As filed with the Securities and Exchange Commission on January 14, 2005
Registration No. 333-119947
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO 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 71-0895709
(State or Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100
(Primary Standard Industrial
Classification Code Number)
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 AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION FEE
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE
----------------------------------------------------------------------------------------------------------
Common Stock 5,794,104(3) $0.30 $1,738,231 $205(4)
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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.
(3) Reduced from 14,925,978 shares in initial Registration Statement.
(4) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
SUBJECT TO COMPLETION DATED JANUARY 14, 2005
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PENGE CORP.
5,794,104 SHARES OF COMMON STOCK
------------------
This prospectus relates to the offering and sale of 5,794,104 shares of
common stock, $.001 par value, of Penge Corp. Of the shares of Common Stock
being offered hereby, 3,861,466 shares of common stock are currently owned by
the selling stockholders and 1,932,638 shares are issuable upon the conversion
of convertible notes payable owned by the selling stockholders. 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."
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.
Our principal office is located at 11231 Winter Cottage Place, Las
Vegas, Nevada 89135, and our telephone number is (702) 562-3176.
-------------------------------
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 January 14, 2005
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................2
RISK FACTORS...................................................................5
FORWARD-LOOKING STATEMENTS....................................................12
SELLING STOCKHOLDERS..........................................................12
PLAN OF DISTRIBUTION..........................................................18
USE OF PROCEEDS...............................................................22
DILUTION......................................................................22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS....................................................23
OUR BUSINESS..................................................................38
MANAGEMENT....................................................................45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................50
DESCRIPTION OF OUR CAPITAL STOCK..............................................52
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................54
LEGAL MATTERS.................................................................55
EXPERTS.......................................................................55
INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS.................................56
WHERE YOU CAN FIND MORE INFORMATION...........................................57
INDEX TO FINANCIAL STATEMENTS.................................................58
PROSPECTUS SUMMARY
In addition to the following summary, you should read the more detailed
information about us, our common stock and our financial statements 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 began operations in September 2002 through the purchase of the Major
Trees Farm, a 272-acre tree and shrub farm near Tucson, Arizona. In May 2004, we
acquired the 17-acre Sampres Farm near Houston, Texas. In the two and one-half
years since our incorporation, we have invested all available capital into
expanding and improving the Major Trees Farm, acquiring the Sampres Farm, and
otherwise attempting to improve our tree production and nursery business. In
that process, we have significantly expanded the number of trees and shrubs
planted on, and harvested from, the Major Trees Farm and have been able to sell
all of our products at prices consistent with our budgets and projections.
In the foreseeable future, we plan to continue to expand our operations
through the planting of additional trees and shrubs on our existing farms and
the purchase of additional nursery properties and businesses. We will continue
to look for nursery businesses or properties with annual revenues of between
$100,000 and $10 million. In the past, we have been able to negotiate favorable
terms with owners of small nursery businesses who are hoping to exit the market.
We attribute this success to the limited liquidity opportunities available to
small nursery businesses and hope to be able to exploit this situation to
negotiate favorable terms in the future.
Our goal is to expand the number of farms we manage and the number of
trees and shrubs planted on those farms in the next few years while holding down
increases in our administrative and other general operating expenses. As we
spread our production costs over a larger inventory, we also hope to experience
a decline in our per-unit production and sales costs. Over time, we believe that
the increases in revenue from our expanded operations will outpace increases in
our administrative, operational and other expenses.
THE OFFERING
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Securities offered by the selling stockholders 5,794,104 shares of common stock
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Shares of our common stock outstanding prior 12,952,332(1)
to this 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.
------------------------------------------------------ -----------------------------------------------------------
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.
------------------------------------------------------ -----------------------------------------------------------
2
(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 1,932,638 shares issuable upon conversion of
convertible notes payable.
SUMMARY FINANCIAL INFORMATION
FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Sales .............................. $ 806,977 $ 669,721 $ 2,652 $ 9,161
Cost of goods sold ................. 428,004 402,980 1,640 3,247
Gross profit (loss) ................ 378,973 266,741 1,012 5,914
------------- ------------- ------------- -------------
Operating expenses ................. 654,287 579,361 225,004 218,642
------------- ------------- ------------- -------------
Income (loss) from operations ...... (275,314) (312,620) (223,992) (212,728)
Other income (expense):
Interest income (expense) ........ (116,163) (68,057) (53,925) (24,937)
Loss on sale of available-for-sale
securities ....................... (13,456) (8,997) -- --
------------- ------------- ------------- -------------
Other income (expense) ............. (129,619) (77,054) (53,925) (24,937)
------------- ------------- ------------- -------------
Net income (loss) .................. $ (400,005) $ (337,586) $ (277,917) $ (233,883)
------------- ------------- ------------- -------------
Net loss per share ................. $ (.03) $ (.04) $ (.02) $ (.02)
Weighted average shares used in
computing net loss per share ..... 12,179,860 9,653,338 12,922,984 11,839,203
3
SEPTEMBER 30, 2004 JUNE 30, 2004
------------------ -------------
BALANCE SHEET DATA:
Cash and cash equivalents ................ 24,980 $ 2,237
Working capital (deficit) ................ (191,890) (303,333)
Total assets ............................. 2,164,704 2,020,827
Retained deficit ......................... (1,015,508) (737,591)
Stockholders' equity ..................... 209,370 335,749
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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 described in
this prospectus represent all of the risks that management has identified and
determined to be material to our company. Additional risks and uncertainties not
currently known unto us or that we currently deem to be immaterial may also
materially and adversely affect our business operations. Any of these risks
could materially and adversely affect our business, results of operations and
financial condition.
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 obtain capital necessary to continue operations and implement our
business plan;
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.
IF WE CANNOT RAISE SUFFICIENT CAPITAL AT REASONABLE PRICES, WE MAY BE UNABLE TO
MEET EXISTING OBLIGATIONS OR ADEQUATELY EXPLOIT EXISTING OR FUTURE
OPPORTUNITIES.
As of [date within 45 days of effective date], we had $[to be
completed] in cash and cash equivalents. As of September 30, 2004, we had a
working capital deficit of $(191,890). We need to obtain significant additional
working capital to implement our business plan of expanding our nursery
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operations and to be able to meet our financial obligations as they become due.
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;
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, AND IF WE DEFAULT UNDER SUCH ARRANGEMENTS, OUR CREDITORS MAY
FORECLOSE ON OUR PLEDGED ASSETS.
We have pledged substantially all of our assets to secure notes payable
funding our purchase of the Major Trees Farm and the Sampres Farm and to secure
other short-term financing. Governing security agreements grant our creditors
the rights and remedies that are commonly provided a secured creditor. If we
default under such arrangements, such creditors may foreclose on, seize and
dispose of, all pledged assets.
WE ARE REQUIRED TO MAKE PAYMENTS UNDER OUTSTANDING NOTES IN AMOUNTS EXCEEDING
OUR EXISTING CASH AND CASH EQUIVALENTS BEGINNING IN MARCH 2005.
We have issued $555,000 of convertible notes payable to fund our
operations, $300,000 of which is secured by certain of the assets of the Major
Trees Farm and the Sampres Farm and $200,000 of which is secured by 50,000 trees
contained in our inventory. A payment of $276,572 in principal plus accrued
interest under these notes is due on March 31, 2005.
In addition, as of September 30, 2004, we owed $815,561 under notes
issued in connection with our acquisitions of the Major Trees Farm and the
Sampres Farm, substantially all of which is secured by certain of the assets
associated with such farms. Payments totaling $309,905 are due by June 30, 2005.
6
The amounts payable under our outstanding notes in the current fiscal
year exceed our current cash and cash equivalents. If we default on payments
under these notes, the holders will have the right to accelerate principal and
interest payments and pursue remedies available at law and under governing
documents. The exercise of such remedies would likely result in our insolvency.
WE MAY BE UNABLE TO CONTINUE TO IDENTIFY APPROPRIATE ACQUISITION TARGETS OR
CONSUMMATE ACQUISITIONS OF THOSE TARGETS, AND IF WE ARE UNABLE TO DO SO OUR
BUSINESS WILL NOT CONTINUE TO GROW AS PLANNED.
Our business plan anticipates growth primarily through the acquisition
of small businesses 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 nursery businesses
for acquisition for various reasons, including:
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 equity securities or a
promissory note 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 if any targets 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).
7
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 $(1,015,508) as of September
30, 2004. 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 IN OUR FINANCIAL
STATEMENTS REGARDING OUR STATUS AS A "GOING CONCERN."
Our consolidated financial statements included in this prospectus have
been prepared on the assumption that we will continue as a going concern. Our
independent registered public accounting firm has issued its 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.
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 expansion of production
and sales from existing properties and through business acquisitions. 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, accounting,
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, and 5% stockholders and their affiliates
control approximately 48% of the outstanding shares of our common stock (62% on
a fully diluted basis). Even if such persons sell all shares registered on their
behalf in the offering, they will continue to control 40% of the outstanding
shares of our common stock (52% on a fully diluted basis). These directors,
8
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,
declarations 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 tree and shrub 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, decreasing
our ability to provide equity-based incentive for new management. We may be
required to offer significant salaries and equity-based compensation in order to
retain or attract qualified management personnel and key employees. If we are
unsuccessful in retaining or attracting such employees, the reduction in the
quantity or quality of personnel may lead to a decline in our production, sales
or service capacity.
OUR FARMS ARE CURRENTLY OUR PRIMARY SOURCE OF REVENUE AND ARE VULNERABLE TO
INSECTS, DISEASE, WEATHER, DROUGHT, FIRE AND OTHER NATURAL HAZARDS.
Our tree and shrub farms are our main assets and currently our primary
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. If the trees and other shrubs we grow are damaged or
destroyed by any of those elements, we could suffer a significant loss of
revenue and assets. The loss would be particularly significant if the affected
plants were the Eldarica Pine, which accounted for approximately 91% of our
revenue in our prior fiscal year and will continue to be a significant portion
of our revenue in the foreseeable future.
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. We have no long-term
contract with Home Depot, and Home Depot could discontinue purchasing from the
Major Trees Farm 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
lead to a material reduction in our revenues.
9
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 likely 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
OBTAINING ADDITIONAL CAPITAL THROUGH THE FUTURE SALE OF COMMON STOCK AND
DERIVATIVE SECURITIES 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 derivative securities will lead to further
dilution of the equity ownership of existing holders of our common stock.
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.
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:
11
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." 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.
SELLING STOCKHOLDERS
All of the offered shares are to be offered and sold by our existing
security holders. Of the shares of our common stock offered hereby, 3,861,466
shares of common stock are currently owned by the selling stockholders and
1,932,638 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 January 1, 2005:
o the name of each selling stockholder;
12
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.
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP UPON COMPLETION OF THE
BEFORE OFFERING OFFERING(1)
--------------------------------- NUMBER OF ----------------------------
SHARES BEING NUMBER OF
BENEFICIAL OWNER NUMBER OF 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 *
Aaron R. Boone 85,000 * 85,000 Nil *
Erron Scott Brady 20,000 * 20,000 Nil *
Eugene H. Bramhall 116,666 * 16,666 100,000 *
Larry L. Bramhall & Lois 80,000 (4) * 80,000 (4) Nil *
T. Bramhall
Scott & Chieko Bramhall 100,000 * 100,000 Nil *
Donna Brown 33,000 * 33,000 Nil *
Pete Chandler 100,000 * 100,000 Nil *
Thomas L. & Ruby Chandler 300,000 2.32% 50,000 250,000 1.93%
Wendy Davis 10,000 * 10,000 Nil *
Dennis Dayley 400,000 (5) 3.09% 400,000 (5) Nil *
Angie Fisher 33,000 * 33,000 Nil *
13
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP UPON COMPLETION OF THE
BEFORE OFFERING OFFERING(1)
--------------------------------- NUMBER OF ----------------------------
SHARES BEING NUMBER OF
BENEFICIAL OWNER NUMBER OF SHARES PERCENT(2) OFFERED SHARES PERCENT(2)
---------------- ---------------- ---------- ------- ------ ----------
Kirk J. & Lori L. Fischer 4,000,000 (6) 28.67% 200,000 (7) 3,800,000 (8) 27.24%
Quinn J. Fischer
London C. Fischer
Britton K. Fischer
Jim & Ellen Fischer 1,190,000 (9) 8.53% 190,000 (10) 1,000,000 (11) 7.17%
Rocky & Janalen Fischer and 1,399,000 (12) 9.96% 299,000 (13) 1,100,000 (14) 7.83%
Affiliated Entities
Abby Nursery LLC
Abigail Paige Fischer
Richard Fritzler 100,000 (15) * 100,000 (15) Nil *
Don R. Geyer 20,000 * 20,000 Nil *
Stanford and Barbara Goulding 277,273 (16) 2.13% 227,273 (17) 50,000 (18) *
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 *
KC & Michelle Holmes and 2,748,727 (19) 19.70% 200,000 (20) 2,548,727 (21) 18.27%
Affiliated Entities
5th Genki LLC
Alecia Monet Holmes
Chance Jaxon Holmes
Brooklyn Elaine Holmes
Rian Michelle Holmes
Steve Holmes 5,000 * 5,000 Nil *
Morris Howell 33,334 * 33,334 Nil *
Dodd Hyer 33,333 * 33,333 Nil *
William W. Jacobsen Sr. 20,000 * 20,000 Nil *
Marla Kamerath 10,000 * 10,000 Nil *
14
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP UPON COMPLETION OF THE
BEFORE OFFERING OFFERING(1)
--------------------------------- NUMBER OF ----------------------------
SHARES BEING NUMBER OF
BENEFICIAL OWNER NUMBER OF SHARES PERCENT(2) OFFERED SHARES PERCENT(2)
---------------- ---------------- ---------- ------- ------ ----------
Roger and Barbara Major and 1,020,000 (22) 7.88% 200,000 820,000 (23) 6.33%
Affiliated Entities
Robert Major
Brett Major
Ryan Major
Cheri Marx 33,000 * 33,000 Nil *
Edward F. May 166,667 1.29% 166,667 Nil *
Linda Olinyk 50,000 * 50,000 Nil *
Joe Ollivier & Affiliated 541,663 (24) 4.03% 473,329 (24) 68,334 (24) *
Entities
First Capital Funding LC
A&J Investments
Aaron Ollivier
Trevor Olsen 20,000 * 20,000 Nil *
Luis G. N. Panuncialman 100,000 * 100,000 Nil *
Kathleen B. Pigott 16,667 * 16,667 Nil *
Miles C. Pitcher 523,329 (25) 3.90% 473,329 (25) 50,000 *
Monitor Finance LC
Robert G. and Juanita C. 854,167 (26) 6.19% 854,167 (26) Nil *
Purcell
Johanna B. & Britta B. 83,333 * 83,333 Nil *
Quisumbing
Shawn & Andrea Rowbotham 116,667 (27) * 100,000 (27) 16,667 *
Lon or LaRae Saxton 16,666 * 16,666 Nil *
Glen K. Stephenson 25,000 * 25,000 Nil *
Sylvia Surrett 15,000 * 15,000 Nil *
Matt Swan 33,334 * 33,334 Nil *
15
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP UPON COMPLETION OF THE
BEFORE OFFERING OFFERING(1)
--------------------------------- NUMBER OF ----------------------------
SHARES BEING NUMBER OF
BENEFICIAL OWNER NUMBER OF SHARES PERCENT(2) OFFERED SHARES PERCENT(2)
---------------- ---------------- ---------- ------- ------ ----------
Michael Tempest 102,521 (28) * 102,521 (28) Nil *
High Desert Value LP
Matthew J. & Ann Thomas 50,000 * 50,000 Nil *
Peter Vanderhooft 29,292 (29) * 29,292 (29) Nil *
Mandy Weider 10,000 * 10,000 Nil *
Darla Wenger 33,000 * 33,000 Nil *
Richard L. Wenger 31,284 * 31,284 Nil *
Richard Wenger 33,000 * 33,000 Nil *
Richard A. Westin 59,000 (30) * 59,000 (30) 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
January 1, 2005, 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) Shares held of record by Larry L. Bramhall & Lois T. Bramhall Living
Trust.
(5) Shares held of record by Dayley Family Trust.
(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. 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.
(7) Includes 200,000 shares held of record by Lori L. Fischer, our
Controller and a director.
(8) 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 1,000,000 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.
(9) 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.
(10) Includes 75,000 shares held of record by Jim Fischer and 115,000 shares
held of record by Ellen Fischer, Jim Fischer's wife.
16
(11) 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.
(12) 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.
(13) 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.
(14) Includes 1,100,000 shares of common stock issuable by us upon the
exercise of options held by Rocky Fischer.
(15) Shares held of record by Bradford Marketing Services.
(16) 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.
(17) Includes 227,273 shares of common stock held of record by Stanford and
Barbara Goulding as Joint Tenants with Rights of Survivorship.
(18) 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.
(19) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by KC Holmes, our Manager of Mergers &
Acquisitions. Also includes 148,727 shares held of record by 5th Genki
LLC, an entity over which Michelle Holmes, wife of KC 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.
(20) Includes 148,727 shares held of record by 5th Genki LLC, an entity over
which KC and Michelle Holmes exercises voting and investment control,
12,418 shares held of record by Alecia Monet Holmes, a dependent
daughter of KC and Michelle Holmes, 12,418 shares held of record by
Chance Jaxon Holmes, a dependent son of KC and Michelle Holmes, 12,418
shares held of record by Brooklyn Elaine Holmes, a dependent daughter
of KC and Michelle Holmes and 12,419 shares held of record by Rian
Michelle Holmes, a dependent daughter of KC and Michelle Holmes.
(21) Includes 387,582 shares held of record by Alecia Monet Holmes, a
dependent daughter of KC and Michelle Holmes, 387,582 shares held of
record by Chance Jaxon Holmes, a dependent son of KC and Michelle
Holmes, 387,582 shares held of record by Brooklyn Elaine Holmes, a
dependent daughter of KC and Michelle Holmes and 387,581 shares held of
record by Rian Michelle Holmes, a dependent daughter of KC and Michelle
Holmes.
(22) 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.
(23) 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.
(24) 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. Shares held by
A&J investments and Aaron Ollivier are not included in the offering.
(25) 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.
17
(26) 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.
(27) Includes 100,000 shares held of record by APS Inc., FUB Custodian for
Shawn A. Rowbotham IRA.
(28) 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.
(29) Includes 29,292 shares of common stock issuable by us upon the
conversion of convertible notes held by the selling stockholder.
(30) Shares held of record by Richard Westin Consulting, Inc.
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 is our Vice President
of Operations and a director, and is the father of Kirk Fischer. Lori Fischer is
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 our former President and Chief Financial Officer, the
current Manager of Mergers & Acquisitions and a significant stockholder of our
company. KC Holmes is the cousin of Kirk Fischer and Rocky Fischer and the
nephew of Jim Fischer. The following persons have the following relationship
with KC Holmes: Steve Homes (brother), Angie Fisher (sister-in-law), Darla
Wenger (sister-in-law), Richard L. Wenger (father-in-law), Richard Wenger
(brother-in-law), Cheri Marx (sister-in-law) and Donna Brown (sister-in-law). We
purchased certain assets of the Major Trees Farm from Roger and Barbara Major in
August 2002 and engage Roger Major as a consultant to our company.
BROKER-DEALERS
None of the selling stockholders are broker-dealers or affiliates of
broker-dealers.
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.
18
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
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 stockholder, 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
19
common stock. A selling stockholder 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 stockholder 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 stockholder must close out any naked position
by purchasing shares. A naked short position is more likely to be created if a
selling stockholder 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.
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.
20
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. We estimate that these expenses will total
approximately $90,000 and plan to pay for such expenses out of our cash flow
from operations.
21
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
September 30, 2004 was $149,311 or approximately $0.01 per each of the
12,952,332 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 $0.01 per share.
As of January 1, 2005, there were outstanding options to purchase up to
4,550,000 shares of our common stock as well as notes payable convertible into
1,932,638 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.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section includes many projections and other forward-looking
statements regarding management's expectations regarding performance of the
Company. You should not place undue reliance on such projections and forward
looking statements, and, when considering such projections and forward-looking
statements, you should keep in mind the risk factors noted throughout this
prospectus. You should also keep in mind that all projections and
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.
OVERVIEW
OUR BUSINESS AND STRATEGY. We began operations in September 2002
through the purchase of the Major Trees Farm, a 272-acre tree and shrub farm
near Tucson, Arizona. In May 2004, we acquired the 17-acre Sampres Farm near
Houston, Texas. We now have more than 200,000 trees and large shrubs planted on
the two farms. Unless otherwise specified or evident from the context, "we,"
"us," the "Company" and similar terms refer to Penge Corp. and its consolidated
subsidiaries.
In the two and one-half years since our incorporation, we have invested
all available capital into expanding and improving the Major Trees Farm,
acquiring the Sampres Farm, and otherwise attempting to improve our tree
production and nursery business. In that process, we have significantly expanded
the number of trees and shrubs planted on, and harvested from, the Major Trees
Farm and have been able to sell all of our products at prices consistent with
our budgets and projections.
In the foreseeable future, we plan to continue to expand our operations
through the planting of additional trees and shrubs on our existing farms and
the purchase of additional nursery properties and businesses. We will continue
to look for nursery businesses or properties with annual revenues of between
$100,000 and $10 million. In the past, we have been able to negotiate favorable
terms with owners of small nursery businesses who are hoping to exit the market.
We attribute this success to the limited liquidity opportunities available to
small nursery businesses and hope to be able to exploit this situation to
negotiate favorable terms in the future.
Our goal is to expand the number of farms we manage and the number of
trees and shrubs planted on those farms in the next few years while holding down
increases in our administrative and other general operating expenses. As we
spread our production costs over a larger inventory, we also hope to experience
a decline in our per-unit production and sales costs. Over time, we believe that
the increases in revenue from our expanded operations will outpace increases in
our administrative, operational and other expenses.
We also offer business structure consulting services on a limited
basis. Our total revenue from these consulting services has been less than
$40,000 since inception. We do not plan to actively market such consulting
services in the future but remain open to accepting consulting engagements as
they arise. Consulting services have been an insignificant part of our business
in the past, and we do not expect consulting services to be a significant part
of our business in the future.
23
OUR ACQUISITIONS.
THE MAJOR TREES FARM. In September 2002, we purchased the Major Trees
Farm, a 272-acre tree farm near Tucson, Arizona. (Information regarding the
structure of the transaction and our acquisition costs is set forth beginning on
page 38). The Major Trees Farm is located in an area with a moderate climate and
an abundant migrant labor source. The Major Trees Farm is relatively large,
includes abundant water rights and contains many of the necessary buildings,
equipment, pivots and wells to substantially expand operations. We primarily
grow Eldarica Pine Trees on the Major Trees Farm, substantially all of which are
harvested in the fall and sold to Home Depot and other retailers. The previous
owners of the Major Trees Farm had a 15-year sales relationship with Home Depot,
which we have been able to continue notwithstanding the absence of any purchase
commitment by Home Depot. We have sold approximately 30,000 trees from the Major
Trees Farm in our 2004-05 winter sales season at an approximate average cost of
$26 per tree and may sell an additional 3,000 - 5,000 trees over the next few
months.
In the two and one-half years since our purchase of the Major Trees
Farm, we have been able to expand the number of trees growing on the farm from
61,000 trees immediately prior to the 2002 fall harvest to approximately 180,000
trees immediately prior to our 2004 fall harvest and replanting. In general, we
are able to harvest a tree 36 months after it is planted. Assuming demand and
pricing remain stable in the future, the inventory we have growing on the Major
Trees Farm is expected to generate approximately $4.7 million in revenue over
the next three years. In addition, our business plan calls for continued
expansion of inventory for the next several years and, accordingly, we expect
our inventory to grow for harvests in 2007-08 and thereafter.
SAMPRES FARM. In May 2004, we acquired the 17-acre Sampres Farm near
Houston, Texas. (Information regarding the structure of the transaction and our
acquisition costs is set forth on page 39). The purchase of this farm is
strategic to us. 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
relative to other parts of the Southwest, and competition is localized, giving
us an opportunity for growth in this region. Many of our best customers
currently are located in State of Texas and immediate surrounding areas. We hope
that, by moving our site of production closer to our key sales markets, we can
decrease our shipping expenses and increase our gross margins.
The Sampres Farm includes trees, shrubs and other nursery products and
is much smaller than the Major Trees Farm, with an existing inventory of
approximately 37,000 trees and shrubs on the date of acquisition. The primary
harvest and sales season for the Sampres Farm is spring/summer, and we
anticipate harvesting and selling the approximately 37,000 trees we purchased in
the acquisition from the Sampres Farm over the next three years. We are
expanding the number of trees and shrubs planted on the Sampres Farm, with over
20,000 additional trees and shrubs planted in the six months following our
acquisition of the farm, and expect to be able to begin harvesting an expanded
inventory in the spring of 2007.
24
PLANNED ACQUISITIONS. 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. We are presently in negotiations with the
owner of a tree, shrub and plant farm in the State of Texas but have not
executed definitive documents and can provide no assurance that we will be able
to execute definitive documents or consummate the transaction. To the extent we
are successful in reaching agreements with respect to future acquisitions, we
plan to finance the cash portion of these acquisitions through cash flow
generated from operations and the issuance of promissory notes and equity
securities. We anticipate that a majority of the purchase price of any
acquisition will be paid for through the issuance of debt or equity securities
to the sellers.
SEASONALITY.
Our primary business is the production and sale of trees and shrubs to
retailers and landscape companies. As with other agricultural business, our
business is seasonal in nature. Most of our revenues come from the Major Trees
Farm on which we grow primarily Eldarica Pine Trees. We generally harvest such
trees in the fall and generate substantially all revenues from such trees
between November and January. Revenues from the Major Trees Farm during other
months of the year are negligible. Although we experience administrative and
other expenses throughout the year, costs associated with the Major Trees Farm
also increase significantly during the October - January period as we harvest
the trees, transport them to market and conduct most of our planting activities.
The primary harvest and sales season for the Sampres Farm is between
March and September of each year, and we expect to incur related transportation,
sales and planting expenses during that period. Revenues from the Sampres Farm
are expected to be less than 30% of our overall revenue, but the acquisition of
this farm should help balance the seasonality of our business.
Even with the purchase of the Sampres Farm, we will continue to
experience dramatic increases and decreases in revenue and expenses throughout
the year. As a result, our quarterly results will generally not be indicative of
our annual results. In addition, this seasonality presents a serious challenge
in managing our cash flow, as we continue to experience many administrative and
other expenses throughout the calendar year. As was the case in late 2004, we
may experience a shortage of cash and an increase in accounts payable and
long-term debt during the late summer and fall months as we incur
administrative, harvesting and other expenses prior to our generation of cash
from operations in the winter months.
GENERAL OUTLOOK.
OPERATIONS: We experienced a net loss of $(337,586) in the partial
fiscal year ended June 30, 2003 ("Fiscal 2003") and a net loss of $(400,005) in
the fiscal year ended June 30, 2004 ("Fiscal 2004"). Detailed information
regarding our revenue and major expense line items is set forth in "Results of
Operations" below. We experienced a 20% increase in revenue between Fiscal 2003
25
and Fiscal 2004, from $669,721 in Fiscal 2003 to $806,977 in Fiscal 2004 with
substantially all revenue in both years coming from the Major Trees Farm. We
expect revenue from the Major Trees Farm to increase only modestly in the fiscal
year ended June 30, 2005 ("Fiscal 2005") but expect to begin harvesting trees
from the Sampres Farm in Fiscal 2005, generating additional revenue of between
$200,000 and $400,000.
Operating expenses increased from $579,361 in Fiscal 2003 to $654,287
in Fiscal 2004. This increase in operating expenses is attributable primarily to
an increase in salaries, wages and related taxes from $148,866 in Fiscal 2003 to
$387,077 in Fiscal 2004. During Fiscal 2003, the executives and key employees of
the Company accepted temporary reductions in pay in order to conserve capital.
During Fiscal 2004, such voluntary reductions were eliminated and the salaries
of most of the executives and key employees were increased in order to bring
them closer to market wages. We do not expect any similar increase in Fiscal
2005. General and administrative expenses are expected to increase overall as we
experience increased legal, accounting and other fees associated with our
preparation and filing of the registration statement of which this prospectus is
a part and our ongoing filing requirements. We expect that cost of goods sold
will increase in absolute terms as our revenues increase but expect a decrease
in cost of goods sold as a percentage of revenue. We expect interest expense to
increase as a result of the increase in our long term debt.
Overall, we expect our revenue in Fiscal 2005 to grow faster than our
expenses and believe our financial performance in Fiscal 2005 will represent an
improvement over that in Fiscal 2004. Any projections related to Fiscal 2005 are
subject to the risks identified in "Risk Factors" and throughout this
prospectus. In addition, we hope to close the acquisition of one nursery
business during Fiscal 2005. If we are successful in closing such an
acquisition, of which we can provide no assurance, we would expect to incur
additional costs associated with the acquisition itself and may recognize
additional revenues since most of the farms we are looking at harvest and sell
during the spring and summer months.
LIQUIDITY AND CAPITAL RESOURCES: As of September 30, 2004, we had
$24,890 in cash and cash equivalents, total current assets of $940,738 and
currently liabilities of $1,132,628, representing a current working capital
deficit of $(191,890). Our current liabilities as of that date include a
$276,572 principal balance on a secured convertible note due March 31, 2005 and
a $525,978 principal balance on non-convertible notes due within one year. We
generate a majority of our revenues between November and January of each fiscal
year. As a result of revenue collected between September 30, 2004 and [date
within 45 days of effective date], we have increased our cash and cash
equivalents balance to $[to be completed] as of [date within 45 days of
effective date].
We anticipate making additional capital expenditures during the
remainder of Fiscal 2005. Specifically, resources permitting, we plan to spend
at least $200,000 to replace inventory sold during Fiscal 2005 and to expand our
inventory of trees and shrubs. We are also budgeting approximately $300,000 for
the cash portion of the purchase price of an acquisition (which amount may or
may not be sufficient) and expect to spend between $50,000 and $100,000 to
replace equipment and other items on the Major Trees Farm and the Sampres Farm.
26
We plan to use cash on hand and that collected in the coming months to
pay a portion of our accounts payable and establish a reserve to cover most of
our planned capital expenditures and basic operating expenses until we again
start generating revenue in March 2005. With respect to the current portion of
our notes payable, we believe that most of the holders of the convertible and
non-convertible notes coming due in the next year will either convert such debt
to equity or replace existing notes with notes with deferred payment dates. To
the extent that does not occur, we believe that we can raise capital sufficient
to repay the current portion of our long term debt through the issuance of
additional notes and the sale of equity securities and warrants.
In addition, members of our management have informally agreed to
provide up to $200,000 of short-term financing to us. Such financing bears
interest at the rate of 8% per annum. Management may demand payment on 30 days
written notice, so long as 180 days have passed since the Company and management
entered into the financing arrangement.
Other than the informal and nonbinding commitments from management, we
do not have any specific commitments from third parties to provide financing
needed to cover any capital shortfalls with respect to our operations, planned
capital expenditures or near-term debt obligations. We caution that,
particularly in light of the early stage of our business, such financing may not
be available on favorable terms, or at all. We may be compelled to divert
substantial portions of our existing cash and future cash flow to the repayment
of debt, which would limit our ability to replace or expand inventory and
acquire additional farms. This would have an adverse affect on revenues in the
coming years. Certain of such debt is secured by our real property, and holders
of the unsecured debt have standard remedies available to debtholders. If we
were to default on such notes and the holders were to exercise their remedies,
we would incur substantial legal expenses, penalties and related costs and could
be forced to seek bankruptcy protection or to discontinue operations.
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.
27
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 the Major Trees Farm.
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 or farm, we record
inventory at the estimated selling price, less the estimated costs
of selling such inventory. A majority of the inventory that we
sold in Fiscal 2003 and Fiscal 2004 was inventory acquired as part
of our acquisition of the Major Trees Farm. In Fiscal 2005 and
afterwards, a portion of our sales will include trees acquired as
part of our acquisitions of the Major Trees Farm and the Sampres
Farm (and possible future acquisitions); however, our operation of
the Major Trees Farm is much larger than our operation of the
Sampres Farm, and in Fiscal 2005 and the following years, we
expect a majority of our goods sold to be trees or shrubs that we
have planted and grown. As a result, we expect cost of good sold
as a percentage of sales to decline in future years.
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.
28
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2004 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2003
The following table reflects selected operational results for fiscal
quarters ended September 30, 2004 and September 30, 2003, which represent the
first quarters of Fiscal 2005 and Fiscal 2004:
YEARS ENDED
SEPTEMBER 30,
2004 2003
---------- ----------
STATEMENT OF OPERATIONS DATA:
REVENUE $ 2,652 $ 9,161
COST OF GOODS SOLD 1,640 3,247
GROSS PROFIT (LOSS) 1,012 5,914
---------- ----------
OPERATING EXPENSES 225,004 218,642
INCOME (LOSS) FROM OPERATIONS (223,992) (212,728)
OTHER INCOME (EXPENSE):
Interest income (expense), net (53,925) (24,937)
---------- ----------
NET INCOME (LOSS) $(277,917) $(233,883)
---------- ----------
LOSS PER COMMON SHARE (.02) (.02)
---------- ----------
Our results of operations for the quarter ended September 30, 2004
included the operations of our Major Trees Farm and the Sampres Farm. Results of
operations for the quarter ended September 30, 2003 do not include the Sampres
Farm, which was acquired in May 2004. Revenue from, and expenses associated
with, the Sampres Farm were nominal for the quarter ended September 30, 2004 and
do not materially affect the comparability of results.
29
REVENUE AND COSTS OF GOOD SOLD. Our revenues are derived primarily from
the sale of trees and other nursery products. Revenues decreased from $9,161 for
the quarter ended September 30, 2003 to $2,652 for the quarter ended September
30, 2004. Costs of Good Sold decreased from $3,247 for the quarter ended
September 30, 2003 to $1,640 for the quarter ended September 30, 2004. Our
revenue and certain of our expenses (particularly our cost of goods sold) are
seasonal, with a majority of our revenue and costs of good sold being recognized
between November and January of each year. As a result, revenues, and related
costs of good sold, for the quarters ended September 30, 2003 and September 30,
2004 are not representative of revenues or costs of good sold for the respective
fiscal years. Such results primarily illustrate the seasonality of our business.
We expect both revenue and costs of good sold to increase significantly for the
quarter ended December 31, 2004 as we enter into our harvest and sales season
for the Major Trees Farm.
OPERATING EXPENSES. Operating expenses consist primarily of personnel
expense associated with management, consulting fees, travel expenses,
professional fees, general overhead and depreciation. Operating expenses
increased from $218,642 for the quarter ended September 30, 2003 to $225,004 for
the quarter ended September 30, 2004. This increase is attributable to an
increase in consulting fees from $46,267 for the quarter ended September 30,
2003 to $60,000 for the quarter ended September 30, 2004 as a result of expenses
incurred in connection our grant of stock options to pay consulting expenses.
Our other general and administrative expenses also increased from $39,063 for
the quarter ended September 30, 2003 to $65,180 for the quarter ended September
30, 2004 primarily as a result of expenses associated with our audit. These
increases were partially offset by a decrease in salaries, wages and related
taxes from $123,167 for the quarter ended September 30, 2003 to $89,082 for the
quarter ended September 30, 2004 as a result of fixed annual salaries in the
current year that are less than the pay rates initially used in the prior year.
We expect general and administrative expense to increase in quarter ended
December 31, 2004 as we experience increased legal, accounting and other costs
associated with becoming a public company.
INTEREST EXPENSE. Interest expense consists primarily of interest paid
on outstanding notes payable and amortization of deferred loan costs. Interest
expense increased from $24,937 for the quarter ended September 30, 2003 to
$53,931 for the quarter ended September 30, 2004. This increase is a result of
an increase in indebtedness primarily in order to fund our expansion of
inventory and our acquisition costs. We expect interest expense to increase in
quarter ended December 31, 2004 as a result of a $100,000 increase in
indebtedness.
NET LOSS. Our net loss increased from $233,883 for the quarter ended
September 30, 2003 to $277,917 for the quarter ended September 30, 2004. The
increase in net loss is the result of incremental increases in our operating
expenses and is primarily attributable to an increase in interest expense
associated with our increased debt and an increase in general and administrative
expenses, particular legal, accounting and other expenses preparatory to the
registration process. The amount of our net loss for the quarter ended September
30, 2004 is not representative of our expected operating results for Fiscal
2005. Our revenue and certain of our costs are seasonal. We expect seasonal
increases in revenue to outpace seasonal increases in our expenses and to
experience a decline in net loss during the quarter ended December 31, 2004.
30
YEAR ENDED JUNE 30, 2004 COMPARED WITH YEAR ENDED JUNE 30, 2003
The following table reflects selected operational results for the
fiscal years ended June 30, 2004 and June 30, 2003:
YEARS ENDED
JUNE 30,
2004 2003
---------- ----------
STATEMENT OF OPERATIONS DATA:
REVENUE $ 806,977 $ 669,721
COST OF GOODS SOLD 428,004 402,980
GROSS PROFIT (LOSS) 378,973 266,741
---------- ----------
OPERATING EXPENSES
Salaries, wages and related taxes 387,077 148,866
Consulting 63,287 235,146
Travel 38,050 21,203
Loss on unsuccessful acquisitions 10,000 5,000
Other general and administrative 155,873 169,146
---------- ----------
Total operating expenses 654,287 579,361
---------- ----------
INCOME (LOSS) FROM OPERATIONS (275,314) (312,620)
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) BEFORE TAXES (404,933) (389,674)
---------- ----------
DEFERRED TAX EXPENSE (BENEFIT) (4,928) (52,088)
---------- ----------
NET INCOME (LOSS) (400,005) (337,586)
---------- ----------
NET INCOME (LOSS) PER COMMON SHARE (.03) (.04)
---------- ----------
Penge Corp. was organized on August 6, 2002 under the laws of the state
of Nevada. Penge acquired the Major Trees Farm on September 27, 2002. Our
results of operations reflect the operations of the Major Trees Farm 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 the Major Trees Farm 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
31
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 small part
because we expect to begin selling a small part of the additional inventory we
planted at the Major Trees Farm.
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
$402,980 for Fiscal 2003 to $428,004 for Fiscal 2004. This increase is primarily
the result of inventory costs associated with increased sales. Cost of goods
sold as a percentage of revenue decreased, from approximately 60% in Fiscal 2003
to approximately 53% in Fiscal 2004. This decrease in cost of goods sold as a
percentage of revenue is a result of the spreading of certain fixed (or
relatively fixed) costs included in cost of goods sold, such as depreciation of
equipment and agricultural buildings, salaries of full time farm employees and
farm equipment costs, across increasing revenue. During Fiscal 2003 and Fiscal
2004, we primarily sold acquired inventory, for which we generally record a
higher expense in cost of goods sold than we do with respect to inventory we
have produced. 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 as a percentage of revenue.
OPERATING EXPENSES. Operating expenses consist primarily of personnel
expense associated with management, consulting fees, travel expenses,
professional fees, general overhead and depreciation. Operating expenses
increased from $579,361 for Fiscal 2003 to $654,287 for Fiscal 2004, an increase
of approximately 13%. Operating expenses as a percentage of revenue decreased
slightly, from approximately 86% in Fiscal 2003 to approximately 81% in Fiscal
2004. This decrease in operating expenses as a percentage of revenue is a result
of spreading increasing costs over more rapidly increasing revenue.
The absolute increase in operating expenses is primarily a result of
increases in salaries, wages and related taxes, which increased from $148,866
for Fiscal 2003 to $387,077 for Fiscal 2004. During Fiscal 2003, the executives
and key employees of the Company accepted temporary reductions in pay in order
to conserve capital. During Fiscal 2004, such voluntary reductions were
eliminated and the salaries of most of the executives and key employees were
increased in order to bring them closer to market wages. We do not expect any
similar increase in Fiscal 2005. Consulting expenses decreased from $235,146 in
Fiscal 2003 to $63,287 in Fiscal 2004, primarily as a result of the $120,000 we
expensed in Fiscal 2003, compared to the $30,000 we expensed in Fiscal 2004, for
equity-based compensation. We expect equity-based consulting expenses to
increase in Fiscal 2005 but not to the $120,000 level in Fiscal 2003. We
experienced a slight decrease, from $169,146 in Fiscal 2003 to $155,873 in
Fiscal 2004, in other general and administrative expenses. In light of expenses
preparatory to, and associated with, the registration statement of which this
prospectus is a part and anticipated ongoing compliance expenses, we expect
other general and administrative expenses to increase in Fiscal 2005.
32
LOSS ON UNSUCCESSFUL ACQUISITIONS. Loss on unsuccessful acquisitions
consists 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 $337,586 for Fiscal 2003 to
$400,005 for Fiscal 2004. Information about our expectations with respect to
Fiscal 2005 is set forth in the "General Outlook" subsection of this discussion
above.
LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments and Expenditures. 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 September 30,
2004:
LESS THAN
1 YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
(10/1/04 TO (10/1/05 TO (10/1/07 TO (AFTER
CONTRACTUAL OBLIGATIONS TOTAL 9/30/05) 9/30/07) 9/30/09) 10/1/09)
------------- ------------- ------------- ------------- -------------
Operating leases -- -- -- -- --
Capital leases -- -- -- -- --
Office lease -- -- -- -- --
Contractual service agreements -- -- -- -- --
Notes payable 1,846,063 919,806 611,676 314,581 --
------------- ------------- ------------- ------------- -------------
Total contractual cash obligations 1,846,063 919,806 611,676 314,581 --
------------- ------------- ------------- ------------- -------------
The following table summarizes the material terms of our convertible
and non-convertible notes (listed in order of ultimate maturity date); except as
set forth in the notes to the table below, we are current with all required
payments, and in compliance with all material covenants with respect to such
note:
33
BALANCE AS OF CONVERSION
PRINCIPAL SEPTEMBER 30, MATURITY DATE; INTEREST AND OTHER
AMOUNT 2004 ORIGINATION DATE REQUIRED PAYMENTS RATE TERMS SECURITY
------ ---- ---------------- ----------------- ---- ----- ----------------------
$250,000 $250,000 3/1/2004 3/1/2005; payment 14% NA Unsecured
of $125,000 was
due on January 5,
2005*
$300,000 $276,572 3/31/2004 3/31/2005; $4,125 10% (1)** Second lien on
monthly Major Trees; second
lien on Sampres
Farm
$50,000 $50,000 8/16/2004 08/15/2006; 12% NA Lien against 7,500
monthly interest trees on the Major
plus additional Trees Farm
3% of principal
due at maturity
$50,000 $50,000 8/16/2004 8/15/2006; 10% NA Lien against 7,500
monthly interest trees on the Major
Trees Farm
$45,000 $45,000 3/31/2004 9/30/2006; 10% (2) Unsecured
quarterly interest
$200,000 $200,000 7/21/2004 1/21/2007; 10% (3) Lien against 50,000
quarterly trees on the Major
interest Trees Farm
$600,000 $314,884 9/27/2002 3/1/2007; 7% N/A First lien on all
$150,000 annually assets acquired
on March 1 from M7 Farms
$200,000 $117,899 9/27/2002 3/1/2007; $50,000 7% NA First lien on
annually on outstanding shares
March 1 of Major Trees, Inc.
$400,000 $382,778 5/26/2004 5/1/2009; $2,500 (4) NA First lien on all
monthly assets acquired
from Sampres Tree
Farm LLC
* Under the terms of the governing documents, we may request an extension
in exchange for a minimum penalty of $12,500; we have requested such an
extension and are negotiating specific terms.
** Under the terms of the governing documents, we agreed to provide a term
life insurance policy in the amount of $550,000 on each of Kirk and Jim
Fischer and to name the lenders as a beneficiary; we have acquired the
insurance policies but have not named the lenders as a beneficiary.
(1) Convertible with accrued interest into common stock at $0.30 per share
anytime through March 2005; holders have option to require us to buy
back some or all of the shares of common stock received upon the
conversion at $0.345 per share upon certain terms; we agreed to
register the shares of common stock issuable upon conversion.
(2) Convertible with accrued interest into 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; we have agreed to register
the shares of common stock issuable upon conversion.
34
(3) Convertible with accrued interest into common stock at $0.24 per share
during the first twelve months, at $0.30 per share during the second
twelve months and at $0.35 per share thereafter; we have agreed to
register the shares of common stock received upon conversion upon
registration of any of our shares of common stock.
(4) Accruing interest at 7% until May 2005, at 8% from May 2005 until May
2007 and at 9% from May 2007 until May 2009.
As of June 30, 2004, we had $2,237 in cash and cash equivalents. This
represents an increase of $2,237 compared to June 30, 2003. Cash used during the
year ended June 30, 2004 includes approximately $453,068 used in operations as
well as $167,340 used in investing activities. Sources of cash during the year
ended June 30, 2004 included a net amount of $622,645 from financing activities.
Of the $622,645 of net cash provided by financing activities, $335,019
represents net cash received less payments made on non-convertible promissory
notes issued to multiple parties from March 2004 - June 2004, $11,264 represents
net cash received less payments made on nonconvertible notes, $312,700
represents the proceeds from issuance of common stock less offering costs. The
$36,338 difference between the $622,645 of net cash provided by financing
activities and the $658,983 of cash itemized above represents payments on
advances and loan costs and proceeds allocated to beneficial conversion
features.
As of September 30, 2004, we had $24,890 in cash and cash equivalents.
This represents an increase of $22,653 compared to June 30, 2004. Cash used
during the quarter ended September 30, 2004 includes approximately $337,872 used
in operations as well as $1,000 provided by investing activities. Sources of
cash during the quarter ended September 30, 2004 included a net amount of
$359,525 from financing activities. Of this net amount, $192,948 represents net
cash received less payments made on notes payable, $30,000 represents the
proceeds from issuance of common stock less offering costs, $11,538 represents
proceeds from the sale of options to purchase common stock, $50,000 represents
proceeds allocated to beneficial conversion features, $91,539 represents net
cash received less payments made on related party advances and $(16,500)
represents payment of loan costs.
Our material capital expenditures for Fiscal 2003 and Fiscal 2004
included direct costs of approximately $291,000 to plant approximately 180,000
trees and shrubs, $65,000 to purchase farming equipment and $150,000 to pay the
cash portion of the purchase price for the Sampres Farm. We made no material
capital expenditures during the quarter ended September 30, 2004.
We anticipate making capital expenditures during the remainder of
Fiscal 2005. Specifically, resources permitting, we plan to spend at least
$200,000 to replace inventory sold during Fiscal 2005 and to expand our
inventory. We are also budgeting approximately $300,000 for the cash portion of
the purchase price of an acquisition (which amount may or may not be sufficient)
and expect to spend between $50,000 and $100,000 to replace equipment and other
items on the Major Trees Farm and the Sampres Farm.
LIQUIDITY. The following table reflects selected balance sheet data as
of September 30, 2004 and June 30, 2004:
35
SEPTEMBER 30, 2004 JUNE 30, 2004
------------------ -------------
BALANCE SHEET DATA:
Cash and cash equivalents ................ $ 24,980 $ 2,237
Working capital (deficit) ................ (191,890) (303,333)
Total assets ............................. 2,164,704 2,020,827
Retained deficit ......................... (1,015,508) (737,591)
Stockholders' equity ..................... 209,370 335,749
As of September 30, 2004, we had $24,890 in cash and cash equivalents,
total current assets of $940,738 and currently liabilities of $1,132,628,
representing a current working capital deficit of $(191,890). Our current
liabilities as of that date include a $276,572 balance on a secured convertible
note due March 31, 2005 and a $525,978 principal balance on non-convertible
notes payable due within one year. We generate a majority of our revenues
between November and January of each fiscal year. As a result of revenue
collected between September 30, 2004 and [date within 45 days of effective
date], we have increased our cash and cash equivalents balance to $[to be
completed] as of [date within 45 days of effective date].
We plan to use cash on hand and that collected in the coming months to
pay a portion of our accounts payable and establish a reserve to cover most of
our planned capital expenditures and basic operating expenses until we again
start generating revenue in March 2005. With respect to the current portion of
our notes payable, we believe that most of the holders of the convertible and
non-convertible notes coming due in the next year will either convert such debt
to equity or replace existing notes with notes with deferred payment dates. To
the extent that does not occur, we believe that we can raise capital sufficient
to repay the current portion of our long term debt through the issuance of
additional notes and the sale of equity securities and warrants.
In addition, members of our management have informally agreed to
provide up to $200,000 of short-term financing to us. Such financing bears
interest at 8% per annum. Management may demand payment on 30 days written
notice, so long as 180 days have passed since the Company and management entered
into the financing arrangement.
Other than the informal and nonbinding commitments from management, we
do not have any specific commitments from third parties to provide financing
needed to cover any capital shortfalls with respect to our operations, planned
capital expenditures or near-term debt obligations. We caution that,
particularly in light of the early stage of our business, such financing may not
be available on favorable terms, or at all. We may be compelled to divert
substantial portions of our existing cash and future cash flow to the repayment
of debt, which would limit our ability to replace or expand inventory and
acquire additional farms. This would have an adverse affect on revenues in the
coming years. Certain of such debt is secured by our real property, and holders
of the unsecured debt have standard remedies available to debtholders. If we
were to default on such notes and the holders were to exercise their remedies,
we would incur substantial legal expenses, penalties and related costs and could
be forced to seek bankruptcy protection or to discontinue operations.
36
Our consolidated financial statements have been prepared on the
assumption that our Company will continue as a going concern. Our independent
registered public accounting firm has issued its 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 issuance of promissory
notes and 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.
37
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 own and operate a tree
production and nursery business. Unless otherwise specified or evident from the
context, "we," "us," the "Company" and similar terms refer to Penge Corp. and
its consolidated subsidiaries.
In the two and one-half years since our incorporation, we have invested
all available capital into expanding and improving the Major Trees Farm,
acquiring the Sampres Farm, and otherwise attempting to improve our tree
production and nursery business. In that process, we have significantly expanded
the number of trees and shrubs planted on, and harvested from, the Major Trees
Farm and have been able to sell all of our products at prices consistent with
our budgets and projections.
In the foreseeable future, we plan to continue to expand our operations
through the planting of additional trees and shrubs on our existing farms and
the purchase of additional nursery properties and businesses. We will continue
to look for nursery businesses or properties with annual revenues of between
$100,000 and $10 million. In the past, we have been able to negotiate favorable
terms with owners of small nursery businesses who are hoping to exit the market.
We attribute this success to the limited liquidity opportunities available to
small nursery businesses and hope to be able to exploit this situation to
negotiate favorable terms in the future.
Our goal is to expand the number of farms we manage, and the number of
trees and shrubs planted on those farms, in the next few years while holding
down increases in our administrative and other general operating expenses. As we
spread our production costs over a larger inventory, we also hope to experience
a decline in our per-unit production and sales costs. Over time, we expect that
the increases in revenue from our expanded operations will outpace increases in
our administrative, operational and other expenses.
We also offer business structure consulting services on a limited
basis. Our total revenue from these consulting services has been less than
$40,000 since inception. We do not plan to actively market such consulting
services in the future but remain open to accepting consulting engagements as
they arise. Consulting services have been an insignificant part of our business
in the past, and we do not expect consulting services to be a significant part
of our business in the future.
The Major Trees Farm
--------------------
In September 2002, pursuant to a Purchase Agreement signed in August
2002 and for a total purchase price of $957,429, consisting of $800,000 of notes
payable and $157,429 in cash, we acquired a tree and shrub farm in southern
Arizona, 90 minutes southeast of Tucson and a wholesale tree and shrub business
consisting of all of the stock of Major Trees, Inc., an Arizona corporation
incorporated on December 29, 1993, and certain assets of Roger and Barbara
Major, dba M7 Farms. Prior to this acquisition, we had no relationships with
Major Trees, Inc. or Roger and Barbara Major. The farm is a 25-year-old tree and
38
shrub farm on 272 acres that grows trees and shrubs that are then sold wholesale
to retail outlets, such as Home Depot, and to retail nurseries and landscape
companies primarily in Arizona, New Mexico, Texas, and Nevada. Prior to our
acquisition of the Major Trees Farm in September 2002, M7 Farms, Major Trees,
Inc. and their predecessors and affiliates had engaged in this business for the
previous approximately 25 years. We now conduct the business previously
conducted jointly by M7 Farms and Major Trees, Inc.
The Major Trees Farm sells a variety of trees and shrubs and is the
largest supplier of Eldarica Pine trees in the Southwest, selling these pine
trees as, among other things, living, potted Christmas trees. The Major Trees
Farm sold approximately 22,100 trees in Fiscal 2003 and generated approximately
$655,000 in revenue for Fiscal 2003. The Major Trees Farm sold approximately
28,600 trees in Fiscal 2004 and generated approximately $758,000 in revenue for
Fiscal 2004. We have approximately 180,000 trees growing on the Major Trees
Farm, 30,000 of which we harvested and sold at the end of calendar 2004, with
the possibility of selling up to an additional 5,000 trees this fiscal year.
Sampres Farm
------------
In May 2004, pursuant to an Asset Purchase Agreement and for a total
purchase price of $670,151, including 400,000 shares of our common stock valued
at $120,000, a $400,000 promissory note and $150,151 in cash, we acquired
certain assets, including a 17-acre tree and shrub farm near Houston, Texas and
other assets related to its operation, from Sampres Tree Farms, L.L.C. and H.
Preston and Shirley M. Franks. Prior to our acquisition of these assets, we had
no relationships with Sampres Tree Farms, L.L.C. or H. Preston and Shirley M.
Franks. In the two years prior to our acquisition of these assets, Sampres Tree
Farms, L.L.C., which was organized in 2002, operated the 17-acre tree and shrub
farm and sold a variety of landscape trees and shrubs primarily at retail, but
also to retail nurseries, in Texas. We are now operating the acquired assets and
are growing a variety of landscape trees and shrubs, which we sell to retail
nurseries and landscape companies in Arizona, New Mexico, Texas and Nevada. We
presently have an inventory of approximately 40,000 - 50,000 trees, which we
plan on harvesting and selling over the next three years. We are expanding the
number of trees and shrubs planted on the Sampres Farm, with over 20,000
additional trees and shrubs planted in the first six months following the
acquisition, and expect to be able to begin harvesting an expanded inventory in
the spring of 2007.
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 price pressures.
39
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 trees,
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
suited 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.
TARGET MARKET, SALES AND MARKETING
Major Retailers
---------------
We market and sell our trees and shrubs to Home Depot and similar major
retailers. Our marketing efforts consist solely of personal contacts with, and
referrals to, purchasing retailers.
The trees sold to the major retailers are primarily Eldarica Pine
trees, which are typically re-sold as potted living Christmas trees. In Fiscal
2004, we generated approximately 75% of our revenues through sales of Eldarica
Pine trees to Home Depot (and 17% of our revenues through sales of Eldarica Pine
trees to other retailers). We do not have any written agreement with, or
purchase commitment from, Home Depot or any other retailer. We anticipate 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.
Nurseries and Landscape Companies
---------------------------------
We have significantly increased our planting of landscape trees and
shrubs other than the Eldarica Pine in an attempt to increase our sales in the
retail nursery and landscape markets. We plan to market such landscape trees and
shrubs primarily through personal contacts with, and referrals to, retail
nurseries and landscaping companies.
In Fiscal 2004, we generated approximately 17% of our revenues through
sales to retail nurseries and landscaping companies in Arizona, New Mexico,
Nevada and Texas.
40
We plan to increase our production of trees through additional
acquisitions of farms such as the Sampres Farm, which added only landscaping
trees, and by planting additional landscape trees on our current properties. We
believe that this will permit us to increase our sales to landscape and nursery
customers and to generate additional revenues during the spring and summer
months. In the long run, we anticipate most of our revenue growth to come from
sales of landscaping trees and shrubs to retail nurseries and landscape
companies.
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 the Major Trees Farm 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
91% of our Fiscal 2004 sales. We anticipate this decreasing as a percentage of
our total sales in the future as we increase our production and sales of other
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.
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.
41
We have not experienced a reduction in orders or significant demands
for price reduction from Home Depot and other cost sensitive retailers. As a
result, we believe that our prices (at least for our Eldarica Pine) are as low
or lower than those 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.
GOVERNMENT REGULATION
The nursery industry as a whole is not regulated by state, federal or
local governments. As a result, our expenses associated with compliance with
government regulations are minimal. Because of the proximity of our properties
to the Mexican border and our use of temporary laborers, we do experience some
administrative expense in connection with our compliance with immigration and
employment laws, including laws requiring that we verify the immigration status
of our employees, limiting our ability to employ legal and illegal aliens,
granting certain minimum wage and other rights to employees and laws designed to
facilitate the organization of labor. If we were to fail to comply with any such
laws or regulations, we may incur significant expenses in connection with any
government investigation or litigation and could be forced to pay fines and/or
take costly measures to ensure compliance. At such point, costs associated with
government regulations could become material.
42
ENVIRONMENTAL REGULATION
We are not required to obtain any environmental permits, and do not use
any hazardous materials, in connection with the operation of our nursery
business. Accordingly, we have incurred no material expenses associated with
environmental compliance. We do, however, use fertilizers and pesticides that
may contain chemicals that have been, or may be, determined to be harmful to the
environment, which chemicals could enter the air, surface water or ground water
in and around our farms or affect animals and plants in the area. If that were
to occur (or has occurred in the past), we may be subject to fines, penalties
and remediation obligations under the environmental laws; such 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. At such point, costs associated with environmental compliance and
remediation could become material.
PROPERTY
We own a 272-acre tree and shrub farm called the Major Trees Farm that
is located at 14660 South Highway 191 in Elfrida, Arizona, which is an
approximately 90 minute drive from Tucson, Arizona. The farm is flat, desert
landscape and is surrounded by other agricultural land. Water for the farm is
drawn from deep wells.
This farm secures a $600,000 note maturing in March 2007. The note
accrues interest at 7% and had an outstanding balance of $314,884 as of
September 30, 2004. Principal payments of $150,000 are due on March 1, 2005 and
March 1, 2007 on the note. We are permitted to prepay the note without penalty
at any time and a final payment of $40,894 will be due on the note upon maturity
in March 2007 assuming we do not make any prepayments and make all other
payments due under the note in a timely manner. In addition, the farm also
secures a $300,000 convertible note maturing in March 2005. This convertible
note had an outstanding balance of $276,572 as of September 30, 2004. This
convertible note requires monthly payments of $4,125. We may prepay the
convertible note and a final payment of $267,493 will be due on the note upon
maturity in March 2005 assuming we do not make any prepayments and make all
other payments due under the convertible note in a timely manner. Although we
plan on increasing the amount of inventory planted on this farm, we do not
otherwise anticipate renovating, improving, or developing this property. In the
opinion of our management, this farm is adequately covered by insurance.
We also own a 17-acre tree and shrub farm called the Sampres Tree Farm
that is located at 19461 Mt. Pleasant Road in Montgomery, Texas, which is an
approximately 30 minute drive from Houston, Texas. The 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. This farm secures a $400,000 note payable maturing in
May 2009. The note accrues interest at the rate of 7% during the first year of
the note (until May 2005), 8% during the second and third years of the note (May
2005-May 2007) and 9% during the fourth and fifth years of the note (May
2007-May 2009). This note had an outstanding balance of $382,778 at September
30, 2004. The note requires monthly payments of $3,101.20 until January 2005,
43
after which it requires monthly payments of $2,500; in addition, principal
payments of $50,000 were required on September 1, 2004 and January 1, 2005. We
are permitted to prepay the note without penalty at any time, and a final
payment of $267,416 will be due on this note upon maturity in May 2009 assuming
we do not make any prepayments and make all other payments due under the note in
a timely manner. In addition, this farm also secures the same $300,000
convertible note, payable maturing in March 2005 that is also secured by the
Major Trees Farm. As discussed above, this convertible note had an outstanding
balance of $276,572 as of September 30, 2004. This convertible note requires
monthly payments of $4,125. We may prepay the convertible note, and a final
payment of $267,493 will be due on the note upon maturity in March 2005 assuming
we do not make any prepayments and make all other payments due under the
convertible note in a timely manner. Although we plan on increasing the amount
of inventory planted on this farm, we do not otherwise anticipate renovating,
improving, or developing this property. In the opinion of our management, this
farm is adequately covered by insurance.
We maintain our corporate records in the home office of Kirk Fischer,
our Chief Executive and Chief Financial Officer, and our executive officers use
such office on occasion for business purposes. We do not have any lease with
respect to such home office. Should we be required to obtain a separate
executive office in the Las Vegas, Nevada area, comparable space is available in
the area at a reasonable rate.
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, 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.
44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Certain information regarding our executive officers and directors is
set forth below. Our executive officers are appointed by, and continue to serve
at the will of, our board of directors. Our directors are elected or appointed
for terms that continue, absent resignation, death or removal by our
stockholders, until the later of the next annual meeting of stockholders or
until a replacement is duly appointed or elected and qualified.
NAME AGE POSITION
---- --- --------
Kirk Fischer 37 Chief Executive Officer, Chief Financial
Officer and Chairman of the Board
Jim Fischer 58 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 2002, 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 and
over 100 employees. From 1990 to 1996, Mr. Fischer 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 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 and over 100
employees. Between 1999 and 2002, Mr. Fischer was employed by 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. 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.
45
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 2002, 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. 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.
KEY EMPLOYEE
Certain information regarding a key employee is set forth below.
KC HOLMES, MANAGER OF MERGERS & ACQUISITIONS. Mr. Holmes has served as
Manager of Mergers & Acquisitions of Penge since September 1, 2004. From its
founding in August 2002 until September 1, 2004, Mr. Holmes served as President,
Chief Financial Officer and as a director of Penge. From 1996 to 2002, Mr.
Holmes served in various capacities with The Murdock Group as an executive and
board member and with Q Comm International (QMM) as a board member and
consultant. He also served as an executive of NEBO Products, an import/export
wholesale business selling hardware and sporting goods, from 1996 to 1999. Mr.
Holmes graduated from Brigham Young University with a degree in Psychology.
Mr. Homes is the cousin of Kirk Fischer, our Chief Executive Officer, Chief
Financial Officer and Chairman of the Board, and the nephew of Jim Fischer,
our Vice President of Operations and a director.
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 $100,000 during fiscal year 2005
(the "named executive officers").
46
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ ------------------------ --------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
NAME AND SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
------------------------------ ----------- ----------- ---------- ----------- ------------- -------------- ------------ ------------
Kirk Fischer, 6/30/04 60,000 - - - - - -
Chief Executive Officer 6/30/03 5,500 - - - 1,000,000 - -
Lori Fischer, 6/30/04 106,075 - - - - - -
Controller 6/30/03 72,000 - - - - - -
KC Holmes, 6/30/04 112,250 - - - - - -
Manager of Mergers & 6/30/03 28,850 - - - 1,000,000 - -
Acquisitions
OPTION/SAR GRANTS IN LAST FISCAL YEAR. No options to purchase common
stock were granted to the named executive officers during the fiscal year ended
June 30, 2004. We have never granted any stock appreciation rights. None of the
named executive officers exercised any options during the fiscal year ended June
30, 2004.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES. The following table sets forth the information concerning the
options to purchase capital stock of the named executive officers exercised
during the fiscal year ended June 30, 2004, and the value of unexercised options
held by the named executive officers as of June 30, 2004.
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES ACQUIRED JUNE 30, 2004 JUNE 30, 2004
ON EXERCISE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE (1)
----------------------------- ---------------- -------------------- --------------------------- --------------------------
Kirk Fischer, Chief - - 1,000,000/0 $190,000/$0
Executive Officer
Lori Fischer, Controller - - - -
KC Holmes, Manager of - - 1,000,000/0 $190,000/$0
Mergers & Acquisitions
47
(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 the fiscal year ended June
30, 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. Each of our executive officers has previously entered
into an engagement agreement based upon our standard form executive employment
agreement, which generally provides for the payment of fair and reasonable
salary, bonuses as determined by the Board of Directors, participation in all
our benefits plans and requires the execution of a confidentiality agreement. In
addition, the form agreement provides that the officer may be terminated with or
without cause, but that, upon termination, the officer shall be paid through the
end of the term of the agreement. The terms of the agreements entered into by
each of the officers have expired; however, KC Holmes, a significant stockholder
and our Manager of Mergers & Acquisitions has also entered into an engagement
agreement based upon our standard form agreement with a term ending September 1,
2006.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information, as of January 1, 2005 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.
PRIOR TO OFFERING FOLLOWING OFFERING
AS OF JANUARY 1, 2005 AS OF JANUARY 1, 2005
-------------------------------------- ----------------------------------------
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
--------------------------
Kirk Fischer and 4,000,000(4) 28.67% 3,800,000(5) 27.24%
Lori Fischer
11231 Winter Cottage
Place, Las Vegas, NV 89135
48
PRIOR TO OFFERING FOLLOWING OFFERING
AS OF JANUARY 1, 2005 AS OF JANUARY 1, 2005
-------------------------------------- ----------------------------------------
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)
---------------- --------------- -------- ------------------- ------------
Jim Fischer 1,190,000(6) 8.53% 1,000,000(7) 7.17%
11231 Winter Cottage
Place, Las Vegas, NV 89135
All Executive Officers 5,190,000 34.71% 4,800,000 32.10%
and Directors as a Group
(3 Persons)
5% STOCKHOLDERS
(WHO ARE NOT EXECUTIVE
OFFICERS OR DIRECTORS)
Rocky Fischer 1,399,000(8) 9.96% 1,100,000(9) 7.83%
1400 Graham, STE B401,
Tomball, TX 77375
KC Holmes 2,748,727(10) 19.70% 2,548,727(11) 18.27%
11231 Winter Cottage
Place, Las Vegas, NV 89135
Roger Major 1,020,000 7.88% 820,000 6.33%
806 W. Knox, Cochise, AZ
85606
Robert G. and Juanita
Purcell(12) 854,167 6.19% Nil -
301 N. Hall St.
P.O. Box 100
Potosi, MO 63664
--------------------------
(1) Ownership numbers include shares of our common stock subject to options
and warrants that are exercisable within 60 days of January 1, 2005.
(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
January 1, 2005, 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.
49
(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) 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.
(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 1,000,000 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 Jim Fischer, our Vice President of
Operations and a director. Also includes 115,000 shares held of record
by Ellen Fischer, Jim Fischer's wife.
(7) 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.
(8) 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.
(9) Includes 1,100,000 shares of common stock issuable upon exercise of
options held by Rocky Fischer.
(10) Includes 1,000,000 shares of common stock issuable by us upon the
exercise of options held by KC Holmes, our Manager of Mergers &
Acquisitions. Also includes 148,727 shares held of record by 5th Genki
LLC, an entity over which Michelle Holmes exercised 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.
(11) Includes 148,727 shares held of record by 5th Genki LLC, an entity over
which Michelle Holmes exercises voting and investment control, 12,418
shares held of record by Alecia Monet Holmes, a dependent daughter of
KC and Michelle Holmes, 12,418 shares held of record by Chance Jaxon
Holmes, a dependent son of KC and Michelle Holmes, 12,418 shares held
of record by Brooklyn Elaine Holmes, a dependent daughter of KC and
Michelle Holmes and 12,419 shares held of record by Rian Michelle
Holmes, a dependent daughter of KC and Michelle Holmes.
(12) Includes convertible notes convertible into 854,167 shares of our
common stock within 60 days of January 1, 2005.
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 or to their designees, among others, in August 2002 in exchange for
$0.00004 per share in cash:
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
50
* 265,000 of such shares were transferred to persons designated by
Mr. Holmes.
Each of the persons named in the table above may be deemed to be promoters of
Penge.
In June 2003, we purchased office furniture and equipment with a value
of $15,130 from KC Holmes, Manager of Mergers & Acquisitions, for $15,130. The
determination of value was made by Kirk Fischer and Jim Fischer, directors of
the Company without a direct financial interest in the transaction. Kirk Fischer
is a cousin of KC Holmes, and Jim Fischer is an uncle of KC Holmes.
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.
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:
NAME OF PERSON 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
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, Manager of 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.
51
The table below summarizes advances made to us by management and other
related parties during fiscal years 2003 and 2004 and the balance owed by Penge
to such individuals as of June 30, 2004:
BALANCE 2003 2003 BALANCE 2004 2004 BALANCE
INDIVIDUAL 8/6/02 ADVANCES PAYMENTS 6/30/03 ADVANCES PAYMENTS 6/30/04
-------------------- ------------ ------------ ----------- ----------- ----------- ------------ ----------
Jim Fischer -- 22,433 (22,433) -- 25,411 (25,411) --
KC Holmes -- 18,079 (5,870) 12,209 51,300 (63,509) --
Kirk Fischer -- 5,000 (4,489) 511 36,700 (37,211) --
Lori Fischer -- 53,664 (50,140) 3,524 127,388 (120,678) 10,234
------------ ------------ ----------- ----------- ----------- ------------ ----------
99,176 (82,932) 16,244 240,799 (246,809) 10,234
The table below summarizes advances made to us by management and other related
parties during the period between June 30, 2004 and December 31, 2004, and the
balance owed by Penge to such individuals as of December 31, 2004:
Balance Balance
Individual 06/30/04 Advances Payments 12/31/04
---------- -------- -------- -------- --------
Jim Fischer -- [*] [*] [*]
KC Holmes -- [*] [*] [*]
Kirk Fischer -- [*] [*] [*]
Lori Fischer 10,234 [*] [*] [*]
-------- -------- -------- --------
10,234 [*] [*] [*]
[*] To be completed in pre-effective amendment when reviewed information is
available.
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 January 1, 2005, there were 12,952,332 shares of our common stock
outstanding, held of record by and beneficially owned by approximately 110
stockholders. As of January 1, 2005, 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 in the future, as
described below.
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;
52
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 or 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 on 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.
53
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 January 1, 2005, 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, 1,932,638 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 3,861,466 of 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.
54
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.
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
Number of securities remaining available for future
to be issued Weighted-average issuance under equity
upon exercise of exercise price of compensation plans (excluding)
outstanding options, outstanding options, securities reflected
Plan category warrants and rights warrants and rights in column (a))
-------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders 4,300,000 $0.11 3,700,000
-------------------------------------------------------------------------------------------------------------
Equity compensation plans None None None
not approved by security
holders
-------------------------------------------------------------------------------------------------------------
4,300,000 $0.11 3,700,000
Total
-------------------------------------------------------------------------------------------------------------
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 registered public accounting firm,
as stated in its 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.
55
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.
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;
56
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.
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, which forms a part of the registration
statement, does not contain all of the information included in the registration
statement and its exhibits, as permitted by the rules and regulations of the SEC
and you should refer to the registration statement and its exhibits. 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. You may read and copy the registration statement,
including exhibits and schedules filed with it, at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants, such as us, that file electronically with the SEC.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements under the Exchange Act and, in
accordance with this law, will file periodic reports, proxy statements and other
information with the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's Public
Reference Room and the website of the SEC referred to above.
57
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Unaudited Condensed Consolidated Balance Sheets,
September 30, 2004 and June 30, 2004 F-1
Unaudited Condensed Consolidated Statements of
Operations, for the three months ended
September 30, 2004 and 2003 F-3
Unaudited Condensed Consolidated Statements of
Comprehensive Income (Loss), for the three
months ended September 30, 2004 and 2003 F-4
Unaudited Condensed Consolidated Statements of
Cash Flows, for the three months ended
September 30, 2004 and 2003 F-5
Notes to Unaudited Condensed Consolidated
Financial Statements F-7
Report of Independent Registered Public Accounting Firm F-23
Consolidated Balance Sheets, June 30, 2004 and 2003 F-24
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-26
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-27
Consolidated Statement of Stockholders' Equity, from
inception on August 6, 2002 through June 30, 2004 F-28
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-31
Notes to Consolidated Financial Statements F-33
58
PENGE CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
2004 2004
---------- ----------
CURRENT ASSETS:
Cash $ 24,890 $ 2,237
Accounts receivable, net of allowance for doubtful
accounts of $171 and $169, respectively 11,251 13,793
Employee advances 400 --
Inventories 903,042 761,802
Prepaid expenses 1,155 2,322
---------- ----------
Total Current Assets 940,738 780,154
---------- ----------
PROPERTY AND EQUIPMENT, net 1,163,347 1,185,366
---------- ----------
OTHER ASSETS:
Definite-life intangible assets, net 33,725 36,616
Deferred loan costs 26,334 18,171
Refundable deposits 560 520
---------- ----------
Total Other Assets 60,619 55,307
---------- ----------
$2,164,704 $2,020,827
========== ==========
[CONTINUED]
F-1
PENGE CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
[CONTINUED]
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
2004 2004
------------ ------------
CURRENT LIABILITIES:
Current portion of convertible notes payable $ 276,572 $ 291,019
Current portion of notes payable 525,978 530,003
Accounts payable 156,323 177,440
Related party advances 101,773 10,234
Accrued payroll and payroll taxes 37,000 50,134
Sales taxes payable 27 27
Warranty reserve 12 31
Accrued interest 34,943 24,599
------------ ------------
Total Current Liabilities 1,132,628 1,083,487
------------ ------------
LONG-TERM DEBT:
Convertible notes payable, net of discounts of
$10,033 and $0, respectively, less current portion 193,700 44,967
Notes payable, less current portion 629,006 556,624
------------ ------------
Total Long-Term Debt 822,706 601,591
------------ ------------
Total Liabilities 1,955,334 1,685,078
------------ ------------
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,
12,952,332 and 12,852,331 shares
issued and outstanding, respectively 12,952 12,852
Additional paid-in capital 1,261,926 1,110,488
Retained earnings (deficit) (1,015,508) (737,591)
------------ ------------
259,370 385,749
Less stock subscription receivable (50,000) (50,000)
------------ ------------
Total Stockholders' Equity 209,370 335,749
------------ ------------
$ 2,164,704 $ 2,020,827
============ ============
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-2
PENGE CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended September 30,
-------------------------
2004 2003
---------- ----------
REVENUES:
Farm crop sales $ 2,652 $ 9,161
COST OF GOODS SOLD 1,640 3,247
---------- ----------
GROSS PROFIT 1,012 5,914
---------- ----------
EXPENSES:
Salaries, wages and related taxes 89,082 123,167
Consulting 60,000 46,267
Travel 10,742 10,145
Other general and administrative 65,180 39,063
---------- ----------
Total Expenses 225,004 218,642
---------- ----------
LOSS FROM OPERATIONS (223,992) (212,728)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 6 --
Interest expense (53,931) (24,937)
---------- ----------
Total Other Income (Expense) (53,925) (24,937)
---------- ----------
LOSS BEFORE INCOME TAXES (277,917) (237,665)
CURRENT TAX EXPENSE (BENEFIT) -- --
DEFERRED TAX EXPENSE (BENEFIT) -- (3,782)
---------- ----------
NET LOSS $(277,917) $(233,883)
========== ==========
LOSS PER COMMON SHARE $ (.02) $ (.02)
========== ==========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-3
PENGE CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
For the Three Months
Ended September 30,
-----------------------
2004 2003
---------- ----------
NET LOSS $(277,917) $(233,883)
OTHER COMPREHENSIVE INCOME (LOSS):
Gain (loss) on available-for-sale securities arising
during the period (net of income taxes (benefit)
of $0 and $(4), respectively) -- 1,128
Plus reclassification adjustment for (gains)
losses included in net income -- --
---------- ----------
COMPREHENSIVE INCOME (LOSS) $(277,917) $(232,755)
========== ==========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-4
PENGE CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended September 30,
-----------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(277,917) $(233,883)
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization of deferred loan costs 8,337 7,505
Amortization of discounts on notes payable 9,695 --
Bad debt expense 2 100
Depreciation and amortization 23,910 15,302
Non-cash expenses 60,000 30,000
Changes in assets and liabilities:
Decrease in accounts receivable 2,540 8,800
(Increase) in employee advances (400) --
(Increase) in inventories (141,240) (45,017)
Decrease in prepaid expenses 1,167 11,749
Decrease in deferred tax asset -- 4,090
(Increase) in refundable deposits (40) --
(Decrease) in accounts payable (21,117) (95,438)
Increase (decrease) in accrued payroll and payroll taxes (13,134) 2,922
(Decrease) in warranty reserve (19) (244)
Increase in accrued interest 10,344 1,342
(Decrease) in deferred tax liability -- (7,872)
---------- ----------
Net Cash (Used) by Operating Activities (337,872) (300,644)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to purchase available-for-sale securities -- (2,457)
Payments to purchase property and equipment -- (40,083)
Proceeds from sale of property and equipment 1,000 --
---------- ----------
Net Cash Provided (Used) by Investing Activities 1,000 (42,540)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from bank overdraft -- 84,178
Related party advances 151,978 144,412
Payments on related party advances (60,439) (160,656)
Payments of loan costs (16,500) (12,178)
Proceeds from convertible notes payable 150,000 --
Payments on convertible notes payable (24,447) --
Proceeds from notes payable 88,462 226,469
Payments on notes payable (21,067) (170,541)
Proceeds from sale of options to purchase common stock 11,538 --
Proceeds allocated to beneficial conversion feature of
convertible notes payable 50,000 --
Proceeds from issuance of common stock 30,000 255,000
Payment of stock offering costs -- (23,500)
---------- ----------
Net Cash Provided by Financing Activities 359,525 343,184
---------- ----------
NET INCREASE (DECREASE) IN CASH 22,653 --
CASH AT BEGINNING OF PERIOD 2,237 --
---------- ----------
CASH AT END OF PERIOD $ 24,890 $ --
========== ==========
[CONTINUED]
F-5
PENGE CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[CONTINUED]
For the Three Months
Ended September 30,
-----------------------
2004 2003
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 25,555 $ 16,090
Income taxes $ -- $ --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the three months ended September 30, 2004:
The Company amortized $9,695 in discounts on notes payable.
In July 2004, the Company issued a $200,000 convertible note payable and
recorded a discount of $50,000 for the beneficial conversion feature of the
convertible note payable.
In August 2004, the Company granted options to purchase 200,000 shares of
common stock for consulting services rendered valued at $60,000.
For the three months ended September 30, 2003:
In September 2003, the Company granted options to purchase 100,000 shares
of common stock for consulting services rendered valued at $30,000.
In September 2003, the Company issued 100,000 shares of common stock for a
subscription receivable of $30,000.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-6
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED 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.
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. AA Subsidiary offered business structure consulting. 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. At the time of
abandonment, AA Subsidiary had no assets and no liabilities. The financial
statements reflect the operations of AA Subsidiary from January 27, 2003
through October 2, 2003. The Company continues to offer business structure
consulting through Parent.
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.
CONDENSED FINANCIAL STATEMENTS - The accompanying financial statements have
been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows at September 30, 2004 and 2003 and for the periods then ended have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles in the United States of America have been condensed or omitted.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's June 30, 2004 audited financial statements. The results of
operations for the periods ended September 30, 2004 and 2003 are not
necessarily indicative of the operating results for the full year.
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 straight-line method
over the estimated useful lives of the assets.
F-7
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
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.
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 - Growing crop inventory is stated at the lower of market or
cost using the retail method. Under the retail method, the Company counts
and extends their inventory at sales prices. This inventory at sales prices
is then multiplied by a cost ratio to determine inventory at cost. The cost
ratio is determined by taking the total of the beginning inventory at cost
plus all direct and indirect costs of growing crops divided by the total of
the ending inventory at sales prices plus sales revenues. Raw material
inventory is stated at the lower of market or cost using the first-in
first-out (FIFO) method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost or
carryover basis. 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
straight-line 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.
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-8
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
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
three months ended September 30, 2004 and 2003.
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 September 30,
2004 and June 30, 2004, the Company has established a reserve for future
warranty expense of $12 and $31, 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 8]. 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. During the three months ended September 30, 2004 and 2003,
the Company did not have any stock-based employee compensation.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" [SEE NOTE 9].
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 10].
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.
F-9
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
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 8 AND 15].
NOTE 2 - ACQUISITION OF CERTAIN ASSETS OF SAMPRES TREE FARMS, L.L.C.
On May 26, 2004, Parent acquired certain assets of Sampres Tree Farms,
L.L.C. 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 Farms, L.L.C.
The Company has accounted for the acquisition as an asset purchase.
The following shows how the acquisition purchase price was allocated to the
assets acquired from Sampres Tree Farms, L.L.C. at May 26, 2004, the date
the acquisition closed.
May 26,
2004
-----------
Inventory $ 133,051
Property and equipment 537,100
-----------
$ 670,151
===========
NOTE 3 - INVENTORIES
Inventories consist of the following at:
September 30, June 30,
2004 2004
------------- -------------
Raw materials $ 171,910 $ 177,390
Growing crops 731,132 584,412
------------- -------------
Total Inventories $ 903,042 $ 761,802
============= =============
The Company has estimated that no allowance for slow moving or obsolete
inventory was necessary at September 30, 2004 and June 30, 2004. The
Company's inventories are collateral for certain notes payable [See Notes 6
and 7].
F-10
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
September 30, June 30,
2004 2004
------------- -------------
Office furniture and equipment $ 23,402 $ 23,402
Farm equipment 348,741 349,741
Buildings 540,234 540,234
Land 367,753 367,753
------------- -------------
1,280,130 1,281,130
Less accumulated depreciation (116,783) (95,764)
------------- -------------
Net Property and Equipment $ 1,163,347 $ 1,185,366
============= =============
Estimated
Useful Lives of
Assets (Years)
---------------
Office furniture and equipment 3 - 10
Farm equipment 2 - 10
Buildings 20 - 30
Land Not applicable
For the three months ended September 30, 2004 and 2003, the Company had
depreciation of $3,109 and $581, respectively, which was expensed as
general and administrative expense. For the three months ended September
30, 2004 and 2003, the Company had depreciation of $17,910 and $11,831,
respectively, which was included in the costs of producing inventory. The
Company's property and equipment are collateral for certain notes payable
[See Notes 6 and 7].
NOTE 5 - DEFINITE-LIFE INTANGIBLE ASSETS
Definite-life intangible assets consist of the following at:
September 30, June 30,
2004 2004
------------- -------------
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 (24,089) (21,198)
------------- -------------
Net Definite-Life Intangible Assets $ 33,725 $ 36,616
============= =============
F-11
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - 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 three months
ended September 30, 2004 and 2003 was $2,891 and $2,890, respectively. The
Company estimates that their amortization expense will be approximately as
follows for the twelve-month periods ended:
Amortization
September 30, Expense
----------- ------------
2005 $ 11,563
2006 11,563
2007 10,599
2008 --
2009 --
------------
$ 33,725
============
NOTE 6 - CONVERTIBLE NOTES PAYABLE
The Company has sold convertible notes payable totaling $555,000 and
recorded discounts totaling $61,000 due to the beneficial conversion
feature of the notes. The discounts are being amortized over the term of
the respective notes. For the three months ended September 30, 2004 and
2003, respectively, the Company amortized $8,733 and $0 of the discounts on
notes payable as interest expense.
The Company has paid a total of $12,655 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
three months ended September 30, 2004 and 2003, respectively, the Company
amortized $1,478 and $0 of the deferred loan costs as interest expense.
In June 2004, the Company issued a $10,000 note payable. The note accrued
interest at 10%, was due in December 2006 and was 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.
In August 2004, the Company repaid the note and accrued interest.
F-12
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CONVERTIBLE NOTES PAYABLE [CONTINUED]
The Company has the following convertible notes payable at:
September 30, June 30,
2004 2004
------------- -------------
$300,000 10% note payable maturing in March 2005, secured by
all of the Company's land, convertible with accrued interest
into common stock at $.30 per share anytime through March
2005 (At the time of conversion, the creditor can require
the Company to redeem any amount of the shares issued in the
conversion at $.345 per share). As required by a covenant in
this note, the Company has purchased key man insurance but has
failed to name the creditor as beneficiary. $ 276,572 $ 291,019
$200,000 10% note payable maturing in January 2007, secured
by 50,000 trees which are part of the Company's inventory,
convertible with accrued interest into common stock at $.24
per share during the first 12 months, at $.30 per share
during the second 12 months and at $.35 per share
thereafter, net of discounts of $45,000 and $0, respectively 155,000 --
$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 $1,400 and $1,800, respectively 8,600 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 $1,400 and $1,800, respectively 8,600 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 $3,500 and $4,500, respectively 21,500 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 $0 and $1,933, respectively -- 8,067
------------- -------------
470,272 335,986
Less current portion (276,572) (291,019)
------------- -------------
$ 193,700 $ 44,967
============= =============
F-13
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CONVERTIBLE NOTES PAYABLE [CONTINUED]
The convertible notes payable mature as follows for the twelve-month
periods ended:
September 30, Principal Due
----------- -------------
2005 $ 276,572
2006 45,000
2007 200,000
2008 --
2009 --
-------------
$ 521,572
=============
For the three months ended September 30, 2004 and 2003, respectively,
interest expense on the convertible notes payable amounted to $22,489 and
$0.
NOTE 7 - NOTES PAYABLE
The Company has the following notes payable at:
September 30, June 30,
2004 2004
------------- -------------
$600,000 7% note payable maturing in March 2007,
secured by all of the assets acquired from M7 Farms $ 314,884 $ 318,728
$200,000 7% note payable maturing in March 2007,
secured by all of the outstanding shares of
MT Subsidiary 117,899 117,899
$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 Farms, L.L.C. 382,778 400,000
$250,000 14% note payable maturing in March 2005 250,000 250,000
$50,000 12% note payable maturing in August 2006,
with an additional payment of 3% of the principal
due on the date of maturity, secured by 7,500 trees
which are part of the Company's inventory 50,000 --
$50,000 10% note payable maturing in August 2006,
secured by 7,500 trees which are part of the
Company's inventory, net of discounts of $10,577
and $0, respectively 39,423 --
------------- -------------
1,154,984 1,086,627
Less current portion (525,978) (530,003)
------------- -------------
$ 629,006 $ 556,624
============= =============
F-14
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE [CONTINUED]
The notes payable mature as follows for the twelve-month periods ended:
September 30, Principal Due
----------- -------------
2005 $ 525,978
2006 289,611
2007 75,833
2008 5,486
2009 268,653
-------------
$ 1,165,561
=============
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 March 2003, the Company issued a $112,250 note payable. The note accrued
interest at 18% and was due in August 2003. In August 2003, the Company
repaid the note.
The Company issued a $50,000 note payable for cash of $38,461 and recorded
a discount of $11,539. The discount is being amortized over the term of the
note. For the three months ended September 30, 2004 and 2003, respectively,
the Company amortized $962 and $0 of the discounts on notes payable as
interest expense.
The Company has paid a total of $66,599 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 three months ended
September 30, 2004 and 2003, respectively, the Company amortized $6,859 and
$7,505 of the deferred loan costs as interest expense.
For the three months ended September 30, 2004 and 2003, respectively,
interest expense on the notes payable amounted to $31,442 and $24,937.
NOTE 8 - 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 15]. No
shares are issued and outstanding at September 30, 2004 and June 30, 2004.
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 15]. 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.
F-15
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CAPITAL STOCK AND OPTIONS [CONTINUED]
From July through September 2004, the Company issued 100,001 shares of
their previously authorized but unissued common stock for cash of $30,000,
or $.30 per share.
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.
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 2] 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.
SALE OF STOCK OPTIONS - In August 2004, the Company sold options to
purchase 50,000 shares of common stock for cash of $11,538. The options are
exercisable at $.30 per share for 10 years. At September 30, 2004, none of
these options had been exercised, forfeited or cancelled.
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. There are no vesting
requirements, so all awards vest immediately. At September 30, 2004, total
awards available to be granted from the Plan amounted to 3,500,000.
In July 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 valued at $60,000. The options vested
immediately and are exercisable at $.30 per share for 10 years. At
September 30, 2004, none of these options had been exercised, forfeited or
cancelled.
F-16
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CAPITAL STOCK AND OPTIONS [CONTINUED]
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
September 30, 2004, none of these options had been exercised, forfeited or
cancelled.
A summary of the status of the options granted under the Company's 2002
Stock Incentive Plan is presented below.
For the Three Months Ended September 30,
---------------------------------------------
2004 2003
-------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- ---------
Outstanding at beginning of period 4,300,000 $ .11 4,200,000 $ .10
Granted 200,000 .30 100,000 .30
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
--------- --------- --------- ---------
Outstanding at end of period 4,500,000 $ .12 4,300,000 $ .11
--------- --------- --------- ---------
Weighted average fair value of
options granted during the period 200,000 $ .30 100,000 $ .30
--------- --------- --------- ---------
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 August 1, 2004: risk-free interest rate
of 4.50%, expected dividend yield of zero, expected lives of 10 years and
expected volatility of 558%. The following assumptions were used for
options granted 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%.
A summary of the status of the options outstanding under the Company's 2002
Stock Incentive Plan at September 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 8.1 years $ .10 2,200,000 $ .10
.11 2,000,000 3.1 years .11 2,000,000 .11
.30 300,000 9.5 years .30 300,000 .30
----------- ----------- ---------------- --------------- ---------- ---------------
$ .10 - .30 4,500,000 6.0 years $ .12 4,500,000 $ .12
----------- ----------- ---------------- --------------- ---------- ---------------
F-17
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - 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 September 30, 2004
and June 30, 2004, the Company has available unused net operating loss
carryforwards of approximately $746,000 and $540,000, respectively, which
may be applied against future taxable income and which expire in various
years through 2025. Also, the Company has unused capital loss carryovers at
September 30, 2004 and June 30, 2004 of approximately $23,000 which expire
in various years through 2009.
At September 30, 2004 and June 30, 2004, respectively, the total of all
deferred tax assets is approximately $157,000 and $118,000 and the total of
all deferred tax liabilities is $49,000, and $50,000. 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 $108,000 and $68,000 at September 30,
2004 and June 30, 2004, respectively. The change in the valuation allowance
for the three months ended September 30, 2004 is approximately $40,000.
The temporary differences, tax credits and carryforwards gave rise to the
following deferred tax asset (liability) at:
September 30, June 30,
2004 2004
------------- -------------
Net operating loss carryover $ 146,687 $ 106,282
Capital loss carryover 4,557 4,557
Excess of book over tax basis of fixed
assets (48,133) (48,860)
Warranty reserve 2 6
Reserve for bad debts 34 33
Accrued compensation 5,409 5,950
------------- -------------
Total deferred tax asset $ 108,556 $ 67,968
============= =============
F-18
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES [CONTINUED]
The components of income tax expense from continuing operations consisted
of the following for:
For the Three Months
Ended September 30,
-----------------------------
2004 2003
------------- -------------
Current income tax expense:
Federal $ -- $ --
State -- --
------------- -------------
Current tax expense $ -- $ --
============= =============
Deferred tax expense (benefit) arising from:
Excess of tax over financial
accounting depreciation $ (726) $ (967)
Warranty reserve 4 48
Accrued compensation 541 2,852
Net operating loss carryover (40,405) (42,547)
Valuation allowance 40,586 36,832
------------- -------------
Net deferred tax expense $ -- $ (3,782)
============= =============
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:
For the Three Months
Ended September 30,
-----------------------------
2004 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 (4.25) (2.48)
Other (.82) (.10)
Valuation allowance (14.60) (15.50)
------------- -------------
Effective income tax rates 0.00% 1.59%
============= =============
F-19
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LOSS PER SHARE
The following data shows the amounts used in computing loss per share:
For the Three Months
Ended September 30,
-----------------------------
2004 2003
------------- -------------
Loss from operations available to
common shareholders (numerator) $ (277,917) $ (233,883)
------------- -------------
Weighted average number of common
shares outstanding used in loss per
share for the period (denominator) 12,922,984 11,839,203
------------- -------------
At September 30, 2004, the Company had outstanding options to purchase
4,550,000 shares and notes payable convertible into 1,914,048 shares which
were not used in the computation of loss per share because their effect
would be anti-dilutive. At September 30, 2003, the Company had outstanding
options to purchase 4,300,000 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 11 - 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.
NOTE 12 - RELATED PARTY TRANSACTIONS
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.
F-20
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS [CONTINUED]
RELATED PARTY ADVANCES - During the three months ended September 30, 2004,
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 three months ended September 30, 2004,
officers/shareholders of the Company and their relatives made advances
totaling $151,978 and the Company repaid advances totaling $60,439. Since
the Company owed $10,234 from prior-year advances, the balance owed to the
officers/shareholders of the Company and their relatives at September 30,
2004 is $101,773.
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 8].
SALES - During the three months ended September 30, 2004 and 2003,
respectively, the Company had sales of $0 and $0 to an entity controlled by
a relative of an officer/shareholder of the Company.
CONSULTING SERVICES - During the three months ended September 30, 2004 and
2003, respectively, the Company paid a relative of an officer/shareholder
of the Company $0 and $4,500 for consulting services.
MANAGEMENT COMPENSATION - For the three months ended September 30, 2004 and
2003, respectively, the Company expensed $30,000 and $38,000 as salary to
the Company's Chief Executive Officer. At September 30, 2004 and June 30,
2004, respectively, the Company owed $21,000 and $22,000 to the Chief
Executive Officer for accrued salary.
For the three months ended September 30, 2004 and 2003, respectively, the
Company expensed $30,000 and $0 as salary to the Company's former Chief
Financial Officer. At September 30, 2004 and June 30, 2004, respectively,
the Company owed $15,000 and $8,500 to the former Chief Financial Officer
for accrued salary.
EMPLOYEES - For the three months ended September 30, 2004 and 2003,
respectively, the Company expensed $12,000 and $3,500 as salary to an
employee of the Company who is the spouse of an officer/shareholder of the
Company. At September 30, 2004 and June 30, 2004, respectively, the Company
owed $0 and $6,000 to this employee for accrued salary.
For the three months ended September 30, 2004 and 2003, respectively, the
Company expensed $18,000 and $24,250 as salary to an employee of the
Company who is a relative of an officer/shareholder of the Company. At
September 30, 2004 and June 30, 2004, respectively, the Company owed $0 and
$0 to this employee for accrued salary.
F-21
PENGE CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - CONCENTRATIONS
ACCOUNTS RECEIVABLE - A significant percent of the Company's accounts
receivable at September 30, 2004 was owed by only three 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 September 30, 2004:
Customer A 33%
Customer B 19%
Customer C 10%
REVENUES - During the three months ended September 30, 2004, a significant
percent of the Company's total sales were made to only two customers. The
following table lists the percent of the sales made to those customers that
accounted for 10% or more of the total revenues for the three months ended
September 30, 2004:
Customer A 47%
Customer B 28%
NOTE 14 - COMMITMENTS AND CONTINGENCIES
REDEMPTION OF COMMON STOCK - The Company has a convertible note payable
which is convertible into common stock at $.30 per share. At the time of
conversion, the creditor can require the Company to redeem any amount of
the shares issued in the conversion at $.345 per share. At September 30,
2004, the Company owed $276,572 in principal and $2,247 in accrued interest
on the note. If the note had been converted into stock on September 30,
2004, then the Company would have issued 929,486 shares of common stock
which would have been redeemable at the creditor's option for $320,673.
NOTE 15 - 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 8]. The financial statements have been restated for all periods
presented to reflect the amended articles of incorporation.
RELATED PARTY NOTES PAYABLE - In October 2004, the Company issued two notes
payable - one to the Company's Manager of Mergers and Acquisitions and one
to a director/shareholder of the Company. Each note is due on demand and
each provides for the Company to borrow up to $200,000 at 8% per annum.
NOTE PAYABLE - In November 2004, the Company issued a $25,000 note payable.
The note accrues interest at 12% per annum and is due in December 2004.
SECURED NOTES PAYABLE - In November 2004, the Company issued a $25,000 note
payable. The note is secured by 10,000 trees which are part of the
Company's inventory. The note accrues interest at 12% per annum and is due
in December 2004.
In November 2004, the Company issued a $35,000 note payable. The note is
secured by 10,000 trees which are part of the Company's inventory. The note
accrues interest at 12% per annum and is due in December 2004.
F-22
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 14 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 14. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
/s/ 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-23
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 761,802 337,170
Prepaid expenses 2,322 14,244
Deferred tax asset -- 4,086
---------- ----------
Total Current Assets 780,154 382,421
---------- ----------
PROPERTY AND EQUIPMENT, net 1,185,366 657,992
---------- ----------
OTHER ASSETS:
Definite-life intangible assets, net 36,616 48,178
Deferred loan costs 18,171 4,025
Refundable deposits 520 --
---------- ----------
Total Other Assets 55,307 52,203
---------- ----------
$2,020,827 $1,092,616
========== ==========
[CONTINUED]
F-24
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 -- 7,872
------------ ------------
Total Long-Term Debt 601,591 444,500
------------ ------------
Total Liabilities 1,685,078 835,226
------------ ------------
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 1,110,488 738,025
Unrealized gain (loss) on available-for-sale securities -- (4,664)
Retained earnings (deficit) (737,591) (337,586)
------------ ------------
385,749 407,390
Less stock subscription receivable (50,000) (150,000)
------------ ------------
Total Stockholders' Equity 335,749 257,390
------------ ------------
$ 2,020,827 $ 1,092,616
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-25
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 428,004 402,980
-------------- --------------
GROSS PROFIT 378,973 266,741
-------------- --------------
EXPENSES:
Salaries, wages and related taxes 387,077 148,866
Consulting 63,287 235,146
Travel 38,050 21,203
Loss on unsuccessful acquisitions 10,000 5,000
Other general and administrative 155,873 169,146
-------------- --------------
Total Expenses 654,287 579,361
-------------- --------------
LOSS FROM OPERATIONS (275,314) (312,620)
-------------- --------------
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 (404,933) (389,674)
CURRENT TAX EXPENSE (BENEFIT) -- --
DEFERRED TAX EXPENSE (BENEFIT) (4,928) (52,088)
-------------- --------------
NET LOSS $ (400,005) $ (337,586)
============== ==============
LOSS PER COMMON SHARE $ (.03) $ (.04)
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-26
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 $ (400,005) $ (337,586)
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) $ (395,341) $ (342,250)
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-27
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 Sub-
--------------------- --------------------- Paid-in for-sale Earnings scription
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-28
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 Sub-
--------------------- --------------------- Paid-in for-sale Earnings scription
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)
Purchase of property and equipment
for $15,130 from an
officer/shareholder of the
Company with a carryover basis
of zero, accounted for as a capital
distribution, net of income taxes
(benefit) of $(2,976), June 2003 -- -- -- -- (12,154) -- -- --
Gain (loss) on available-for-sale
securities arising during the period -- -- -- -- -- (13,661) -- --
Net loss for the period ended
June 30, 2003 -- -- -- -- -- 8,997 (337,586) --
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE, June 30, 2003 -- -- 11,615,000 11,615 738,025 (4,664) (337,586) (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 -- -- --
[CONTINUED]
F-29
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 Sub-
--------------------- --------------------- Paid-in for-sale Earnings scription
Shares Amount Shares Amount Capital Securities (Deficit) Receivable
--------- --------- --------- --------- --------- --------- --------- ---------
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 -- -- --
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 (400,005) --
--------- --------- ---------- --------- ---------- --------- ----------- ---------
BALANCE, June 30, 2004 -- $ -- 12,852,331 $ 12,852 $1,110,488 $ -- $ (737,591) $(50,000)
========= ========= ========== ========= ========== ========= =========== =========
The accompanying notes are an integral part of this
consolidated financial statement.
F-30
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 $ (400,005) $ (337,586)
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 70,209 46,753
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 (291,581) (95,364)
Decrease in prepaid expenses 11,922 35,756
Decrease in deferred tax asset 2,944 32
(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 (7,872) (52,120)
------------- -------------
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) (27,308)
Acquisitions, net of cash acquired (150,151) (157,429)
------------- -------------
Net Cash (Used) by Investing Activities (167,340) (197,004)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) bank overdraft (1,894) 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)
Purchase of property and equipment accounted for as
a capital distribution -- (15,130)
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 622,645 275,345
------------- -------------
NET INCREASE (DECREASE) IN CASH 2,237 --
CASH AT BEGINNING OF PERIOD -- --
------------- -------------
CASH AT END OF PERIOD $ 2,237 $ --
============= =============
[CONTINUED]
F-31
PENGE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[CONTINUED]
From Inception
For the on August 6,
Year Ended 2002 Through
June 30, 2004 June 30, 2003
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 76,232 $ 37,839
Income taxes $ -- $ --
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 Farms L.L.C. 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-32
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. AA Subsidiary offered business structure consulting. 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. At the time of
abandonment, AA Subsidiary had no assets and no liabilities. The financial
statements reflect the operations of AA Subsidiary from January 27, 2003
through October 2, 2003. The Company continues to offer business structure
consulting through Parent.
Parent and MT Subsidiary ("the Company") grow 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 straight-line 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-33
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 - Growing crop inventory is stated at the lower of market or
cost using the retail method. Under the retail method, the Company counts
and extends their inventory at sales prices. This inventory at sales prices
is then multiplied by a cost ratio to determine inventory at cost. The cost
ratio is determined by taking the total of the beginning inventory at cost
plus all direct and indirect costs of growing crops divided by the total of
the ending inventory at sales prices plus sales revenues. Raw material
inventory is stated at the lower of market or cost using the first-in
first-out (FIFO) method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost or
carryover basis. 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
straight-line 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.
F-34
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
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.
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 10]. 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.
F-35
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
From Inception
For the on August 6,
Year Ended 2002 Through
June 30, 2004 June 30, 2003
------------- -------------
Net loss, as reported $ (400,005) $ (337,586)
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 $ (400,005) $ (637,586)
------------- -------------
Loss per common share, as reported $ (.03) $ (.04)
Loss per common share, pro forma $ (.03) $ (.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 12].
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 13].
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 10 AND 18].
F-36
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 3 - ACQUISITION OF CERTAIN ASSETS OF SAMPRES TREE FARMS, L.L.C.
On May 26, 2004, Parent acquired certain assets of Sampres Tree Farms
L.L.C. 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 Farms, L.L.C.
The Company has accounted for the acquisition as an asset purchase.
F-37
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITION OF CERTAIN ASSETS OF SAMPRES TREE FARMS, L.L.C.
[CONTINUED]
The following shows how the acquisition purchase price was allocated to the
assets acquired from Sampres Tree Farms, L.L.C. at May 26, 2004, the date
the acquisition closed.
May 26,
2004
-------------
Inventory $ 133,051
Property and equipment 537,100
-------------
$ 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 584,412 279,951
------------- -------------
Total Inventories $ 761,802 $ 337,170
------------- -------------
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 9].
F-38
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 $ 23,402 $ 7,522
Farm equipment 349,741 154,532
Buildings 540,234 311,047
Land 367,753 222,008
------------- -------------
1,281,130 695,109
Less accumulated depreciation (95,764) (37,117)
------------- -------------
Net Property and Equipment $ 1,185,366 $ 657,992
------------- -------------
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 $4,586 and $1,276,
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 $54,061 and $35,841,
respectively, which was included in the costs of producing inventory. The
Company's property and equipment are collateral for certain notes payable [SEE
NOTES 8 AND 9].
F-39
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
============= =============
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- 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.
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.
F-40
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8- CONVERTIBLE NOTES PAYABLE [CONTINUED]
The Company has the following convertible notes payable at:
June 30,
-----------------------------
2004 2003
------------- -------------
$300,000 10% note payable maturing in March
2005, secured by all of the Company's land,
convertible with accrued interest into
common stock at $.30 per share anytime
through March 2005 (At the time of
conversion, the creditor can require the
Company to redeem any amount of the shares
issued in the conversion at $.345 per
share). As required by a covenant in this
note, the Company has purchased key man
insurance, but has failed to name the
creditor as beneficiary. $ 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-41
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8- 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 9 - 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 Farms, L.L.C. 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-42
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - 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 10 - 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-43
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - 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.
F-44
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK AND OPTIONS [CONTINUED]
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.
CAPITAL DISTRIBUTION - In June 2003, the Company paid $15,130 to an
officer/shareholder of the Company to purchase property and equipment.
Since the carryover basis in the property and equipment was zero, the
Company recorded a capital distribution of $12,154, net of income taxes
(benefit) of $(2,976).
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. There are no vesting
requirements, so all awards vest immediately. 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.
F-45
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK AND OPTIONS [CONTINUED]
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.
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-46
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - 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 12 - 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 $540,000 and $217,000, respectively, which may be applied
against future taxable income and which expire in various years through
2024. Also, the Company has unused capital loss carryovers at June 30, 2004
and 2003 of approximately $23,000 and $9,000, respectively, which expire in
various years through 2009.
At June 30, 2004 and 2003, respectively, the total of all deferred tax
assets is approximately $118,000 and $51,000 and the total of all deferred
tax liabilities is $50,000, and $55,000. 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 $68,000 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 $68,000 and $0, respectively.
F-47
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES [CONTINUED]
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 $ 106,282 $ 42,774
Capital loss carryover 4,557 1,770
Excess of book over tax basis of fixed
assets (48,860) (52,416)
Warranty reserve 6 59
Reserve for bad debts 33 33
Unrealized loss on marketable securities -- 1,142
Accrued compensation 5,950 2,852
----------- -----------
Total deferred tax asset $ 67,968 $ (3,786)
----------- -----------
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 $ (3,556) $ (4,600)
Bad debt allowance -- (33)
Capital loss carryover (2,787) (1,770)
Warranty reserve 53 (59)
Accrued compensation (3,098) (2,852)
Net operating loss carryover (63,508) (42,774)
Valuation allowance 67,968 --
----------- -----------
Net deferred tax expense $ (4,928) $ (52,088)
----------- -----------
Deferred income tax expense results primarily from the reversal of
temporary timing differences between tax and financial statement income.
F-48
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES [CONTINUED]
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 (1.46) (6.06)
Other (.20) (.24)
Valuation allowance (16.79) --
------------- -------------
Effective income tax rates 1.22% 13.37%
------------- -------------
NOTE 13 - 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) $ (400,005) $ (337,586)
------------- -------------
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.
F-49
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - 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.
NOTE 15 - 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 with a carryover
basis of zero. This has been accounted for as a capital distribution [SEE
NOTE 10].
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 10].
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 10].
F-50
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RELATED PARTY TRANSACTIONS [CONTINUED]
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 10].
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 10].
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 10].
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.
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.
F-51
PENGE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - 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.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
REDEMPTION OF COMMON STOCK - The Company has a convertible note payable
which is convertible into common stock at $.30 per share. At the time of
conversion, the creditor can require the Company to redeem any amount of
the shares issued in the conversion at $.345 per share. At June 30, 2004,
the Company owed $291,019 in principal and $2,233 in accrued interest on
the note. If the note had been converted into stock on June 30, 2004, then
the Company would have issued 977,506 shares of common stock which would
have been redeemable at the creditor's option for $337,240.
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 10]. 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.
F-52
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.
RELATED PARTY NOTES PAYABLE - In October 2004, the Company issued two notes
payable - one to the Company's Manager of Mergers and Acquisitions and one
to a director/shareholder of the Company. Each note is due on demand and
each provides for the Company to borrow up to $200,000 at 8% per annum.
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-53
======================================= =====================================
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, 5,794,104 SHARES OF COMMON STOCK
AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN MADE
BY US.
THIS PROSPECTUS DOES NOT OFFER TO SELL PENGE CORP.
OR BUY ANY SECURITIES IN ANY
JURISDICTION WHERE 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 Prospectus
CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF. ---------------
UNTIL [______________] ALL DEALERS
THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE DEALER'S
OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH January 14, 2005
RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================= =====================================
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;
II-1
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.
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 $205
Accounting and legal fees and expenses $75,000
Printing expenses $5,000
Miscellaneous expenses $10,000
----------
TOTAL: $90,205
==========
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:
II-2
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. 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/or 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 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; (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; and (g) the Company was
not at the time of the offering subject to the reporting requirements of the
Securities Exchange Act, an investment company, or a development stage company
with no specific business plan or a business plan involving engaging in
a merger or acquisition with an unidentified company.
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. Of those
2,295,000 shares, 1,570,000 shares were sold for cash totaling $157,000; 150,000
shares were sold for services valued at $15,000; 450,000 shares were sold for a
subscription receivable of $45,000, which was subsequently paid in full; and
125,000 shares were sold for available-for-sale securities valued at $12,500.
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;
(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; and (g) the Company was not at the
time of the offering subject to the reporting requirements of the Securities
Exchange Act, an investment company, or a development stage company with no
specific business plan or a business plan involving engaging in a merger or
acquisition with an unidentified company.
II-3
Between January 2003 and June 2003, we offered and sold 720,000 shares of
our common stock at $0.20 per share to 10 investors. Of those 720,000 shares,
500,000 shares were sold for cash totaling $100,000; 20,000 shares were sold for
services valued at $4,000 and 200,000 shares were sold to pay rent of $40,000.
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 of $150,000 on a note payable received in connection with our
purchase of the Major Trees Farm and certain assets of M7 Farms on September 27,
2002 and Thomas L. Chandler, accepted 50,000 shares of our common stock valued
at $10,000 as repayment of a short-term loan. 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.
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. Of those 680,000 shares,
260,000 shares were sold for cash totaling $65,000 and 420,000 shares were sold
for a subscription receivable of $105,000, which was subsequently paid in full.
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)
II-4
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 August 2003 and September 2004, we offered and sold 717,332 shares
of our common stock at $0.30 per share to 13 investors. Of these shares, 550,665
were sold for cash totaling $165,200 and 166,667 shares were sold for a
subscription receivable of $50,000, which is still outstanding. 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 Farms, L.L.C. 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"
II-5
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.
CONVERTIBLE NOTES PAYABLE
In March 2004, we issued a convertible note payable secured by both of our
farms totaling $300,000 to two investors. This note bears 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 note
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.
II-6
In July 2004, we issued a convertible note payable for $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
note 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 note 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 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.
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
II-7
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.
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.
II-8
INCORPORATED BY
EXHIBIT REFERENCE/FILED
NO. EXHIBIT HEREWITH
------- ------------------------------------------ -------------------------
2.1 Asset Purchase Agreement by and Among Incorporated by reference
Penge Corp., Kirk Fischer and H. Preston to the Company's
and Shirley M. Franks along with Sampres Registration Statement on
Tree Farm L.L.C. dated as of May 20, 2004 Form SB-2 dated October
and exhibits 25, 2004, File No.
333-119947.
2.2 Purchase Agreement, Receipts and Escrow Incorporated by reference
Instructions dated August 14, 2002 and to the Company's
exhibits (re Penge and Major Trees) Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
4.1 Articles of Incorporation, as amended to Incorporated by reference
date to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
4.2 Bylaws, as amended to date Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
4.3 Form of Common Stock Certificate Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
5 Opinion of Stoel Rives LLP To be filed by amendment
10.1 2002 Stock Incentive Plan Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
II-9
10.2 Form of Incentive Stock Option Agreement Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.3 Form of Non Statutory Option Agreement Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.4 Form of Executive Employment Agreement Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.5 Consulting Agreement between Roger Major Incorporated by reference
and Penge Corp. dated March 5, 2003 to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.6 Form of Convertible Note Purchase Incorporated by reference
Agreement to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.7 Form of Convertible Promissory Note Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.8 $50,000 Promissory Note between Major Incorporated by reference
Trees Corp. and Stanford Goulding as to the Company's
Trustee for Survivors Trust dated August Registration Statement on
16, 2004 Form SB-2 dated October
25, 2004, File No.
333-119947.
II-10
10.9 $50,000 Promissory Note between Major Incorporated by reference
Trees Corp. and Stanford Goulding as to the Company's
Trustee for Marital Trust dated August Registration Statement on
16, 2004 Form SB-2 dated October
25, 2004, File No.
333-119947.
10.10 $400,000 Real Estate Lien Note and Deed Incorporated by reference
of Trust between Penge Corp., Kirk to the Company's
Fischer and Sampres Tree Farm, L.L.C. and Registration Statement on
H. Preston Franks and Shirley M. Franks Form SB-2 dated October
dated May 26, 2004 25, 2004, File No.
333-119947.
10.11 $300,000 Convertible Promissory Note Incorporated by reference
dated March 31, 2004 between Penge Corp. to the Company's
and Monitor Finance LC and First Capital Registration Statement on
Funding LC Form SB-2 dated October
25, 2004, File No.
333-119947.
10.12 $226,469 Note and Trust Deed between Incorporated by reference
Penge Corp., Kirk Fischer and Monitor to the Company's
Finance, L.C. dated August 22, 2003 and Registration Statement on
Modification and Extension of Trust Deed Form SB-2 dated October
Note dated March 1, 2004 25, 2004, File No.
333-119947.
10.13 $200,000 Promissory Note between Penge Incorporated by reference
Corporation and Steven Sutherland dated to the Company's
September 27, 2002 Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.14 $600,000 Promissory Note between Penge Incorporated by reference
Corporation and Roger Major and Barbara to the Company's
Major dated September 27, 2002 Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.15 Engagement Agreement between Penge Corp Filed herewith
and KC Holmes dated September 1, 2004
10.16 Convertible Note Purchase Agreement among Filed herewith
Penge Corp., First Capital Funding LC and
Monitor Finance LC dated March 31, 2004
10.17 Form of Promissory Note between Penge Filed herewith
Corp. and Related Parties
II-11
10.18 Deed of Trust dated April 5, 2004 between Filed herewith
Penge Corporation and Monitor Finance,
L.C. and First Capital Funding, L.C.
10.19 Deed of Trust dated July 25, 2004 between Filed herewith
Penge Corp. and Kirk J. Fischer and
Monitor Finance, L.C. and First Capital
Funding, L.C.
21.1 Subsidiary List Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
23.1 Consent of Independent Registered Public Filed herewith
Accounting Firm
23.2 Consent of Stoel Rives LLP Included in Item 5
24.1 Power of Attorney Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
II-12
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.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-13
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 January 14, 2005.
PENGE CORP.
By: /s/ Kirk Fischer
-------------------------------------
Kirk Fischer, Chief Executive Officer
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 January 14, 2005
----------------------- Financial Officer, Chairman of
Kirk Fischer the Board (Principal Executive
Officer and Principal Financial
Officer)
* Director January 14, 2005
-----------------------
Jim Fischer
* Controller and Director January 14, 2005
-----------------------
Lori Fischer
* By: /s/ Kirk Fischer
--------------------------
Kirk Fischer
Attorney-in-Fact
II-14
INCORPORATED BY
EXHIBIT REFERENCE/FILED
NO. EXHIBIT HEREWITH
------- ------------------------------------------ -------------------------
2.1 Asset Purchase Agreement by and Among Incorporated by reference
Penge Corp., Kirk Fischer and H. Preston to the Company's
and Shirley M. Franks along with Sampres Registration Statement on
Tree Farm L.L.C. dated as of May 20, 2004 Form SB-2 dated October
and exhibits 25, 2004, File No.
333-119947.
2.2 Purchase Agreement, Receipts and Escrow Incorporated by reference
Instructions dated August 14, 2002 and to the Company's
exhibits (re Penge and Major Trees) Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
4.1 Articles of Incorporation, as amended to Incorporated by reference
date to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
4.2 Bylaws, as amended to date Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
4.3 Form of Common Stock Certificate Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
5 Opinion of Stoel Rives LLP To be filed by amendment
10.1 2002 Stock Incentive Plan Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
II-15
10.2 Form of Incentive Stock Option Agreement Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.3 Form of Non Statutory Option Agreement Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.4 Form of Executive Employment Agreement Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.5 Consulting Agreement between Roger Major Incorporated by reference
and Penge Corp. dated March 5, 2003 to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.6 Form of Convertible Note Purchase Incorporated by reference
Agreement to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.7 Form of Convertible Promissory Note Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.8 $50,000 Promissory Note between Major Incorporated by reference
Trees Corp. and Stanford Goulding as to the Company's
Trustee for Survivors Trust dated August Registration Statement on
16, 2004 Form SB-2 dated October
25, 2004, File No.
333-119947.
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10.9 $50,000 Promissory Note between Major Incorporated by reference
Trees Corp. and Stanford Goulding as to the Company's
Trustee for Marital Trust dated August Registration Statement on
16, 2004 Form SB-2 dated October
25, 2004, File No.
333-119947.
10.10 $400,000 Real Estate Lien Note and Deed Incorporated by reference
of Trust between Penge Corp., Kirk to the Company's
Fischer and Sampres Tree Farm, L.L.C. and Registration Statement on
H. Preston Franks and Shirley M. Franks Form SB-2 dated October
dated May 26, 2004 25, 2004, File No.
333-119947.
10.11 $300,000 Convertible Promissory Note Incorporated by reference
dated March 31, 2004 between Penge Corp. to the Company's
and Monitor Finance LC and First Capital Registration Statement on
Funding LC Form SB-2 dated October
25, 2004, File No.
333-119947.
10.12 $226,469 Note and Trust Deed between Incorporated by reference
Penge Corp., Kirk Fischer and Monitor to the Company's
Finance, L.C. dated August 22, 2003 and Registration Statement on
Modification and Extension of Trust Deed Form SB-2 dated October
Note dated March 1, 2004 25, 2004, File No.
333-119947.
10.13 $200,000 Promissory Note between Penge Incorporated by reference
Corporation and Steven Sutherland dated to the Company's
September 27, 2002 Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.14 $600,000 Promissory Note between Penge Incorporated by reference
Corporation and Roger Major and Barbara to the Company's
Major dated September 27, 2002 Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
10.15 Engagement Agreement between Penge Corp Filed herewith
and KC Holmes dated September 1, 2004
10.16 Convertible Note Purchase Agreement among Filed herewith
Penge Corp., First Capital Funding LC and
Monitor Finance LC dated March 31, 2004
10.17 Form of Promissory Note between Penge Filed herewith
Corp. and Related Parties
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10.18 Deed of Trust dated April 5, 2004 between Filed herewith
Penge Corporation and Monitor Finance,
L.C. and First Capital Funding, L.C.
10.19 Deed of Trust dated July 25, 2004 between Filed herewith
Penge Corp. and Kirk J. Fischer and
Monitor Finance, L.C. and First Capital
Funding, L.C.
21.1 Subsidiary List Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
23.1 Consent of Independent Registered Public Filed herewith
Accounting Firm
23.2 Consent of Stoel Rives LLP Included in Item 5
24.1 Power of Attorney Incorporated by reference
to the Company's
Registration Statement on
Form SB-2 dated October
25, 2004, File No.
333-119947.
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