002, the Company issued 150,000 shares of their previously
authorized but unissued common stock for consulting services rendered
valued at $15,000, or $.10 per share.
In September and October 2002, the Company issued 1,570,000 shares of their
previously authorized but unissued common stock (100,000 shares of which
were issued to a relative of an officer/shareholder of the Company) for
cash of $157,000, or $.10 per share.
In August 2002, in connection with their organization, the Company issued
7,340,000 shares of their previously authorized but unissued common stock
for cash of $294, or $.00004 per share.
F-21
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CAPITAL STOCK AND OPTIONS [CONTINUED]
STOCK OPTION PLAN - In October 2002, the Company's Board of Directors
approved and adopted the "2002 Stock Incentive Plan" ("the Plan") with a
maximum of 8,000,000 shares of common stock reserved for issuance under the
Plan. The Plan provides for both the direct award of shares and for the
grant of options to purchase shares to employees, officers, directors,
agents, consultants, advisors and independent contractors. Awards under the
Plan will be granted as determined by the Board of Directors and the Board
of Directors shall determine which eligible persons are to receive
Incentive Stock Options, Non-Statutory Stock Options or stock issuances.
The Board of Directors also sets the number of shares, the exercise price
and the exercise terms for grants. Options granted to non-exempt employees
are required to have an exercise price of at least 85% of the fair market
value of the common stock at the time of grant. Incentive Stock Options
must be granted with an exercise price of at least 100% (110% for
shareholders who own at least 10% of the Company's outstanding stock) of
the fair market value of the common stock at the time of grant. Incentive
Stock Options are required to expire within 10 years. At June 30, 2004,
total awards available to be granted from the Plan amounted to 3,700,000.
In September 2003, the Company's Board of Directors granted options to
purchase 100,000 shares of common stock from the 2002 Stock Incentive Plan
to a consultant for services rendered valued at $30,000. The options vested
immediately and are exercisable at $.30 per share for 10 years. At June 30,
2004, none of these options had been exercised, forfeited or cancelled.
In November 2002, the Company's Board of Directors granted options to
purchase 2,000,000 shares of common stock from the 2002 Stock Incentive
Plan to officers of the Company for services rendered. The options vested
immediately and are exercisable at $.11 per share for 5 years. The Company
did not record any amount for the options since there was no intrinsic
value for the options. At June 30, 2004, none of these options had been
exercised, forfeited or cancelled.
In November 2002, the Company's Board of Directors granted options to
purchase 1,000,000 shares of common stock from the 2002 Stock Incentive
Plan to an employee of the Company for services rendered. The options
vested immediately and are exercisable at $.10 per share for 10 years. The
Company did not record any amount for the options since there was no
intrinsic value for the options. At June 30, 2004, none of these options
had been exercised, forfeited or cancelled.
In November 2002, the Company's Board of Directors granted options to
purchase 1,200,000 shares of common stock from the 2002 Stock Incentive
Plan (1,000,000 options of which were granted to a relative of an
officer/shareholder of the Company) to consultants for services rendered
valued at $120,000. The options vested immediately and are exercisable at
$.10 per share for 10 years. At June 30, 2004, none of these options had
been exercised, forfeited or cancelled.
F-22
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CAPITAL STOCK AND OPTIONS [CONTINUED]
A summary of the status of the options granted under the Company's 2002
Stock Incentive Plan is presented below.
From Inception on
For the Year Ended August 6, 2002
June 30, 2004 Through June 30, 2003
-------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- ---------
Outstanding at beginning of period 4,200,000 $ .10 - $ -
Granted 100,000 .30 4,200,000 .10
Exercised - - - -
Forfeited - - - -
Expired - - - -
--------- --------- --------- ---------
Outstanding at end of period 4,300,000 $ .11 4,200,000 $ .10
--------- --------- --------- ---------
Weighted average fair value of
options granted during the period 100,000 $ .30 4,200,000 $ .10
--------- --------- --------- ---------
The fair value of each option granted is estimated on the date granted
using the Black-Scholes option pricing model, with the following
assumptions used for the grants on September 1, 2003: risk-free interest
rate of 4.45%, expected dividend yield of zero, expected lives of 10 years
and expected volatility of 760%. The following assumptions were used for
options granted on November 5, 2002: risk-free interest rates of 3.00% and
4.10%, expected dividend yield of zero, expected lives of 5 and 10 years
and expected volatility of 1,506%.
A summary of the status of the options outstanding under the Company's 2002
Stock Incentive Plan at June 30, 2004 is presented below:
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
----------- ------------ ---------------- -------------- ----------- --------------
$ .10 2,200,000 8.4 years $ .10 2,200,000 $ .10
.11 2,000,000 3.3 years .11 2,000,000 .11
.30 100,000 9.2 years .30 100,000 .30
----------- ----------- -------------- -------------- --------- --------------
$ .10 - .30 4,300,000 6.0 years $ .11 4,300,000 $ .11
----------- ----------- -------------- -------------- --------- --------------
F-23
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - UNSUCCESSFUL ACQUISITIONS
In May 2004, the Company was negotiating a possible acquisition of another
company. However, the negotiations were called off and no acquisition
occurred. All expenses associated with the unsuccessful acquisition have
been classified as a loss on unsuccessful acquisition.
In April 2003, the Company was negotiating a possible acquisition of
another company. However, the negotiations were called off and no
acquisition occurred. All expenses associated with the unsuccessful
acquisition have been classified as a loss on unsuccessful acquisition.
NOTE 13 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". SFAS
No. 109 requires the Company to provide a net deferred tax asset or
liability equal to the expected future tax benefit or expense of temporary
reporting differences between book and tax accounting methods and any
available operating loss or tax credit carryforwards. At June 30, 2004 and
2003, the Company has available unused net operating loss carryforwards of
approximately $638,000 and $222,000, respectively, which may be applied
against future taxable income and which expire in various years through
2024.
At June 30, 2004 and 2003, respectively, the total of all deferred tax
assets is approximately $127,000 and $47,000 and the total of all deferred
tax liabilities is $49,000, and $49,000. The amount of and ultimate
realization of the benefits from the deferred tax assets for income tax
purposes is dependent, in part, upon the tax laws in effect, the future
earnings of the Company, and other future events, the effects of which
cannot be determined. Because of the uncertainty surrounding the
realization of the loss carryforwards, the Company has established a
valuation allowance of approximately $79,000 and $0 at June 30, 2004 and
2003, respectively. The change in the valuation allowance for the year
ended June 30, 2004 and for the period from inception on August 6, 2002
through June 30, 2003 is approximately $79,000 and $0, respectively.
The temporary differences, tax credits and carryforwards gave rise to the
following deferred tax asset (liability) at:
June 30,
--------------------------
2004 2003
---------- ----------
Net operating loss carryover $ 125,548 $ 43,600
Capital loss carryover 1,770 1,770
Excess of book over tax basis of fixed
assets (48,640) (49,171)
Warranty reserve 6 59
Reserve for bad debts 33 33
Unrealized loss on marketable securities -- 1,142
Contribution carryover 8 --
---------- ----------
Total deferred tax asset $ 78,725 $ (2,567)
---------- ----------
F-24
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES [CONTINUED]
The components of income tax expense from continuing operations consisted
of the following for:
From Inception
For the on August 6,
Year Ended 2002 Through
June 30, 2004 June 30, 2003
------------- -------------
Current income tax expense:
Federal $ - $ -
State - -
-------------- --------------
Current tax expense $ - $ -
-------------- --------------
Deferred tax expense (benefit) arising from:
Excess of tax over financial
accounting depreciation $ (531) $ (10,820)
Bad debt allowance - (33)
Capital loss carryover - (1,770)
Warranty reserve 53 (59)
Contribution carryover (8) -
Net operating loss carryover (81,948) (43,600)
Valuation allowance 78,724 -
-------------- --------------
Net deferred tax expense $ (3,710) $ (56,282)
-------------- --------------
Deferred income tax expense results primarily from the reversal of
temporary timing differences between tax and financial statement income.
The reconciliation of income tax expense from continuing operations
computed at the U.S. federal statutory tax rate to the Company's effective
rate is as follows for:
From Inception
For the on August 6,
Year Ended 2002 Through
June 30, 2004 June 30, 2003
------------- -------------
Computed tax at the expected
federal statutory rate 15.00% 15.00%
State income taxes, net of federal benefit 4.67 4.67
Compensation due to options (1.30) (5.74)
Other (.28) (.24)
Valuation allowance (17.28) -
------------- -------------
Effective income tax rates .81% 13.69%
------------- -------------
F-25
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - LOSS PER SHARE
The following data shows the amounts used in computing loss per share:
From Inception
For the on August 6,
Year Ended 2002 Through
June 30, 2004 June 30, 2003
------------- -------------
Loss from operations available to
common shareholders (numerator) $ (430,634) $ (353,090)
------------- -------------
Weighted average number of common
shares outstanding used in loss per
share for the period (denominator) 12,179,860 9,653,338
------------- -------------
At June 30, 2004, the Company had outstanding options to purchase 4,300,000
shares and notes payable convertible into 1,202,084 shares which were not
used in the computation of loss per share because their effect would be
anti-dilutive. At June 30, 2003, the Company had outstanding options to
purchase 4,200,000 shares which were not used in the computation of loss
per share because their effect would be anti-dilutive. Dilutive loss per
share was not presented, as the Company had no common stock equivalent
shares for all periods presented that would affect the computation of
diluted loss per share.
NOTE 15 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America,
which contemplate continuation of the Company as a going concern. However,
the Company was only recently formed and has not yet been successful in
establishing profitable operations. Further, the Company has current
liabilities in excess of current assets. These factors raise substantial
doubt about the ability of the Company to continue as a going concern. In
this regard, management is proposing to raise any necessary additional
funds not provided by operations through loans or through additional sales
of their common stock or through possible business combinations. There is
no assurance that the Company will be successful in raising this additional
capital or in achieving profitable operations. The financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
F-26
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - RELATED PARTY TRANSACTIONS
ACCOUNTS RECEIVABLE - At June 30, 2004, an entity controlled by a relative
of an officer/shareholder of the Company owed $630 in accounts receivable
to the Company.
ASSET ACQUISITION - In June 2003, the Company purchased $15,130 of property
and equipment from an officer/shareholder of the Company.
ACCOUNTS PAYABLE - At June 30, 2003, the Company had accrued consulting
fees of $14,500 payable to a relative of an officer/shareholder of the
Company for consulting services rendered during the year ended June 30,
2003. In July 2003, the Company paid the accrued fees.
RELATED PARTY ADVANCES - During the year ended June 30, 2004 and the period
from inception on August 6, 2002 through June 30, 2003,
officers/shareholders of the Company and their relatives have made advances
to the Company and the Company has repaid the advances as funds have been
available. During the year ended June 30, 2004, officers/shareholders of
the Company and their relatives made advances totaling $240,799 and the
Company repaid advances totaling $246,809. Since the Company owed $16,244
from prior-year advances, the remaining balance owed to the
officers/shareholders of the Company and their relatives at June 30, 2004
is $10,234. During the period from inception on August 6, 2002 through June
30, 2003, officers/shareholders of the Company and their relatives made
advances totaling $99,176 and the Company repaid advances totaling $82,932,
leaving a balance of $16,244 owed to the officers/shareholders of the
Company and their relatives at June 30, 2003.
STOCK ISSUANCE - In October 2002, the Company issued 100,000 shares of
their previously authorized but unissued common stock to a relative of an
officer/shareholder of the Company for cash of $10,000 [SEE NOTE 11].
OPTIONS - In September 2003, the Company granted options to purchase
100,000 shares of common stock to a relative of an officer/shareholder of
the Company for consulting services [SEE NOTE 11].
In November 2002, the Company granted options to purchase 2,000,000 shares
of common stock to officers/shareholders of the Company for employee
services [SEE NOTE 11].
In November 2002, the Company granted options to purchase 1,000,000 shares
of common stock to a relative of an officer/shareholder of the Company for
employee services [SEE NOTE 11].
In November 2002, the Company granted options to purchase 1,000,000 shares
of common stock to a relative of an officer/shareholder of the Company for
consulting services [SEE NOTE 11].
SALES - For the year ended June 30, 2004 and the period from inception on
August 6, 2002 through June 30, 2003, respectively, the Company had sales
of $630 and $0 to an entity controlled by a relative of an
officer/shareholder of the Company.
CONSULTING SERVICES - During the year ended June 30, 2004 and the period
from inception on August 6, 2002 through June 30, 2003, respectively, the
Company paid a relative of an officer/shareholder of the Company $24,020
and $25,875 for consulting services.
F-27
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - RELATED PARTY TRANSACTIONS [CONTINUED]
MANAGEMENT COMPENSATION - For the year ended June 30, 2004 and the period
from inception on August 6, 2002 through June 30, 2003, respectively, the
Company expensed $60,000 and $5,500 as salary to the Company's Chief
Executive Officer. At June 30, 2004 and 2003, respectively, the Company
owed $22,000 and $0 to the Chief Executive Officer for accrued salary.
For the year ended June 30, 2004 and the period from inception on August 6,
2002 through June 30, 2003, respectively, the Company expensed $112,250 and
$28,500 as salary to the Company's former Chief Financial Officer. At June
30, 2004 and 2003, respectively, the Company owed $8,500 and $0 to the
former Chief Financial Officer for accrued salary.
EMPLOYEES - For the year ended June 30, 2004 and the period from inception
on August 6, 2002 through June 30, 2003, respectively, the Company expensed
$106,075 and $72,000 as salary to an employee of the Company who is the
spouse of an officer/shareholder of the Company. At June 30, 2004 and 2003,
respectively, the Company owed $6,000 and $0 to this employee for accrued
salary.
For the year ended June 30, 2004 and the period from inception on August 6,
2002 through June 30, 2003, respectively, the Company expensed $77,000 and
$29,500 as salary to an employee of the Company who is a relative of an
officer/shareholder of the Company. At June 30, 2004 and 2003,
respectively, the Company owed $0 and $0 to this employee for accrued
salary.
NOTE 17 - CONCENTRATIONS
ACCOUNTS RECEIVABLE - A significant percent of the Company's accounts
receivable at June 30, 2004 was owed by only four customers. The following
table lists the percent of the receivables owed by those customers that
accounted for 10% or more of the total accounts receivable at June 30,
2004:
Customer A 29%
Customer B 16%
Customer C 11%
Customer D 11%
REVENUES - During the year ended June 30, 2004 and the period from
inception on August 6, 2002 through June 30, 2003, respectively, the
Company had a significant customer which accounted for 77% and 69% of the
Company's total sales. The loss of this significant customer could
adversely affect the Company's business and financial condition.
F-28
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - SUBSEQUENT EVENTS
AMENDED ARTICLES OF INCORPORATION - In October 2004, Parent filed amended
articles of incorporation with the State of Nevada. The amended articles of
incorporation authorized 10,000,000 shares of preferred stock with $.001
par value and changed the common stock par value from no par value to $.001
[SEE NOTE 11]. The financial statements have been restated for all periods
presented to reflect the amended articles of incorporation.
COMMON STOCK ISSUANCE - In July and August 2004, the Company issued 100,001
shares of their previously authorized but unissued common stock for cash of
$30,000, or $.30 per share.
GRANT OF STOCK OPTIONS - In August 2004, the Company's Board of Directors
granted options to purchase 200,000 shares of common stock from the 2002
Stock Incentive Plan to a consultant for services rendered. The options
vested immediately and are exercisable at $.30 per share for 10 years.
SALE OF STOCK OPTIONS - In August 2004, the Company sold options to
purchase 50,000 shares of common stock. The options are exercisable at $.30
per share for 10 years.
SECURED CONVERTIBLE NOTE PAYABLE - In July 2004, the Company issued a
$200,000 note payable. The note is secured by 50,000 trees which are part
of the Company's inventory. The note accrues interest at 10% per annum and
is due January 2007. The unpaid principal and interest are convertible into
common stock at $.24 per share during the first year, at $.30 per share
during the second year and at $.35 per share thereafter.
SECURED NOTES PAYABLE - In August 2004, the Company issued a $50,000 note
payable. The note is secured by 7,500 trees which are part of the Company's
inventory. The note accrues interest at 12% per annum and is due August
2006. The note also calls for an additional payment of 3% of the principal
due on the date of maturity.
In August 2004, the Company issued a $50,000 note payable. The note is
secured by 7,500 trees which are part of the Company's inventory. The note
accrues interest at 10% per annum and is due August 2006.
F-29
============================================ ===================================
NO DEALER, SALESMAN OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS NOT CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER
MADE HEREBY, AND, IF GIVEN OR MADE, SUCH 14,925,978 SHARES OF COMMON STOCK
INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN MADE BY US.
THIS PROSPECTUS DOES NOT OFFER TO SELL OR
BUY ANY SECURITIES IN ANY JURISDICTION WHERE PENGE CORP.
IT IS UNLAWFUL.
THE INFORMATION IN THIS PROSPECTUS IS
CURRENT AS OF THE DATE HEREOF. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS _______________
CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. Prospectus
_______________________ _______________
October 25, 2004
============================================ ===================================
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation provide that we shall indemnify and
advance expenses to our directors, officers, employees, fiduciaries or agents
and to any person who is or was serving at our request as a director, officer,
partner, trustee, employee, fiduciary or agent of another domestic or foreign
corporation or other person or of an employee benefit plan (and their respective
estates or personal representatives) to the fullest extent as from time to time
permitted by Nevada law.
Our bylaws provide that we shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of our company, by reason of
the fact that he or she is or was a director, officer, employee or agent of our
company, or is or was serving at the request of our company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him or her in connection with the action, suit or proceeding if he or she
acted in good faith and in a manner that he or she reasonably believed to be in
or not opposed to the best interests of our company and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
With respect to derivative actions, our bylaws provide that we shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of our
company to procure a judgment in its favor by reason of the fact that he or she
is or was a director, officer, employee or agent of our company, or is or was
serving at the request of our company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise
against expenses, including amounts paid in settlement and attorneys' fees
actually and reasonably incurred by him or her in connection with the defense or
settlement of the action or suit if he or she acted in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of our company. We may not indemnify any such person for any claim,
issue or matter as to which such person has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to our company or for amounts paid in settlement to our company, unless and only
to the extent that the court in which the action or suit was brought or other
court of competent jurisdiction determines upon application that in view of all
the circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
Any indemnification under the provisions described above, unless
ordered by a court, may be made by our company only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances. The determination
must be made:
o By the stockholders;
o By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit
or proceeding;
o If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by
independent legal counsel in a written opinion; or
o If a quorum consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent
legal counsel in a written opinion.
II-1
Our bylaws further provide that the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must be
paid by our company as they are incurred and in advance of the final disposition
of the action, suit or proceeding, upon receipt of an undertaking by or on
behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he or she is not entitled
to be indemnified by our company.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, we have been informed
that in the opinion of the SEC such indemnification is contrary to public policy
as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses of the offering,
sale and distribution of the offered securities being registered pursuant to
this registration statement (the "Registration Statement"). We will bear all of
the expenses listed below. All of the amounts shown are estimates except the SEC
registration fees.
ITEM AMOUNT
---- ------
SEC registration fees $567
Accounting and legal fees and expenses $75,000
Printing expenses $5,000
Miscellaneous expenses $10,000
---------------
TOTAL: $90,567
===============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years, Penge has issued and sold the following
unregistered securities on the dates and for the consideration indicated:
SHARES OF COMMON STOCK
In connection with our organization, during August 2002, we offered and
sold an aggregate of 7,340,000 shares of our common stock at a per share price
of $0.00004 per share for aggregate proceeds of $294 and contributions to our
planning and founding. The offer and sale of such shares of our common stock
were effected in reliance upon the exemptions for sales of securities not
involving a public offering, as set forth in Rule 504 promulgated under the
Securities Act and in Section 4(2) of the Securities Act, based upon the
following: (a) the investors confirmed to us that they had such background,
education and experience in financial and business matters as to be able to
evaluate the merits and risks of an investment in the securities; (b) there was
no public offering or general solicitation with respect to the offering; (c) the
investors had access to all relevant and available information regarding and
were involved in the planning and founding of our company, (d) the investors
acknowledged that all securities being purchased were "restricted securities"
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; (e) a legend was placed on the certificates
II-2
representing each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or transferred
in a transaction exempt from registration under the Securities Act; and (f) the
aggregate offering price for the offering (combined with the offering price of
all prior offerings of securities under Rule 504, any exemption under Section
3(b) of the Securities Act or in violation of Section 5(a) of the Securities
Act) did not exceed $1 million.
During September 2002 and October 2002, we offered and sold 2,295,000
shares of our common stock at $0.10 per share to 26 investors. The offer and
sale of such shares of our common stock were effected in reliance upon the
exemptions for sales of securities not involving a public offering, as set forth
in Rule 504 promulgated under the Securities Act and in Section 4(2) of the
Securities Act, based upon the following: (a) the investors confirmed to us that
they had such background, education and experience in financial and business
matters as to be able to evaluate the merits and risks of an investment in the
securities; (b) there was no public offering or general solicitation with
respect to the offering; (c) the investors were provided with certain disclosure
materials and all other information requested with respect to our company; (d)
the investors acknowledged that all securities being purchased were "restricted
securities" for purposes of the Securities Act, and agreed to transfer such
securities only in a transaction registered under the Securities Act or exempt
from registration under the Securities Act; (e) a legend was placed on the
certificates representing each such security stating that it was restricted and
could only be transferred if subsequently registered under the Securities Act or
transferred in a transaction exempt from registration under the Securities Act;
and (f) the aggregate offering price for the offering (combined with the
offering price of all prior offerings of securities under Rule 504, any
exemption under Section 3(b) of the Securities Act or in violation of Section
5(a) of the Securities Act) did not exceed $1 million.
Between January 2003 and June 2003, we offered and sold 770,000 shares
of our common stock at $0.20 per share to 10 investors. The offer and sale of
such shares of our common stock were effected in reliance upon the exemptions
for sales of securities not involving a public offering, as set forth in Rule
506 promulgated under the Securities Act and in Section 4(2) of the Securities
Act, based upon the following: (a) the investors confirmed to us that they were
"accredited investors," as defined in Rule 501 of Regulation D promulgated under
the Securities Act and had such background, education and experience in
financial and business matters as to be able to evaluate the merits and risks of
an investment in the securities; (b) there was no public offering or general
solicitation with respect to each offering; (c) the investors were provided with
certain disclosure materials and all other information requested with respect to
our company; (d) the investors acknowledged that all securities being purchased
were "restricted securities" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend was
placed on the certificates representing each such security stating that it was
restricted and could only be transferred if subsequently registered under the
Securities Act or transferred in a transaction exempt from registration under
the Securities Act.
In January 2003, Roger Major accepted 750,000 shares of our common
stock as partial payment on a note payable received in connection with our
purchase of Major Trees and certain assets of M7 Farms on September 27, 2002.
The offer and sale of these shares of common stock were effected in reliance
upon the exemptions for sales of securities not involving a public offering as
set forth in Rule 506 promulgated under the Securities Act and in Section 4(2)
of the Securities Act, based upon the following: (a) Major confirmed to us that
he was an "accredited investor" as defined in Rule 501 of Regulation D
promulgated under the Securities Act; (b) there was no public offering or
general solicitation with respect to such offering; (c) Major was provided with
certain disclosure materials and all other information requested with respect to
our company; (d) Major acknowledged that all securities being acquired were
"restricted securities" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend was
placed on the certificates representing each such security that it was
restricted and could only be transferred if subsequently registered under the
Securities Act or transferred in a transaction exempt from registration under
the Securities Act.
II-3
Between July 2003 and September 2003, we offered and sold 680,000
shares of our common stock at $0.25 per share to seven investors. The offer and
sale of such shares of our common stock were effected in reliance upon the
exemptions for sales of securities not involving a public offering, as set forth
in Rule 506 promulgated under the Securities Act and in Section 4(2) of the
Securities Act, based upon the following: (a) the investors confirmed to us that
they were "accredited investors," as defined in Rule 501 of Regulation D
promulgated under the Securities Act and had such background, education and
experience in financial and business matters as to be able to evaluate the
merits and risks of an investment in the securities; (b) there was no public
offering or general solicitation with respect to each offering; (c) the
investors were provided with certain disclosure materials and all other
information requested with respect to our company; (d) the investors
acknowledged that all securities being purchased were "restricted securities"
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (e) a legend was placed on the certificates
representing each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or transferred
in a transaction exempt from registration under the Securities Act.
Between September 2003 and August 2004, we offered and sold 717,332
shares of our common stock at $0.30 per share to 13 investors. The offer and
sale of such shares of our common stock were effected in reliance upon the
exemptions for sales of securities not involving a public offering, as set forth
in Rule 506 promulgated under the Securities Act and in Section 4(2) of the
Securities Act, based upon the following: (a) the investors confirmed to us that
they were "accredited investors," as defined in Rule 501 of Regulation D
promulgated under the Securities Act and had such background, education and
experience in financial and business matters as to be able to evaluate the
merits and risks of an investment in the securities; (b) there was no public
offering or general solicitation with respect to each offering; (c) the
investors were provided with certain disclosure materials and all other
information requested with respect to our company; (d) the investors
acknowledged that all securities being purchased were "restricted securities"
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (e) a legend was placed on the certificates
representing each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or transferred
in a transaction exempt from registration under the Securities Act.
In May 2004, we issued 400,000 shares of our common stock valued at
$120,000, or $0.30 per share, to H. Preston and Shirley Franks in connection
with our acquisition of certain assets of Sampres Tree Farm LLC. The offer and
sale of such shares of our common stock were effected in reliance upon the
exemptions for sales of securities not involving a public offering, as set forth
in Rule 506 promulgated under the Securities Act and in Section 4(2) of the
Securities Act, based upon the following: (a) the investors confirmed to us that
they were "accredited investors," as defined in Rule 501 of Regulation D
promulgated under the Securities Act and had such background, education and
experience in financial and business matters as to be able to evaluate the
merits and risks of an investment in the securities; (b) there was no public
offering or general solicitation with respect to each offering; (c) the
investors were provided with certain disclosure materials and all other
information requested with respect to our company; (d) the investors
acknowledged that all securities being purchased were "restricted securities"
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (e) a legend was placed on the certificates
representing each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or transferred
in a transaction exempt from registration under the Securities Act.
II-4
CONVERTIBLE NOTES PAYABLE
In March 2004, we issued unsecured convertible notes payable totaling
$300,000 to two investors. These notes bear interest at 10% per annum with
unpaid principal and accrued interest convertible into shares of our common
stock at $0.30 per share. The offer and sale of such convertible notes payable
were effected in reliance upon the exemptions for sales of securities not
involving a public offering, as set forth in Rule 506 promulgated under the
Securities Act and in Section 4(2) of the Securities Act, based upon the
following: (a) the investors confirmed to us that they were "accredited
investors," as defined in Rule 501 of Regulation D promulgated under the
Securities Act and had such background, education and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in the securities; (b) there was no public offering or general
solicitation with respect to each offering; (c) the investors were provided with
certain disclosure materials and all other information requested with respect to
our company; (d) the investors acknowledged that all securities being purchased
were "restricted securities" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend was
placed on the certificates representing each such security stating that it was
restricted and could only be transferred if subsequently registered under the
Securities Act or transferred in a transaction exempt from registration under
the Securities Act.
Between March and June 2004, we issued unsecured convertible notes
payable totaling $55,000 to four investors. These notes bear interest at 10% per
annum, mature between September and December 2006 and are convertible into
shares of our common stock at $0.25 per share during the first six months, at
$0.35 per share during the second six months and at $0.50 per share thereafter.
The offer and sale of such convertible notes payable were effected in reliance
upon the exemptions for sales of securities not involving a public offering, as
set forth in Section 4(2) of the Securities Act, based upon the following: (a)
the investors confirmed to us that they were "accredited investors," as defined
in Rule 501 of Regulation D promulgated under the Securities Act and had such
background, education and experience in financial and business matters as to be
able to evaluate the merits and risks of an investment in the securities; (b)
there was no public offering or general solicitation with respect to each
offering; (c) the investors were provided with certain disclosure materials and
all other information requested with respect to our company; (d) the investors
acknowledged that all securities being purchased were "restricted securities"
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (e) a legend was placed on the certificates
representing each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or transferred
in a transaction exempt from registration under the Securities Act.
In July 2004, we issued convertible notes payable totaling $200,000 to
two investors, secured by 50,000 trees from our inventory, bearing interest at
10% per annum and maturing in January 2007. The unpaid principal and interest on
the notes is convertible into shares of our common stock at $0.24 per share
during the first year, at $0.30 per share during the second year and at $0.35
per share thereafter. The offer and sale of such notes was effected in reliance
upon the exemptions for sales of securities not involving a public offering, as
set forth in Rule 506 promulgated under the Securities Act and in Section 4(2)
of the Securities Act, based upon the following: (a) the investors confirmed to
us that they were "accredited investors," as defined in Rule 501 of Regulation D
promulgated under the Securities Act and had such background, education and
experience in financial and business matters as to be able to evaluate the
merits and risks of an investment in the securities; (b) there was no public
offering or general solicitation with respect to the offering; (c) the investors
were provided with certain disclosure materials and all other information
requested with respect to our company; (d) the investors acknowledged that all
securities being purchased were "restricted securities" for purposes of the
Securities Act, and agreed to transfer such securities only in a transaction
registered under the Securities Act or exempt from registration under the
Securities Act; and (e) a legend was placed on the certificates representing
each such security stating that it was restricted and could only be transferred
if subsequently registered under the Securities Act or transferred in a
transaction exempt from registration under the Securities Act.
II-5
OPTIONS TO PURCHASE SHARES OF COMMON STOCK
In November 2002, we granted options to purchase the following number
of shares of our common stock to the following individuals under our 2002 Stock
Incentive Plan:
NAME OF INDIVIDUAL NUMBER OF OPTIONS TO PURCHASE SHARES
OF COMMON STOCK
---------------------------------------- ------------------------------------
Kirk Fischer 1,000,000
Jim Fischer 1,000,000
KC Holmes 1,000,000
Rocky Fischer 1,000,000
Doug Bean 200,000
In September 2003, we granted Rocky Fischer 100,000 options to purchase
shares of our common stock under our 2002 Stock Incentive Plan. In August 2004,
we granted Doug Bean 200,000 options to purchase shares of our common stock
under our 2002 Stock Incentive Plan. No such options have been exercised.
The offers and issuances of the options to purchase shares of our
common stock described in the preceding paragraph were effected in reliance upon
the exemption for offers and sales pursuant to certain compensatory benefit
plans as set forth in Rule 701 promulgated under the Securities Act, based upon
the following: (a) the offers and issuances were made pursuant to a written
compensatory benefit plan established by us for the compensation of our
officers, employees, directors, consultants and other permitted persons; (b) the
recipients of such options were officers, employees, directors, consultants or
other permitted persons at the time of the issuance of the options (and any
recipients that were consultants provided bona fide services unrelated to a
capital-raising transaction or the promotion of a market for our stock in
exchange for such options); (c) we were not subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, at the time of issuance of the options; (d) the aggregate sale price,
calculated in accordance with Rule 701, of the options issued in reliance on
Rule 701 during any 12-month period did not exceed $1 million; (e) all
recipients were provided with certain disclosure materials and all other
information requested with respect to our company, including a copy of the
governing compensatory benefit document; (f) the option recipients acknowledged
that all securities being purchased were "restricted securities" for purposes of
the Securities Act, and agreed to transfer such securities only in a transaction
registered under the Securities Act or exempt from registration under the
Securities Act; and (g) the governing option agreement requires that, unless
otherwise permitted by law, a legend be placed on the certificates representing
each such security stating that it was restricted and could only be transferred
if subsequently registered under the Securities Act or transferred in a
transaction exempt from registration under the Securities Act.
In August 2004, we offered and sold options to purchase 50,000 shares
of our common stock to a single investor in connection with a $50,000 secured
note payable. The offer and sale of such options to purchase shares of our
common stock were effected in reliance upon the exemptions for sales of
securities not involving a public offering, as set forth in Rule 506 promulgated
under the Securities Act and in Section 4(2) of the Securities Act, based upon
the following: (a) the investors confirmed to us that they were "accredited
investors," as defined in Rule 501 of Regulation D promulgated under the
Securities Act and had such background, education and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in the securities; (b) there was no public offering or general
solicitation with respect to each offering; (c) the investors were provided with
certain disclosure materials and all other information requested with respect to
our company; (d) the investors acknowledged that all securities being purchased
were "restricted securities" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend was
placed on the certificates representing each such security stating that it was
restricted and could only be transferred if subsequently registered under the
Securities Act or transferred in a transaction exempt from registration under
the Securities Act.
II-6
ITEM 27. EXHIBITS
The following exhibits required by Item 601 of Regulation S-K promulgated under
the Securities Act have been included with the Registration Statement as
indicated below.
INCORPORATED BY
EXHIBIT NO. EXHIBIT REFERENCE/FILED HEREWITH
-------------- --------------------------------------------------------- ------------------------------------
2.1 Asset Purchase Agreement by and Among Penge Corp., Kirk Filed herewith
Fischer and H. Preston and Shirley M. Franks along with
Sampres Tree Farm L.L.C. dated as of May 20, 2004 and
exhibits
2.2 Purchase Agreement, Receipts and Escrow Instructions dated Filed herewith
August 14, 2002 and exhibits (re Penge and Major
Trees)
4.1 Articles of Incorporation, as amended to date Filed herewith
4.2 Bylaws, as amended to date Filed herewith
4.3 Form of Common Stock Certificate Filed herewith
5 Opinion of Stoel Rives LLP To be filed by amendment
10.1 2002 Stock Incentive Plan Filed herewith
10.2 Form of Incentive Stock Option Agreement Filed herewith
10.3 Form of Non Statutory Option Agreement Filed herewith
10.4 Form of Executive Employment Agreement Filed herewith
10.5 Consulting Agreement between Roger Major and Penge Filed herewith
Corp. dated March 5, 2003
10.6 Form of Convertible Note Purchase Agreement Filed herewith
10.7 Form of Convertible Promissory Note Filed herewith
10.8 $50,000 Promissory Note between Major Trees Corp. and Filed herewith
Stanford Goulding as Trustee for Survivors Trust dated
August 16, 2004
II-7
INCORPORATED BY
EXHIBIT NO. EXHIBIT REFERENCE/FILED HEREWITH
-------------- --------------------------------------------------------- ------------------------------------
10.9 $50,000 Promissory Note between Major Trees Corp. and Filed herewith
Stanford Goulding as Trustee for Marital Trust dated
August 16, 2004
10.10 $400,000 Real Estate Lien Note and Deed of Trust Filed herewith
between Penge Corp., Kirk Fischer and Sampres Tree
Farm, L.L.C. and H. Preston Franks and Shirley M.
Franks dated May 26, 2004
10.11 $150,000 Convertible Promissory Note dated March 31, Filed herewith
2004 between Penge Corp. and Monitor Finance LC and
$150,000 Convertible Promissory Note dated March 31,
2004 between Penge Corp. and First Capital Funding LC
10.12 $226,469 Note and Trust Deed between Penge Corp., Kirk Filed herewith
Fischer and Monitor Finance, L.C. dated August 22, 2003
and Modification and Extension of Trust Deed Note dated
March 1, 2004
10.13 $200,000 Promissory Note between Penge Corporation and Filed herewith
Steven Sutherland dated September 27, 2002
10.14 $600,000 Promissory Note between Penge Corporation and Filed herewith
Roger Major and Barbara Major dated September 27, 2002
21.1 Subsidiary List Filed herewith
23.1 Consent of Independent Registered Public Accounting Filed herewith
Firm
23.2 Consent of Stoel Rives LLP Included in Item 5
24.1 Power of Attorney Included on the signature page
hereof
II-8
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To 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.
(ii) Reflect in the prospectus any facts or events
that, individually or together, represent a fundamental change
in the information. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of 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) 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.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) That for determining liability under the Securities Act,
to 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) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
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.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Las
Vegas, Nevada, on October 25, 2004.
PENGE CORP.
By: /s/ Kirk Fischer
------------------------------------
Kirk Fischer, Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Kirk Fischer his or her
attorney-in-fact and agent, with full power of substitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any or
all amendments to this Registration Statement on Form SB-2, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection with this Registration
Statement, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that any of said attorney-in-fact
and agent, or his or her substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
In accordance with the requirements of the Securities Act, this
registration Statement was signed by the following persons in the capacities and
on the dates stated:
/s/ Kirk Fischer Chief Executive Officer, Chief Financial Officer, October 25, 2004
---------------- Chairman of the Board (Principal Executive Officer
Kirk Fischer and Principal Financial Officer)
/s/ Jim Fischer Director October 25, 2004
----------------
Jim Fischer
/s/ Lori Fischer Controller and Director October 25, 2004
----------------
Lori Fischer
II-10
EXHIBIT INDEX
INCORPORATED BY
EXHIBIT NO. EXHIBIT REFERENCE/FILED HEREWITH
-------------- --------------------------------------------------------- ------------------------------------
2.1 Asset Purchase Agreement by and Among Penge Corp., Kirk Filed herewith
Fischer and H. Preston and Shirley M. Franks along with
Sampres Tree Farm L.L.C. dated as of May 20, 2004 and
exhibits
2.2 Purchase Agreement, Receipts and Escrow Instructions dated Filed herewith
August 14, 2002 and exhibits (re Penge and Major
Trees)
4.1 Articles of Incorporation, as amended to date Filed herewith
4.2 Bylaws, as amended to date Filed herewith
4.3 Form of Common Stock Certificate Filed herewith
5 Opinion of Stoel Rives LLP To be filed by amendment
10.1 2002 Stock Incentive Plan Filed herewith
10.2 Form of Incentive Stock Option Agreement Filed herewith
10.3 Form of Non Statutory Option Agreement Filed herewith
10.4 Form of Executive Employment Agreement Filed herewith
10.5 Consulting Agreement between Roger Major and Penge Filed herewith
Corp. dated March 5, 2003
10.6 Form of Convertible Note Purchase Agreement Filed herewith
10.7 Form of Convertible Promissory Note Filed herewith
10.8 $50,000 Promissory Note between Major Trees Corp. and Filed herewith
Stanford Goulding as Trustee for Survivors Trust dated
August 16, 2004
10.9 $50,000 Promissory Note between Major Trees Corp. and Filed herewith
Stanford Goulding as Trustee for Marital Trust dated
August 16, 2004
10.10 $400,000 Real Estate Lien Note and Deed of Trust Filed herewith
between Penge Corp., Kirk Fischer and Sampres Tree
Farm, L.L.C. and H. Preston Franks and Shirley M.
II-11
Franks dated May 26, 2004
10.11 $150,000 Convertible Promissory Note dated March 31, Filed herewith
2004 between Penge Corp. and Monitor Finance LC and
$150,000 Convertible Promissory Note dated March 31,
2004 between Penge Corp. and First Capital Funding LC
10.12 $226,469 Note and Trust Deed between Penge Corp., Kirk Filed herewith
Fischer and Monitor Finance, L.C. dated August 22, 2003
and Modification and Extension of Trust Deed Note dated
March 1, 2004
10.13 $200,000 Promissory Note between Penge Corporation and Filed herewith
Steven Sutherland dated September 27, 2002
10.14 $600,000 Promissory Note between Penge Corporation and Filed herewith
Roger Major and Barbara Major dated September 27, 2002
21.1 Subsidiary List Filed herewith
23.1 Consent of Independent Registered Public Accounting Filed herewith
Firm
23.2 Consent of Stoel Rives LLP Included in Item 5
24.1 Power of Attorney Included on the signature page
hereof
II-12