AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON July 7, 2000
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PEPPERMILL CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 1081 98-0186841
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
ORGANIZATION) CODE NUMBER)
PEPPERMILL CAPITAL CORPORATION
1819 CLARKSON, SUITE 204
CHESTERFIELD, MISSOURI 63017
(636) 530-4532
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CLAYTON VARNER
1819 CLARKSON ROAD, SUITE 204
CHESTERFIELD, MISSOURI 63017
(636) 530-4532
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
John M. Klimek, Esq.
Scott P. Slykas, Esq.
Merrick & Klimek, P.C.
401 South LaSalle, Suite 1302
Chicago, Illinois 60605
(312) 294-6044
(312) 294-6045 (Facsimile)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the merger described herein (the "Merger").
----------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
----------
If this form is filed to registered additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number 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. ______________
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------------------
Proposed Proposed
Title of Each Class Maximum Maximum
Of Securities to Which Amount to be Offering Price Aggregate Amount of
Transaction Applies Registered Per Share(5) Offering Price Registration Fee(6)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Peppermill Capital Corporation Common
Stock, par value $.001 per share 73,544,358(1) $0 $0 $0
------------------------------------------------------------------------------------------------------------------------------------
Peppermill Capital Corporation Preferred
Stock, par value $.001 per share 10,000,000(2) $0 $0 $0
------------------------------------------------------------------------------------------------------------------------------------
Peppermill Capital Corporation Common
Stock, par value $.001 per share 4,494,800(3) $0 $0 $0
------------------------------------------------------------------------------------------------------------------------------------
Peppermill Capital Corporation Common
Stock, par value $.001 per share 10,000,000(4) $0 $0 $0
------------------------------------------------------------------------------------------------------------------------------------
TOTAL $
-----------------------
</TABLE>
(1) The maximum number of shares of common stock, par value $.001 per share, of
Peppermill Capital Corporation ("Peppermill") that may be issued and
distributed to shareholders of Varner Technologies, Inc., a Missouri
corporation ("Varner"), pursuant to the Agreement and Plan of Merger to
which this Proxy Statement-Prospectus relates, based on (a) 14,827,828
shares of Varner voting common stock, par value $.01 per share, currently
outstanding and 9,686,958 shares of Varner non-voting common stock, par
value $.01 per share, currently outstanding; and (b) multiplied by the
conversion ratio of three (3) shares of Peppermill common stock for each
share of Varner voting common stock and non-voting common stock, and
assuming the exchange of all shares of Varner common stock.
(2) The maximum number of shares of preferred stock, par value $.001 per share,
of Peppermill that may be issued and distributed to shareholders of Varner
pursuant to the Agreement and Plan of Merger to which this Proxy
Statement-Prospectus relates, based on (a) up to 2,000,000 shares of Varner
preferred stock, par value $.01 per share, currently authorized; and (b)
multiplied by a conversion ratio of five (5) shares of Peppermill preferred
stock for each share of Varner preferred stock, and assuming the exchange
of all shares of Varner preferred stock.
(3) The maximum number of shares of common stock of Peppermill to be issued to
current holders of Peppermill common stock as a stock dividend as part of
the merger.
(4) The maximum number of shares of common stock of Peppermill to be issued
upon conversion of the Peppermill preferred stock.
(5) Estimated solely for the purpose of computing the registration fee, based
upon the book value of Varner's capital stock of ($.018) per share on March
31, 2000, in accordance with Rule 457(f)(2) under the Securities Act of
1933, as amended (the "Act").
(6) Calculated pursuant to Rule 457(f) under the Securities Act.
Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing. |_|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
ii
<PAGE>
(Peppermill Shareholder Letter)
PEPPERMILL CAPITAL CORPORATION
1819 Clarkson Road, Suite 205
Chesterfield, Missouri 63017
(636) 530-4532
TO THE SHAREHOLDERS OF PEPPERMILL CAPITAL CORPORATION
A MERGER PROPOSAL
Dear Shareholders:
As you may have learned from press reports, Varner Technologies, Inc.
("Varner") has purchased 10,116,000 shares or approximately 90% of the
outstanding shares of common stock of Peppermill Capital Corporation
("Peppermill"). Immediately after the stock purchase, Mr. Clayton Varner,
President of Varner, was appointed as President and director of Peppermill. The
companies have also signed an agreement providing for the merger of Varner into
Peppermill. Immediately after the merger, the surviving entity will be renamed
Varner Technologies, Inc.
As a consequence of the merger (i) each holder of one share of common stock
or one share of non-voting common stock of Varner will receive three (3) shares
of Peppermill common stock; (ii) each holder of one share of preferred stock of
Varner will receive five (5) shares of a newly created class of Peppermill
preferred stock; and (iii) each current holder of one share of Peppermill common
stock will receive a dividend of four (4) additional shares of Peppermill common
stock. After the merger, Varner common shareholders will own approximately 93%
of the common stock of Peppermill and former shareholders of Peppermill will
then own approximately 7% of Peppermill common stock. The holders of Varner
preferred stock will own 100% of Peppermill preferred stock after the merger.
The board of directors of Peppermill has approved the merger. Final
approval of the merger will require the vote of the holders of a majority of
Peppermill's common stock. Varner owns approximately 90% of Peppermill common
stock and so it is expected that the merger will be approved by Peppermill
shareholders. BUT YOUR VOTE IS IMPORTANT AND YOU ARE ASKED TO CONSIDER AND
PROVIDE WRITTEN CONSENT TO THE MERGER. The merger has been approved by the Board
of Directors of Varner and under Missouri law and Varner's corporate documents
no vote is required of Varner shareholders.
Peppermill common stock is listed on the OTC Bulletin Board under the
trading symbol "PEPM". Peppermill common stock commenced trading on November 25,
1999, shortly after the announcement of the purchase by Varner of Peppermill's
capital stock and the signing of the letter of intent regarding the merger. On
June 30, 2000, Peppermill common stock closed at $1.625.
The accompanying Proxy Statement-Prospectus contains detailed information
concerning Peppermill, Varner, the Stock Purchase Agreement and the merger. I
urge you to read carefully the Proxy Statement-Prospectus, in particular the
discussion in the section entitled "RISK FACTORS" which begins on page ___ and
in the section entitled "Dissenters Rights" which begins on page ____. AFTER
CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF PEPPERMILL DETERMINED THE
MERGER TO BE FAIR TO PEPPERMILL SHAREHOLDERS AND IN THEIR BEST INTERESTS. THE
PEPPERMILL BOARD OF DIRECTORS RECOMMENDS THAT PEPPERMILL SHAREHOLDERS PROVIDE
THEIR WRITTEN CONSENT TO THE MERGER.
iii
<PAGE>
Please use this opportunity to make your preferences known. Please
complete, sign, date and return the accompanying written consent in the enclosed
self-addressed stamped envelope.
Very truly yours,
Clayton Varner, President and
Chairman of Peppermill Capital
Corporation
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 PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement-Prospectus is dated _________________, 2000 and was
first mailed to shareholders on or about ______________, 2000.
iv
<PAGE>
(Varner Shareholder Letter)
VARNER TECHNOLOGIES, INC.
1819 Clarkson Road, Suite 205
Chesterfield, Missouri 63017
(636) 530-4532
TO THE SHAREHOLDERS OF VARNER TECHNOLOGIES, INC.
A MERGER PROPOSAL
Dear Shareholders:
As you may have learned from press reports, Varner Technologies, Inc.
("Varner") has purchased 10,116,000 shares or approximately 90% of the
outstanding shares of common stock of Peppermill Capital Corporation
("Peppermill"). Immediately after the stock purchase, Clayton Varner, President
of Varner, was appointed as President and sole director of Peppermill. The
companies have also signed an agreement providing for the merger of Varner into
Peppermill. Immediately after the merger, the surviving entity will be renamed
Varner Technologies, Inc.
As a consequence of the merger: (i) each holder of one share of common
stock or one share of non-voting common stock of Varner will receive three (3)
shares of Peppermill common stock; (ii) each holder of one share of preferred
stock of Varner will receive five (5) shares of a newly created class of
Peppermill preferred stock which will contain rights and restrictions
substantially equal to the shares of Varner preferred stock; and (iii) each
current holder of one share of Peppermill common stock will receive a dividend
of four (4) additional shares of Peppermill common stock. After the merger,
Varner common shareholders will own approximately 93% of the common stock of
Peppermill and former shareholders of Peppermill will then own approximately 7%
of Peppermill common stock. The holders of Varner preferred stock will own 100%
of Peppermill preferred stock after the merger.
For a period of thirty (30) days after the merger is effective, holders of
Peppermill preferred stock will be able to convert those shares into shares of
common stock of Peppermill on a one for one basis. After such period, shares of
Peppermill Preferred Stock will not be able to convert to shares of Peppermill
common stock and will not be able to be sold for a period of one year. By
converting to common stock, holders of preferred stock will receive shares that
are listed on the NASDAQ OTC/Bulletin Board, but will lose the preferences
granted to the preferred stock, including certain preemptive rights to
participate in a future public offering of Peppermill's common stock. See
"Comparison of Rights of Holders of Varner Capital Stock and Peppermill Capital
Stock."
The Board of Directors of Peppermill have approved the merger. Final
approval of the merger will require the vote of the holders of a majority of
Peppermill's common stock. Varner owns approximately 90% of Peppermill common
stock and so it is expected that the merger will be approved by Peppermill
shareholders. The merger has been approved by the Board of Directors of Varner.
Under Missouri law and Varner's corporate documents no vote is required of
Varner shareholders. This Prospectus is being distributed to you as a Varner
shareholder to provide full disclosure of the transaction and your rights as a
Peppermill shareholder should the merger be completed.
Peppermill common stock is listed on the OTC Bulletin Board under the
trading symbol "PEPM". Peppermill common stock commenced trading on November 25,
1999, shortly after the announcement of the purchase by Varner of Peppermill's
capital stock and the signing of the letter of intent regarding the merger. On
June 30, 2000, Peppermill common stock closed at $1.625.
v
<PAGE>
The accompanying Prospectus contains detailed information concerning
Peppermill, Varner, the Stock Purchase Agreement and the merger. I urge you to
read carefully the Prospectus, in particular the discussion in the section
entitled "RISK FACTORS" which begins on page ___. AFTER CAREFUL CONSIDERATION,
THE BOARD OF DIRECTORS OF VARNER DETERMINED THE MERGER TO BE FAIR TO VARNER
SHAREHOLDERS AND IN THEIR BEST INTERESTS.
Very truly yours,
Clayton Varner, President and
Chairman of Varner Technologies, Inc.
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.
This Prospectus is dated _________, 2000 and was first mailed to
shareholders on or about ________, 2000.
vi
<PAGE>
(TO BE SENT TO PEPPERMILL SHAREHOLDERS ONLY)
Peppermill Capital Corporation
1819 Clarkson Road
Suite 205
Chesterfield, Missouri 63017
NOTICE
To the Shareholders of Peppermill Capital Corporation:
You are hereby being solicited, to provide your written consent, to the
following matters:
1. The authorization of a merger of Varner Technologies, Inc. into
Peppermill in accordance with the terms and conditions contained in the
Agreement and Plan of Merger dated as of June 2, 2000.
2. An amendment to the Articles of Incorporation of Peppermill to
increase the authorized number of shares of common stock and to authorize
two classes of preferred stock.
3. An amendment to the Articles of Incorporation to change the name of
the company to Varner Technologies, Inc.
Written consent is being solicited in lieu of holding a special meeting of
shareholders. Only owners of voting common stock as shown on Peppermill's
records at the close of business on _______, 2000, will be entitled to notice of
and to provide their consent. The proposed action requires the written consent
of a majority of the outstanding shares of the Company's common stock. It is,
therefore, important that you sign, date and return the enclosed consent card in
the envelope provided as soon as possible. Prompt notice of the taking of the
action will be given in writing to those shareholders who have not consented,
once the Company has obtained the necessary number of consents.
By Order of the Board of Directors
--------------------------------------
Clayton Varner, Chairman and President
YOUR VOTE IS IMPORTANT
It is important that as many shares as possible
consent to the proposed action. Please date, sign,
and promptly return the consent card in the
enclosed envelope.
vii
<PAGE>
(PEPPERMILL DOCUMENT ONLY)
SOLICITATION OF WRITTEN CONSENT OF PEPPERMILL SHAREHOLDERS
PROXY STATEMENT-PROSPECTUS
This Proxy Statement-Prospectus is being furnished to Peppermill
shareholders in connection with the solicitation of written consent by the
Peppermill board of directors in connection with the proposed merger.
This Proxy Statement-Prospectus is first being furnished to shareholders of
Peppermill on or about ________, 2000.
PURPOSE OF THE WRITTEN CONSENTS
Written consents of the shareholders of Peppermill are being solicited for
the following matters:
a proposal to adopt the Agreement and Plan of Merger, dated as of June
2, 2000, by and among Peppermill and Varner;
an amendment to the Company's Articles of Incorporation to increase
the authorized number of shares of common stock and to authorize two
classes of preferred stock; and
an amendment to the Company's Articles of Incorporation to change the
name of the Company to Varner Technologies, Inc.
Adoption of the merger agreement will also constitute approval of the merger and
other transactions contemplated by the merger.
If the shareholders of Peppermill adopt the merger agreement, Varner will
merge with and into Peppermill and Peppermill (renamed as Varner Technologies,
Inc.) will survive the merger. As a Peppermill shareholder, you will maintain
your current shares in Peppermill and receive an additional four (4) shares of
Peppermill common stock for each share of Peppermill common stock you currently
own. Each holder of one share of Varner voting common stock or non-voting common
stock will receive three (3) shares of Peppermill common stock. Each holder of a
share of Varner preferred stock will receive five (5) shares of newly created
Peppermill preferred stock. Prior to the merger there are 11,239,700 shares of
Peppermill common stock outstanding. After the merger there will be
approximately 79,162,858 shares of common stock and 10,000,000 shares of
preferred stock. Initially, there will be no warrants and options to purchase
shares of Peppermill common stock. The holders of Varner preferred stock will
own 100% of Peppermill preferred stock after the merger.
viii
<PAGE>
SHAREHOLDER RECORD DATE FOR THE WRITTEN CONSENT
Peppermill's board of directors has fixed the close of business on _______,
2000, as the record date for determination of Peppermill shareholders entitled
to notice of and entitled to provide their written consent. On the record date,
there were 11,239,700 shares of Peppermill common stock outstanding held by
approximately __ holders of record.
VOTE OF PEPPERMILL SHAREHOLDERS REQUIRED FOR ADOPTION OF THE MERGER AGREEMENT
The written consent of the holders of at least a majority of Peppermill's
common stock outstanding and entitled to vote is required to adopt the merger
agreement and to amend the Company's Articles of Incorporation to authorize a
change in Peppermill's authorized capital and to change the Company's name. You
are entitled to one vote for each share of Peppermill common stock held by you
on the record date on each proposal.
As a result of the stock purchase agreement, Varner owns approximately 90%
of the common stock of Peppermill, and it is, therefore, assumed that the merger
and other matters will be authorized.
WRITTEN CONSENTS
All written consents will be voted in accordance with the instructions
indicated thereon. If no instructions are indicated on a properly executed
written consent, the shares will be voted FOR adoption of the merger agreement
and FOR an amendment to the Articles of Incorporation to authorize an increase
in the number of shares of common stock, to authorize two classes of preferred
stock, and to change the Company's name. You are urged to mark the box on the
written consent to indicate how to vote your shares.
Abstentions and failures to vote will have the same effect as a vote
against the merger and the amendments to the Articles of Incorporation.
Peppermill will assume the expenses incurred in connection with the printing and
mailing of this Proxy Statement-Prospectus.
ix
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF THE PROXY STATEMENT-PROSPECTUS..........................................
THE COMPANIES
SUMMARY OF THE MERGER..............................................................
Structure of the Transaction..................................................
Why Did Varner Purchase Peppermill Common Stock and Why
Are Peppermill and Varner Proposing to Merger?............................
What Will I Receive in the Merger?............................................
Peppermill Shareholder Approval...............................................
Recommendation of Peppermill's Board of Directors.............................
Procedure for Casting Your Vote...............................................
You Do Not Have to Exchange Your Stock Certificates...........................
(Peppermill and Varner)
You Have Dissenter's Rights (Peppermill)......................................
Completion and Effectiveness of the Merger....................................
Conditions to Completion of the Merger........................................
Termination of the Merger Agreement...........................................
Interests of Certain Persons in the Merger....................................
U.S. Federal Income Tax Consequence of the Merger.............................
Restrictions on the Ability to Sell Peppermill Stock..........................
Forward Looking Statements in this Proxy Statement-Prospectus.................
UNAUDITED COMPARATIVE PER SHARE INFORMATION........................................
COMPARATIVE MARKET PRICE INFORMATION...............................................
RISK FACTORS ......................................................................
Risk Factors Relating to the Merger Between Peppermill and Varner.............
Varner Shareholders will Receive Three (3) Shares of Peppermill
Common Stock for Each Share of Varner Common Stock
or Varner Non-Voting Common Stock Despite Changes
in Market Value......................................................
Although Varner Expects that the Merger will Result in Benefits,
Those Benefits May Not be Realized...................................
Risk Factors Relating to Peppermill's Business................................
Peppermill has had Limited Operations Since its Formation in 1998.........
Risk Factors Relating to Varner's Business....................................
Varner has a History of Losses and Expects Continued Losses...............
Varner has a Limited Operating History....................................
Varner's Strategy of Expansion Through Acquisitions May
Not be Effective.....................................................
Varner's Quarterly Financial Results are Subject to Significant
Fluctuations.........................................................
Varner's Liquidity and Capital Resources are Limited and We will
Need to Raise More Money in the Future to Develop and
Expand Our Existing Business.........................................
Varner Faces Heavy Competition in the Internet and Telecommunications
Industry for All of the Services Varner Currently Provides and
Those Varner Intends to Provide in the Future........................
</TABLE>
x
<PAGE>
<TABLE>
<S> <C>
Varner is Dependent on Relationships with Facilities-Based Providers
of Telecommunications Services and Thus We Run the Risk
of Adverse Future Changes in the Terms on Which We Obtain
Their Services for Resale............................................
Varner's Internet Service Business is Dependent Upon Its Internal
and Leased Network...................................................
We are dependent on Telecommunications Carriers and Other Suppliers.......
Customers May Not Accept Our Planned Services.............................
We Depend on the Services of a Small Number of Key Management
People...............................................................
Varner's Business is Subject to Government Regulation.....................
Because of the Fast Pace of Technological Change in the Internet
Industry, there is a Risk that We will Fall Behind in Keeping Up
With Change, Which Could Harm Our Ability to Compete.................
Varner's Business Depends on Continued Growth of the Internet
As a Medium of Communication and Commerce............................
Any Decline in Varner's Member Retention Levels for Its Internet
Services May Adversely Affect Us.....................................
If We are Unable to Recruit Independent Sales Representatives, We
May Not be Able to Continue Our Network Marketing Program
To Recruit Subscribers...............................................
Government Regulations May Require Us to Change Our Network
Marketing Program of Independent Sales Representatives...............
Risk Factors Relating to the Peppermill Stock.................................
Peppermill Stock May Be Difficult to Resell...............................
You May Not be Able to Resell Shares of Our Stock at or for More
Than the Price You Paid..............................................
If Our Shareholders Sell Substantial Amounts of Our Stock in the
Public Market, the Market Price of Our Stock Could Fall..............
Sales of Peppermill's Securities May Be Subject to the Penny Stock
Rules................................................................
Principal Shareholders, Executive Officers and Directors will
Retain Substantial Influence Following this Offering.................
Forward-Looking Statements Contained in this Document May Not
Be Accurate..........................................................
THE MERGER
Background of the Merger......................................................
Peppermill's Reasons for the Merger...........................................
Recommendation of Peppermill's Board of Directors.............................
Varner's Reasons for the Merger...............................................
Completion and Effectiveness of the Merger....................................
Structure of the Merger and Conversion of Varner Capital Stock................
Exchange of Peppermill Stock Certificates (Peppermill Document Only)..........
As a Peppermill Shareholder there is No Need to Exchange Your
Stock Certificates for New Certificates, Even After the Merger
and Change in the Company's Name.....................................
You Do Not have to Exchange Varner Stock Certificates for
Peppermill Stock Certificates (Varner Document Only).................
Material United States Federal Income Tax Consequences
of the Merger........................................................
</TABLE>
xi
<PAGE>
<TABLE>
<S> <C>
Tax Implications to Peppermill Shareholders (Peppermill Document Only)....
Tax Implications to Varner Shareholders (Varner Document Only)............
Tax Implications to Peppermill and Varner.................................
Regulatory Filings and Approvals Required to Complete the Merger..........
Restrictions on Sales of Shares by Affiliates of Peppermill and Varner....
Conditions to Completion of the Merger....................................
Termination of the Merger Agreement.......................................
Extension, Waiver and Amendment of the Merger Agreement...................
Operations After the Merger...............................................
DISSENTER'S AND APPRAISAL RIGHTS (Peppermill Document Only)........................
BUSINESS OF PEPPERMILL.............................................................
Historical Overview of Peppermill.............................................
Other Mineral Properties......................................................
Employees.....................................................................
Peppermill's Discussion and Analysis or Plan of Operation.....................
General...................................................................
Plan of Operation.........................................................
Liquidity and Capital Resources...........................................
Accounting and Audit......................................................
Amortization of Mining Rights.............................................
Assessment Work...........................................................
Bank Charges..............................................................
Consulting Fees...........................................................
Incorporation Costs Written Off...........................................
Legal.....................................................................
Office and Miscellaneous..................................................
Report Preparation........................................................
Transfer Agent's Fees.....................................................
Travel....................................................................
Security Ownership in Peppermill of Certain Beneficial Ownership
and Management............................................................
Description of Securities.....................................................
Common Stock..............................................................
Preferred Stock...........................................................
Options Outstanding.......................................................
Market Information............................................................
Holders ......................................................................
Dividends.....................................................................
Legal Proceedings.............................................................
Disagreement with Accountants and Financial Disclosure........................
VARNER'S BUSINESS..................................................................
Overview
Company Background and Business...............................................
Products and Services.........................................................
Market and Competition........................................................
Internet Use and Technology Trends........................................
Internet Service Provider Market..........................................
Telecommunications Market.................................................
</TABLE>
xii
<PAGE>
<TABLE>
<S> <C>
Competition...................................................................
Internet Service Industry.................................................
Network Marketing.........................................................
Marketing Plan................................................................
Strategic Mergers and Acquisitions............................................
Marketing.....................................................................
Network Marketing.............................................................
Management of Independent Representatives.....................................
Training and Marketing Support................................................
Employees.....................................................................
Market Information............................................................
Holders ......................................................................
Dividends.....................................................................
Legal Proceedings.............................................................
VARNER MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................
Overview .....................................................................
Revenues .....................................................................
Significant Costs and Expenses................................................
Results of Operations
Revenues..................................................................
Cost of Sales.............................................................
Expenses..................................................................
Commissions...............................................................
Salaries and Compensation.................................................
Other Operating Expenses..................................................
Other Income and Expense..................................................
Net Loss..................................................................
Liquidity and Capital Resources...............................................
Material Commitments
VARNER'S MANAGEMENT................................................................
Management and the Interrelationship of Peppermill's Management...............
Stock Ownership by Management and Others......................................
Executive Compensation........................................................
Employment Agreements.........................................................
Compensation of Directors.....................................................
Section 16(a) Beneficial Ownership Reporting Compliance.......................
Board of Directors Affiliations and Related Transactions......................
COMPARISON OF RIGHTS OF HOLDERS OF VARNER CAPITAL
STOCK AND PEPPERMILL CAPITAL STOCK............................................
Classes of Common Stock of Varner and Peppermill..............................
Stock Options and Warrants....................................................
Dividends.....................................................................
Voting Rights.................................................................
Classified Board of Directors.................................................
Number of Directors, Quorum...................................................
Removal of Directors..........................................................
Filling Vacancies of the Board of Directors...................................
Interested Directors..........................................................
Limits on Shareholder Action by Written Consent...............................
</TABLE>
xiii
<PAGE>
<TABLE>
<S> <C>
Ability to Call Special Meeting...............................................
Notice of Shareholder Meeting Given by the Corporation........................
Amendment of Articles of Incorporation........................................
Amendment of By-Laws..........................................................
Shareholder Right to Inspect Books and Records................................
Derivative Actions............................................................
Indemnification of Directors and Officers.....................................
Shareholder Liability.........................................................
Business Combinations.........................................................
Shareholder Rights Plan.......................................................
Exchange of Assets, Mergers and Consolidations................................
Short Form Merger.............................................................
Dissenter's Rights............................................................
Preferred Stock...............................................................
Peppermill Series A Preferred Stock
LEGAL OPINION
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION................................................
STATEMENT REGARDING FORWARD LOOKING INFORMATION....................................
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES................................................
</TABLE>
xiv
<PAGE>
VARNER TECHOLOGIES, INC.
PEPPERMILL CAPITAL CORPORATION
PROPOSED MERGER
SUMMARY OF THE PROXY
STATEMENT-PROSPECTUS
This summary may not contain all of the information that is important to
you. You should carefully read this entire document and the other documents we
refer to for a more complete understanding of the merger. In particular, you
should read the documents attached to this Proxy Statement-Prospectus, including
the Merger Agreement, which is attached as Annex A.
THE COMPANIES
Peppermill Capital Corporation
1819 Clarkson, Suite 204
Chesterfield, Missouri 63017
Peppermill Capital Corporation, a Nevada corporation, was incorporated on
April 9, 1998. Peppermill has generated no revenues to date.
Peppermill has registered its common stock on a Form 10-SB and has obtained
approval to list its common stock for trading on the OTC Bulletin Board.
Peppermill common stock commenced trading on November 25, 1999, and trades under
the symbol "PEPM".
Varner Technologies, Inc.
1819 Clarkson Road
Suite 205
Chesterfield, Missouri 63017
http://www.varner.com
Varner Technologies, Inc., a Missouri corporation, incorporated on November
17, 1994, markets and sells Internet services, e-commerce, long distance
telephone services, wireless telephone services and products, prepaid telephone
cards and other telecommunications products and services.
SUMMARY OF THE MERGER
STRUCTURE OF THE TRANSACTION (SEE PAGE __).
Varner has purchased 10,116,000 shares, approximately 90% of the
outstanding common stock of Peppermill from certain shareholders of Peppermill.
Immediately upon the completion of the stock purchase, Varner and Peppermill
entered into a letter of intent relating to the merger of the two companies. The
companies then negotiated an Agreement and Plan of Merger whereby holders of
Varner voting common stock and non-voting common stock will receive Peppermill
common stock and holders of Varner preferred stock will receive Peppermill
preferred stock.
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WHY DID VARNER PURCHASE PEPPERMILL COMMON STOCK AND WHY ARE PEPPERMILL AND
VARNER PROPOSING TO MERGE? (SEE PAGE __-)
The Varner board considered a variety of factors in making its decision to
purchase 90% of the common stock of Peppermill and to approve the merger
agreement. The Varner board determined that it was important for Varner to be a
publicly traded company for the following reasons:
o To allow Varner access to funding sources often available only to
public companies.
o To allow Varner the ability to structure acquisitions or merge with
other companies using its publicly traded securities as consideration.
o To provide liquidity to Varner shareholders.
The Varner board considered several different methods for becoming a public
company and determined that a merger with Peppermill was the preferred method as
it was the fastest. Due to the competition in the markets in which Varner
competes, Varner's ability to accomplish its goals of acquiring or merging with
other companies in the industry as soon as possible was a critical concern.
The Peppermill Board has determined that the Peppermill shareholders will
have a better chance of realizing potential appreciation in their shareholdings
by being owners of an operating company.
WHAT WILL I RECEIVE IN THE MERGER?
If you are a Peppermill shareholder. If the merger is completed, as a
Peppermill shareholder, you will retain your shares in Peppermill, which will be
the surviving company and will receive a dividend of four (4) additional shares
of Peppermill common stock for every one share you currently own.
If you are a Varner shareholder. If the merger is completed, as a Varner
shareholder, you will receive three (3) shares of Peppermill common stock for
each share of Varner voting common stock and/or Varner non-voting common stock
you own. This Prospectus is being distributed to you as a Varner shareholder to
provide you with full disclosure of the transaction and your rights as a
Peppermill shareholder should the merger be completed. If you are a holder of
Varner preferred stock, and the merger is completed, you will receive five (5)
shares of Peppermill preferred stock for each share of Varner preferred stock
you own. The rights and preferences of holders of the Peppermill preferred stock
will be substantially equal to the rights and preferences of holders of the
Varner preferred stock.
For a period of thirty (30) days after the merger is effective, holders of
Peppermill preferred stock will be able to convert those shares into shares of
common stock of Peppermill on a one for one basis. After such period, shares of
Peppermill preferred stock will not be able to convert to shares of Peppermill
common stock and will not be able to be sold for a period of one year. By
converting to common stock, holders of preferred stock will receive shares that
are listed on the NASDAQ OTC/Bulletin Board, but will lose the preferences
granted to the
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preferred stock, including certain preemptive rights to participate in a future
public offering of Peppermill's common stock. See "Comparison of Rights of
Holders of Varner Capital Stock and Peppermill Capital Stock."
The number of shares of Peppermill common stock to be issued for each share
of Varner common stock is fixed and will not be adjusted based upon changes in
the price of the Peppermill shares at the time of the merger. As a result, to
the extent a Varner shareholder receives Peppermill common stock, the value of
the shares he receives in the merger will not be known at the time of this Proxy
Statement-Prospectus and may go up or down as the market price of Peppermill
common stock goes up or down. Based on the number of Varner and Peppermill
shares outstanding as of the date of this Proxy Statement-Prospectus, the former
shareholders of Varner common stock will own approximately 93% of Peppermill
common stock after the merger.
PEPPERMILL SHAREHOLDER APPROVAL (SEE PAGE ___).
Under Nevada law, and in accordance with the Articles of Incorporation of
Peppermill as amended, the merger will need to be approved by the holders of a
majority of the voting common stock of Peppermill. The Peppermill board has
already approved the merger and Varner holds the vast majority of Peppermill
common stock. It is anticipated, therefore, that approval of the merger will be
obtained.
RECOMMENDATION OF PEPPERMILL'S BOARD OF DIRECTORS (SEE PAGE ___).
[Peppermill Document Only]
After careful consideration, the Peppermill board of directors determined
the merger to be fair to you and in your best interests and declared the merger
advisable. The board has also obtained a fairness opinion finding that the
merger is fair to Peppermill shareholders. Peppermill's board of directors
approved the merger agreement and recommends that you provide your written
consent for it.
PROCEDURE FOR CASTING YOUR VOTE (SEE PAGE ___) [Peppermill Document Only]
Peppermill shareholders should mail their signed written consent in the
enclosed return envelope as soon as possible so that their shares of Peppermill
voting common stock may be counted. If you do not include instructions on how to
vote your properly executed written consent, your shares will be voted FOR
adoption of the merger agreement, FOR the amendment to the Articles of
Incorporation authorizing an increase in the authorized shares of common stock
and the creation of two classes of preferred stock, and FOR the amendment to the
Articles of Incorporation authorizing the change in the company name.
YOU DO NOT HAVE TO EXCHANGE YOUR STOCK CERTIFICATES (SEE PAGE ___)
[Peppermill Document Only]
There will be no need for Peppermill shareholders to exchange their current
Peppermill stock certificates after the merger. If the merger is adopted, you
will receive a stock certificate representing additional shares issued as part
of the stock dividend. If you have a brokerage account and would like your
certificates transferred to your account electronically, please contact
Peppermill's transfer agent at:
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Florida Atlantic Stock Transfer, Inc.
7130 Nob Hill Road
Tamarac, Florida 33321
(954) 726-4954
(954) 726-6305 (Facsimile)
YOU DO NOT HAVE TO EXCHANGE YOUR STOCK CERTIFICATES (SEE PAGE ___)
[Varner Document Only]
After the merger is completed, there will be no need to exchange your
current stock certificates. Each certificate representing shares of Varner
voting common stock or non-voting common stock will represent an equal number of
shares of Peppermill common stock. Each certificate representing shares of
Varner preferred stock will represent an equal number of shares of Peppermill
preferred stock. You will be issued certificates representing the balance of
Peppermill common stock and Peppermill preferred stock you own after the merger.
For example, if you own one share of Varner common stock and one share of Varner
preferred stock, after the merger your certificates will now represent one share
of Peppermill common stock and one share of Peppermill preferred stock, and you
will receive certificates representing two (2) additional shares of Peppermill
common stock and four (4) additional shares of Peppermill preferred stock. Do
not dispose of your Varner stock certificates. If you have a brokerage account
and would like your certificates transferred to your account electronically,
please contact Peppermill's transfer agent at:
Florida Atlantic Stock Transfer, Inc.
7130 Nob Hill Road
Tamarac, Florida 33321
(954) 726-4954
(954) 726-6305 (Facsimile)
YOU HAVE DISSENTER'S RIGHTS (SEE PAGE ___) [Peppermill Document Only]
If you do not vote for the merger and you follow the specific notice
provisions set forth on page ___, you have the right to receive the fair market
value of your Peppermill shares.
COMPLETION AND EFFECTIVENESS OF THE MERGER (SEE PAGE ___)
We will complete the merger when all of the conditions to the merger are
satisfied or waived. The merger will become effective when we file articles of
merger with the states of Missouri and Nevada.
We are working toward completing the merger as quickly as possible.
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE ___)
Our respective obligations to complete the merger are subject to the prior
satisfaction or waiver of conditions. The conditions that must be satisfied or
waived before the completion of the merger include the following:
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o the merger agreement must be adopted by Peppermill shareholders
o the registration statement must be effective under the securities laws
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE ___)
The merger agreement may be terminated under certain circumstances at any
time before the completion of the merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (SEE PAGE __)
As of the record date, Varner beneficially owned approximately 90% of the
outstanding common shares of Peppermill entitled to vote. Mr. Varner, the
President and a director of Peppermill, is also the President and a director of
Varner. All of the directors of Peppermill are also directors of Varner.
Directors and executive officers of Varner own a majority of Varner's common
stock.
U.S. FEDERAL INCOME TAX CONSEQUENCE OF THE MERGER (SEE PAGE __)
We have structured the merger so that, in general, we expect that
Peppermill, Varner and their respective shareholders will not recognize gain or
loss for United States federal income tax purposes in the merger.
RESTRICTIONS ON THE ABILITY TO SELL PEPPERMILL STOCK (SEE PAGE __)
Shares of Peppermill common stock retained by current Peppermill
shareholders will be freely tradable. Any shares of Peppermill common stock
received in connection with the merger will be freely transferable unless the
holder is considered an "affiliate" of either of Varner or Peppermill under the
Securities Act of 1933. Shares of Peppermill common stock held by affiliates may
only be sold pursuant to a registration statement or exemption under the
Securities Act.
There will be no market for the Peppermill preferred stock and the stock
will not be able to be sold for a period of one year from the date of the
merger. ...........For a period of thirty (30) days after the merger is
effective, holders of Peppermill preferred stock will be able to convert their
shares into shares of common stock of Peppermill on a one for one basis. After
such period, shares of Peppermill preferred stock will not be able to convert to
shares of Peppermill common stock and will not be able to be sold for a period
of one year. By converting to common stock, holders of preferred stock will
receive shares that are listed on the NASDAQ OTC/Bulletin Board, but will lose
the preferences granted to the preferred stock, including certain preemptive
rights to participate in a future public offering of Peppermill's common stock.
See "Comparison of Rights of Holders of Varner Capital Stock and Peppermill
Capital Stock."
FORWARD LOOKING STATEMENTS IN THIS PROXY STATEMENT-PROSPECTUS (SEE PAGE ___)
This Proxy Statement-Prospectus and the documents incorporated by reference
into this Proxy Statement-Prospectus contain forward-looking statements within
the "safe harbor"
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provisions of the Private Securities Litigation Reform Act of 1995 with respect
to Peppermill's and Varner's financial condition, results of operations and
business and on the expected impact of the merger on Peppermill's financial
performance. Words such as "anticipates," "expects," "intends," "plan,"
"believes," "seeks," "estimates" and similar expressions identify
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward-looking statements. In evaluating the merger, you should carefully
consider the discussion of risks and uncertainties in the section entitled "Risk
Factors" on page ___ of this Proxy Statement-Prospectus.
UNAUDITED COMPARATIVE PER SHARE INFORMATION
<TABLE>
<CAPTION>
As of and for the Year Ended As of and for the Quarter Ended
December 31, 1999 March 31, 2000
---------------------------- -------------------------------
PEPPERMILL VARNER(1) PEPPERMILL VARNER(1)
<S> <C> <C> <C> <C>
Book Value Per Share - Net $0 $(.029) $0 $(.018)
Cash Dividends Per Share $0 $ 0 $0 $ 0
Income (Loss) Per Share $0 $(.072) $0 $(.025)
</TABLE>
(1) Assumes conversion of Varner preferred stock.
COMPARATIVE MARKET PRICE INFORMATION
Peppermill common stock is traded on the OTC Bulletin Board under the
symbol "PEPM." Peppermill common stock commenced trading on November 25, 1999,
after the purchase by Varner of 90% of Peppermill common stock and the signing
of a letter of intent regarding the merger. Varner common stock is not traded
publicly.
The following table sets forth historical trading information for
Peppermill common stock on the first trading day of each month since trading
commenced including the price of Peppermill common stock the last full trading
day prior to the printing of this Proxy Statement-Prospectus.
PEPPERMILL
COMMON STOCK
DATE CLOSING PRICE
--------------------------------------------------------------------------------
December 1, 1999 ..................................................... $9.00
January 3, 2000 ..................................................... $7.25
February 1, 2000 ..................................................... $6.50
March 1, 2000 ..................................................... $6.25
April 3, 2000 ..................................................... $5.00
May 1, 2000 ..................................................... $3.69
June 1, 2000 ..................................................... $3.38
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Because the market price of Peppermill common stock may increase or
decrease before the completion of the merger, you are urged to obtain current
market quotations.
RISK FACTORS
An investment in Peppermill common stock involves a high degree of risk. In
addition to other information contained in or incorporated by reference into
this Proxy Statement-Prospectus, you should carefully consider the following
risk factors in deciding whether to provide your written consent for the merger.
RISK FACTORS RELATING TO THE MERGER
BETWEEN PEPPERMILL AND VARNER
VARNER SHAREHOLDERS WILL RECEIVE THREE (3) SHARES OF PEPPERMILL COMMON STOCK FOR
EACH SHARE OF VARNER COMMON STOCK OR VARNER NON-VOTING COMMON STOCK DESPITE
CHANGES IN MARKET VALUE.
Upon completion of the merger, each share of Varner voting common stock or
Varner non-voting common stock, will be exchanged three (3) shares of Peppermill
common stock. There will be no adjustment for changes in the value of Varner
common stock or changes in the market price of Peppermill common stock. The
shares of Peppermill commenced trading after the purchase by Varner of
approximately 90% of the outstanding capital stock of Peppermill. As a result,
the only shares available for trading until the merger is effective are
approximately 10% of Peppermill capital stock owned by the former Peppermill
shareholders. Due to the lack of a public market for Peppermill common stock and
due to the limited shares available for trading, the market price of the
Peppermill common stock can be expected to fluctuate. Due to the announcement of
the merger, the value of the Peppermill common stock will be influenced to a
great extent by Varner's operations. Accordingly, the specific dollar value of
Peppermill common stock to be received by Varner shareholders upon completion of
the merger will depend on the market value of Peppermill common stock at the
time of completion of the merger.
ALTHOUGH VARNER EXPECTS THAT THE MERGER WILL RESULT IN BENEFITS, THOSE
BENEFITS MAY NOT BE REALIZED
Varner has entered into the merger agreement expecting that the merger will
result in benefits, including allowing Varner to enter into mergers and
acquisitions utilizing its publicly traded securities as consideration, making
investment capital more readily available to Varner and providing its
shareholders with liquidity for their shares. Achieving the benefits of the
merger will depend in part on a public trading market developing for shares.
While Peppermill shares are listed on the OTC Bulletin Board, they have been
trading for a very short period of time and there is no assurance that a market
for these shares will continue or that the shares will trade at a price or at a
volume that will provide the benefits listed above.
RISK FACTORS RELATING TO PEPPERMILL'S BUSINESS
PEPPERMILL HAS HAD LIMITED OPERATIONS SINCE ITS FORMATION IN 1998
Peppermill was incorporated in April, 1998, and has had no revenues to
date. Peppermill currently has mineral rights to certain mineral claims in the
Princeton area of British Columbia,
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Canada. Peppermill is in the early stages of exploration work and does not have
any known mineral body or mine facilities. It is not anticipated that this
business will be developed in the immediate future, if at all.
RISK FACTORS RELATING TO VARNER'S BUSINESS
VARNER HAS A HISTORY OF LOSSES AND EXPECTS CONTINUED LOSSES
Varner incurred net losses of approximately $1,070,000 for the year end
December 31, 1997, $1,994,000 for the year ended December 31, 1998, and
$1,399,000 for the year ended December 31, 1999. As of December 31, 1999, Varner
had an accumulated deficit of approximately $5,485,000 representing, in large
part, the sum of our historical net losses. We have not achieved profitability
in any quarterly or annual period, and we expect to continue to incur net losses
for the foreseeable future. Although our revenues have grown in recent quarters,
we cannot be certain that we will be able to sustain these growth rates or that
we will obtain sufficient revenues to achieve profitability. If we do achieve
profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future.
VARNER HAS A LIMITED OPERATING HISTORY
Varner was incorporated on November 17, 1994, and began offering services
to the public in March of 1997. These services include:
o Internet access;
o Long distance service;
o Prepaid telephone cards; and
o Electronic mail services.
When making your investment decision, you should consider the risks and
difficulties we may encounter in the new and rapidly evolving telecommunications
and Internet market, especially given our limited operating history. These risks
include our ability to:
o Expand our subscriber base and increase subscriber revenues;
o Compete favorably in a highly competitive market;
o Access sufficient capital to support our growth;
o Recruit and retain qualified employees and independent
representatives; and
o Introduce new products and services.
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We cannot be certain that we will successfully address any of these risks.
In addition, our business is subject to general economic conditions, which may
not be favorable for our business in the future.
VARNER'S STRATEGY OF EXPANSION THROUGH ACQUISITIONS MAY NOT BE EFFECTIVE
As a key component of our growth strategy, we intend to acquire companies
and assets that we feel will enhance our revenue growth, operations and
profitability. Acquisitions may result in the use of significant amounts of
cash, potentially dilutive issuances of equity securities and expenses, each of
which could materially and adversely affect our business. These acquisitions
involve numerous risks, including:
o the difficulties in the integration and assimilation of the
operations, technologies, products and personnel of the acquired
business;
o the diversion of management's attention from other business
concerns;
o the availability of favorable financing for future acquisitions;
and
o the potential loss of key employees of any acquired business.
We will need to be able to successfully integrate our acquired businesses,
and the failure to do so could have a material adverse effect on our business,
results of operations and financial condition.
VARNER'S QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
As a result of limited operating history, we cannot forecast our operating
expenses based on our historical results. Our revenues currently depend heavily
on our ability to attract and retain independent representatives to sell our
products and services and their ability to find subscribers who purchase
telecommunication or Internet products. If our actual revenues are less than our
projected revenues, we may be unable to reduce expenses proportionately, and our
operating results, cash flows and liquidity would likely be adversely affected.
VARNER'S LIQUIDITY AND CAPITAL RESOURCES ARE LIMITED AND WE WILL NEED TO RAISE
MORE MONEY IN THE FUTURE TO DEVELOP AND EXPAND OUR EXISTING BUSINESS
We will require significant capital resources to develop and expand our
existing businesses, acquire or develop additional Internet and
telecommunications-related businesses, and fund near term operating losses. Thus
far, we have paid for our near term capital expenses, operating losses and
working capital requirements from sales of our capital stock in private
placements. As of March 31, 2000, Varner has raised over $5,805,150 in sales of
its capital stock. Longer term, it is likely that we will need to raise
additional money to fully implement our goals.
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Our ability to grow depends significantly on our ability to expand our
operations by opening new points of presence, which requires significant capital
expenditures and advance expenditures and commitments for leased
telecommunications facilities and advertising. We anticipate that our cash
requirements for 2000 will include disbursements for some or all of the
following purposes:
o Expansion of our sales and marketing operations;
o Expansion of our network infrastructure;
o Potential acquisitions; and
o Working capital and general corporate purposes.
We will need to seek additional capital from public or private equity or
debt sources to fund our growth and operating plans.
We cannot be certain that we will be able to raise additional capital in
the future on terms acceptable to us or at all. If alternative sources of
financing are insufficient or unavailable, we will be required to modify our
growth and operating plans in accordance with the extent of available financing.
VARNER FACES HEAVY COMPETITION IN THE INTERNET AND TELECOMMUNICATION INDUSTRY
FOR ALL OF THE SERVICES VARNER CURRENTLY PROVIDES AND THOSE VARNER INTENDS TO
PROVIDE IN THE FUTURE
We face intense competition in conducting our business, and we expect such
competition to continue to increase. Our competitors include various other
Internet access providers with much larger subscriber bases than ours including
America Online, MindSpring and Prodigy. Furthermore, a number of our competitors
offer a broader variety of business services and may have done so for longer
periods of time. Every local market we have entered or intend to enter is served
by multiple Internet access providers. Our current and prospective competitors
include many large companies, some of which are better known than us and may
have greater financial, technical and marketing resources than we do.
As a result of increased competition in our industry, we expect to
encounter significant pricing pressure. We cannot be certain that we will be
able to offset the effects of any required price reductions through an increase
in the number of our subscribers, higher revenues from our business services,
cost reductions or otherwise, or that we will have the resources to continue to
compete successfully.
The telecommunications industry and all of its segments are highly
competitive. We expect that competition will continue to intensify in the future
due to the increase in the size, resources and number of market participants. We
face competition from larger, better capitalized incumbent local exchange
carriers ("ILEC"), including Ameritech.
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VARNER IS DEPENDENT ON RELATIONSHIPS WITH FACILITIES-BASED PROVIDERS OF
TELECOMMUNICATIONS SERVICES AND THUS WE RUN THE RISK OF ADVERSE FUTURE CHANGES
IN THE TERMS ON WHICH WE OBTAIN THEIR SERVICES FOR RESALE
Varner does not own any part of a local exchange network or a long distance
network. As a result, for our long distance and prepaid phone card business, we
depend entirely on third parties for resale of their services. Although we
believe that our relationships with these carriers is good, the termination or
disruption in these services would have a material adverse affect on our
business.
VARNER'S INTERNET SERVICE BUSINESS IS DEPENDENT UPON ITS INTERNAL AND LEASED
NETWORK
Varner's success depends, in part, on the capacity, reliability and
security of our network infrastructure. We do not own all of our Internet
service networks. As a result, we must contract for these services with third
parties. Our relationship with these Internet service providers, or ISP's are
good, but the interruption or termination of these services would have a
material adverse affect on our business. Network capacity constraints may occur
in the future, both at the level of particular dial-up points of presence, or
POPs (affecting only members attempting to use that particular POP), and in
connection with system-wide services (such as e-mail, which can affect all
members). These capacity constraints would result in slowdowns, delays or
inaccessibility when members try to use a particular services. Poor network
performance could cause members to terminate their membership with us.
WE ARE DEPENDENT ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS
We rely on telecommunications carriers to transmit our Internet traffic
over local and long distance networks. These networks may experience disruptions
that are not easily remedied. In addition, we depend on certain suppliers of
hardware and software. If our suppliers fail to provide us with network
services, equipment or software in the quantities, at the quality levels or at
the times we require, or if we cannot develop alternative sources of supply, it
will be difficult, if not impossible, for us to provide our services.
CUSTOMERS MAY NOT ACCEPT OUR PLANNED SERVICES
The success of our business strategy will depend upon consumer acceptance
of our planned offerings, many of which are in their early stages of deployment
or are only in the planning stage. Subscriber acceptance could be hurt by
customer loyalty to more established competitors and unfamiliarity with Varner.
In addition, we cannot be sure that technical problems will not impede or delay
subscriber acceptance of our services.
WE DEPEND ON THE SERVICES OF A SMALL NUMBER OF KEY MANAGEMENT PEOPLE
We believe that our success depends to a significant extent upon the
abilities and continued efforts of our senior management. The loss of the
services of any of these people could have a negative effect upon our results of
operations and financial condition.
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While the management of Varner has extensive experience in the network
marketing, software and systems development, retailing, Internet operations and
in operating companies, the combined management experience of the principals may
not meet all of the requirements or the demands of the day to day operations of
a developing Internet provider and telecommunications company. Therefore, it is
possible that Varner may find it necessary to retain the services of consultants
and management level staff. Competition for experienced persons in these fields
is intense.
VARNER'S BUSINESS IS SUBJECT TO GOVERNMENT REGULATION
Our telecommunication services are subject to extensive regulation by the
FCC and by the public utility commissions of various states. Changes in
statutes, regulations and judicial interpretations could have material adverse
effects on our telecommunications operations.
We provide Internet services through data transmissions over public
telephone lines and cable television networks. These transmissions are subject
to regulation by the Federal Communications Commission and state public utility
commissions. These regulations affect the prices we pay for transmission
services, the competition we face for telecommunications services and other
aspects of our market. As an Internet access provider, we are not subject to
direct regulation by the FCC or any other governmental agency, other than
regulations applicable to businesses generally. However, we could become subject
to FCC or other regulatory agency regulation, especially as Internet services
and telecommunications services converge. Changes in the regulatory environment
could decrease our revenues, increase our costs and affect our service
offerings.
Several regulations have been enacted and several court cases have been
decided relating to liability of ISPs and other on-line service providers for
information carried on or through their services or equipment, involving
copyright, indecency, obscenity, defamation and fraud. Federal and state
statutes continue to prohibit the on-line distribution of obscene materials. The
law in this area is unsettled and there may be new legislation or court
decisions that expose Varner to liability.
Additional laws or regulations may be adopted with respect to the Internet,
covering issues such as Universal Service Fund support payments, content, user
privacy, pricing, libel, obscene material, indecency, gambling, intellectual
property protection and infringement and technology export and other controls.
Other federal Internet-related legislation has been introduced which may limit
commerce and discourse on the Internet. The FCC recently ruled that ISPs are
enhanced service providers, calls to ISPs are jurisdictionally interstate, and
ISPs should not pay access charges applicable to telecommunications carriers.
The FCC is examining inter-carrier compensation for calls to ISPs, which could
affect ISPs' costs.
BECAUSE OF THE FAST PACE OF TECHNOLOGICAL CHANGE IN THE INTERNET INDUSTRY, THERE
IS A RISK THAT WE WILL FALL BEHIND IN KEEPING UP WITH CHANGE, WHICH COULD HARM
OUR ABILITY TO COMPETE
The Internet services market is characterized by rapidly changing
technology, evolving industry standards, changes in member needs and frequent
new service and product introductions. Our future success depends, in part, on
our ability to use leading technologies
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effectively, to develop our technical expertise, to enhance our existing
services and to develop new services that meet changing member needs on a timely
and cost-effective basis. In particular, we must provide subscribers with the
appropriate products, services and guidance to best take advantage of the
rapidly evolving Internet. Our failure to respond in a timely and effective
manner to new and evolving technologies could have a negative impact on our
business and financial results.
VARNER'S BUSINESS DEPENDS ON CONTINUED GROWTH OF THE INTERNET AS A MEDIUM OF
COMMUNICATION AND COMMERCE
Our future success in the Internet business substantially depends on
continued growth in the use of the Internet. Although we believe that Internet
usage and popularity will continue to grow as it has in the past, we cannot be
certain that this growth will continue or that it will continue in its present
form. If Internet usage declines or evolves away from our business, our growth
in this area will slow or stop and our financial results may suffer.
ANY DECLINE IN VARNER'S MEMBER RETENTION LEVELS FOR ITS INTERNET SERVICES MAY
ADVERSELY AFFECT US
Our new member acquisition costs are substantial relative to the monthly
fees we charge. Accordingly, our long-term success largely depends on our
retention of existing members. While we continue to invest significant resources
in our infrastructure and technical and member support capabilities, it is
relatively easy for Internet users to switch to competing providers. Any
significant loss of members will substantially decrease our revenue and cause
our business to suffer.
IF WE ARE UNABLE TO RECRUIT INDEPENDENT SALES REPRESENTATIVES, WE MAY NOT BE
ABLE TO CONTINUE OUR NETWORK MARKETING PROGRAM TO RECRUIT SUBSCRIBERS
We employ a network marketing program that entails the use of independent
representatives to sell our Internet and telecommunications services and to
recruit other independent representatives to sell these services. Independent
representatives are paid commissions by us for their sales of access service
plans, as well as from sales made by those they recruit into the program. The
success of our network marketing program will depend on our ability to attract,
retain and motivate a large base of independent representatives, who, in turn,
are expected to recruit both subscribers for our services as well as other
independent sales representatives. We believe that significant turnover among
independent representatives is typical of network marketing programs. Therefore,
in order to maintain or increase the overall number of our independent
representatives, existing representatives must continually recruit new
independent representatives. Our ability to attract and retain independent
representatives could be negatively affected by:
o Adverse publicity relating to our services or operations,
including our network marketing program;
o Our program structure, which may include modifications in
commission rates and training fees;
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o The quality and range of our product offerings;
o The level of support services we provide to our independent
representatives; and
o The availability of competing network marketing opportunities.
GOVERNMENT REGULATIONS MAY REQUIRE US TO CHANGE OUR NETWORK MARKETING PROGRAM OF
INDEPENDENT SALES REPRESENTATIVES
Because our independent representatives are classified as independent
contractors, we may encounter difficulty enforcing the policies and rules that
we have established to govern their conduct. Violations of these policies and
rules can reflect negatively on us. In addition, our network marketing program
is affected by extensive government regulation, such as federal and state
regulation of the offer and sale of business franchises, business opportunities
and securities. Various governmental agencies monitor direct selling activities,
and we may be required to supply information regarding our marketing program to
certain of these agencies. We also may fail to comply with existing statutes or
regulations as a result of misconduct by our independent representatives, the
ambiguous nature of some of the regulations and the considerable interpretive
and enforcement discretion given to regulators. Any assertion or determination
that our company or our independent representatives are not in compliance with
existing statutes or regulations could have a material adverse effect on our
business and operations.
RISK FACTORS RELATING TO THE PEPPERMILL STOCK
PEPPERMILL STOCK MAY BE DIFFICULT TO RESELL
Prior to the acquisition by Varner of Peppermill common stock, you could
not buy or sell Peppermill common stock publicly. An active public market for
Peppermill common stock may not develop or be sustained after this offering.
YOU MAY NOT BE ABLE TO RESELL SHARES OF OUR STOCK AT OR FOR MORE THAN THE PRICE
YOU PAID
The stock market in general, and the stock prices of Internet companies in
particular, have recently experienced extreme volatility that often has been
unrelated to the operating performance of any specific public companies. If
continued, these broad market and industry fluctuations may adversely affect the
trading price of Peppermill common stock, regardless of our actual operating
performance.
IF OUR SHAREHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR STOCK IN THE PUBLIC MARKET,
THE MARKET PRICE OF OUR STOCK COULD FALL
If Peppermill shareholders sell substantial amounts of Peppermill common
stock in the public market, the market price of the Peppermill common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and place that we deem
appropriate.
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SALES OF PEPPERMILL'S SECURITIES MAY BE SUBJECT TO THE PENNY STOCK RULES
The resale of Peppermill's securities may be subject to the requirements of
the penny stock rules, absent the availability of an exemption. The SEC has
adopted rules that regulate broker/dealer practices in connection with
transactions in "penny stocks." Penny stocks are usually equities selling for
under $5.00, which are not registered on certain national exchanges or quoted on
the NASDAQ system. The penny stock rules may obligate the broker/dealer to
deliver a standardized risk disclosure document, to provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker/dealers and its salespersons in those transactions, and money account
statements showing the market value of each penny stock held in the customer
accounts, to make a special written determination that the penny stock is a
suitable investment for the purchaser and to receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rule. As long as Peppermill common stock
is subject to the penny stock rules, investors may find it more difficult to
sell their securities. The market liquidity for Peppermill's securities could be
severely and adversely affected by limiting the ability of broker/dealers to
sell Peppermill's securities and the ability of the investors to sell their
securities in the secondary market.
PRINCIPAL SHAREHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN SUBSTANTIAL
INFLUENCE FOLLOWING THIS OFFERING
Varner executive officers, directors and existing 5% and greater
shareholders will beneficially own or control a substantial portion of
Peppermill common stock after the merger. As a result, such persons, if they
were to act together, will be in a position to elect and remove directors and
control the outcome of most matters submitted to shareholders for a vote.
Additionally, such persons would be able to influence significantly a proposed
amendment to our charter, a merger proposal, a proposed sale of assets or other
major corporate transaction or a non-negotiated takeover attempt. Such
concentration of ownership may discourage a potential acquirer from making an
offer to buy our company, which, in turn, could adversely affect the market
price of our common stock.
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS DOCUMENT MAY NOT BE ACCURATE
Included in this Prospectus are various forward-looking statements which
can be identified by the use of forward looking terminology such as "may,"
"will," "expect," "anticipate," "estimate," "continue," "believe" or other
similar words. We have made forward-looking statements with respect to the
following, among others:
o our goals and strategies;
o the importance and expected growth of Internet technology;
o the pace of change in Internet and telecommunications
marketplace;
o the demand for Internet and telecommunications services; and
o our product offerings.
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These statements are forward-looking and reflect our current expectations.
They are subject to a number of risks and uncertainties, including but not
limited to, changes in technology and changes in the Internet and
telecommunications marketplace. In light of the many risks and uncertainties
surrounding the Internet and telecommunications marketplace, shareholders should
keep in mind that we cannot guarantee that the forward-looking statements
described in this Prospectus will transpire.
THE MERGER
This section of the Proxy Statement-Prospectus describes material aspects
of the proposed merger, including the stock purchase agreement and the merger
agreement. While we believe that the description covers the material terms of
the merger and the related transactions, this summary may not contain all of the
information that is important to you. You should read this entire document and
the other documents we refer to carefully for a more complete understanding of
the merger.
BACKGROUND OF THE MERGER
In October of 1999, Mr. Clayton Varner, President of Varner, met with Doug
Aguililla of Emerson Bennett & Associates, L.L.C., a consultant engaged to
assist Varner in seeking financing and assisting Varner in obtaining a public
market for its capital stock. Mr. Aguililla suggested finding a suitable merger
or acquisition candidate for Varner to accomplish Varner's goals.
Mr. Aguililla suggested Peppermill, a company for which Emerson Bennett &
Associates, L.L.C. serves as a market maker, as a possible merger candidate.
During late October and early November of 1999, Mr. Varner had several meetings
with Brent Vickers, a former President of Peppermill, to discuss an acquisition
or merger between the companies.
On November 19, 1999, the parties came to an agreement in principal
relating to the acquisition by Varner of approximately 90% of Peppermill's
common stock from certain shareholders of Peppermill.
On November 19, 1999, Varner entered into an agreement with Peppermill to
purchase 10,116,000 shares of Peppermill common stock, and said purchase was
consummated on November 22, 1999.
On November 19, 1999, Clayton Varner was appointed as President and
director of Peppermill.
On November 19, 1999, Varner entered into a letter of intent relating to
the merger of Varner into Peppermill. On November 24, 1999, Peppermill publicly
announced the stock purchase agreement and the signing of the letter of intent.
On June 2, 2000, Varner held a Board of Directors meeting at which meeting
senior management of Varner discussed the proposed merger and the proposed
principal terms and conditions of the transaction. After extensive discussion
regarding the merger proposal, the Varner board of directors unanimously
determined that the merger, upon the terms contained in the
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merger agreement, is fair to and in the best interests of Varner's shareholders
and adopted the merger agreement.
On June 2, 2000, Peppermill held a board of directors meeting to discuss
the proposed merger and the proposed principal terms of and conditions of the
transactions. After extensive discussion regarding the merger proposal, the
Peppermill board of directors unanimously determined that the merger, upon the
terms contained in the merger agreement, is fair to and in the best interests of
Peppermill shareholders, adopted the merger agreement and recommended that its
shareholders vote in favor of the merger.
On June 2, 2000, the parties negotiated the final changes in the definitive
merger agreement, and on that day, the merger agreement and the related
documents were executed.
PEPPERMILL'S REASONS FOR THE MERGER
Peppermill has generated no revenues. The board of directors have
determined that following the merger the shareholders of Peppermill will be the
owners of an operating company, and that they will have the potential to realize
appreciation in their share holdings. Peppermill engaged Evans & Evans, Inc. to
prepare a Valuation Report and Related Fairness Opinion with respect to the
terms of the proposed merger transaction with Varner. Evans & Evans was founded
in 1989 and has been extensively involved in the financial service and
management consulting fields. Evans & Evans has offices in Vancouver, British
Columbia; Calgary, Alberta; Toronto, Ontario; Kanata, Ontario; Halifax, Nova
Scotia and Portland, Oregon. Evans & Evans was selected due to certain
consulting work they had performed for Varner in evaluating potential
acquisition targets. There is no relationship between Evans & Evans and Varner
or Peppermill or their respective principals, nor is any relationship
anticipated. Evans & Evans was asked to evaluate the fairness of the merger
transaction, the terms of which were negotiated by Peppermill and Varner. The
report found the terms of the proposed merger fair, from a financial point of
view, to the shareholders of Peppermill. In assessing the fairness of the merger
transaction, the report compared the fair market value of the outstanding shares
of Peppermill as of October 31, 1999, to the fair market value, on a pro forma
basis, of Peppermill common shareholders' respective interest in the Company
after the merger. Evans & Evans found the value of the shares of Peppermill
after the proposed merger to be higher than the shares of Peppermill prior to
the merger. The report also identified but did not attempt to quantify certain
other benefits to Peppermill's shareholders, including the fact that Peppermill
shareholders will be participating in an operating company, that the merger will
provide Peppermill with access to new business opportunities and the ability of
Varner to bring business development to Peppermill. In determining the fair
market value of Varner's shares, the primary valuation approach was to determine
the enterprise value of Varner based upon the number of subscribers Varner had
for its internet and e-mail services. Evans & Evans used a Rule of Thumb
Approach, involving the number of subscribers multiplied by the industry
standard revenue dollar value per subscriber as determined by Evans & Evans in
an interview process of individuals within the industry. As a back-up approach,
Evans & Evans compared Varner with other companies in the ISP industry whose
shares trade on North American stock exchanges. The value of Peppermill's common
stock was valued on its book value per share, adjusted for the fact that
Peppermill is a public company.
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RECOMMENDATION OF PEPPERMILL'S BOARD OF DIRECTORS
After careful consideration, the Peppermill board of directors unanimously
determined the merger to be fair to Peppermill shareholders and in their best
interests and declared the merger advisable. Peppermill's board of directors
approved the merger agreement and unanimously recommends adoption of the merger
agreement.
VARNER'S REASONS FOR THE MERGER
Varner's board of directors believes that the merger will be beneficial to
Varner and its shareholders for the following reasons:
o The merger will result in Varner being a publicly traded company,
which may make public financing more readily available.
o The public trading market for the Peppermill shares may allow
Varner to negotiate mergers and/or acquisitions utilizing its
capital stock as consideration.
o The merger may provide liquidity for holders of Varner shares,
which will be listed and traded.
o Varner's board of directors determined that the merger was fair,
from a financial point of view, to the Varner shareholders.
o Varner's board weighed Varner's strategic alternatives to the
merger, including remaining a non-public company and determined
the merger was the best alternative.
In the course of its deliberations, the Varner board reviewed with Varner
management and outside advisors a number of additional factors relevant to the
merger, including:
o Varner's business, financial condition, results of operations and
prospects.
o The impact of the merger on Varner's customers and independent
representatives.
o Varner's evaluation of other, potential strategic relationships.
Varner's board of directors also identified and considered a variety of
potentially negative factors in its deliberations concerning the merger,
including, but not limited to:
o The risk that the potential benefits sought in the merger might
not be fully realized, including, the possibility that
Peppermill's stock might not attain or maintain a public trading
market.
o The costs involved in the merger.
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o The other risks described under "Risk Factors" on page ____ of
this Proxy Statement-Prospectus.
Varner's board of directors believed that these risks were outweighed by
the potential benefits of the merger.
The foregoing discussion is not exhaustive of all factors considered by
Varner's board of directors. Each member of Varner's board may have considered
different factors, and Varner's board evaluated these factors as a whole and did
not qualify or otherwise assign relative weights to factors considered.
COMPLETION AND EFFECTIVENESS OF THE MERGER
The merger will be completed when all of the conditions to completion of
the merger are satisfied or waived, including adoption of the merger agreement
by the shareholders of Peppermill. The merger will become effective upon the
filing articles of merger with the states of Nevada and Missouri.
We are working towards completing the merger as quickly as possible.
STRUCTURE OF THE MERGER AND CONVERSION OF VARNER CAPITAL STOCK.
In accordance with the merger agreement and Missouri and Nevada law, Varner
will be merged into Peppermill. As a result of the merger, the separate
corporate existence of Varner will cease and Peppermill will survive the merger.
Upon the completion of the merger, the name of Peppermill will be changed to
Varner Technologies, Inc.
Upon completion of the merger, each outstanding share of Varner voting
common stock and Varner non-voting common stock will be converted into three (3)
shares of Peppermill common stock. Each share of Varner preferred stock will be
converted into five (5) shares of newly created Peppermill preferred stock. The
holders of Varner preferred stock will own 100% of Peppermill preferred stock
after the merger.
Peppermill shareholders will also be asked to consent to an amendment to
Peppermill's Articles of Incorporation, increasing the authorized shares of
Peppermill common stock to 600,000,000, authorizing the issuance of 100,000,000
shares of preferred stock and changing the name of Peppermill to Varner
Technologies, Inc. A form of Certificate of Amendment to the Articles of
Incorporation of Peppermill are attached to this Proxy Statement-Prospectus as
Annex B.
EXCHANGE OF PEPPERMILL STOCK CERTIFICATES ]PEPPERMILL DOCUMENT ONLY]
AS A PEPPERMILL SHAREHOLDER THERE IS NO NEED TO EXCHANGE YOUR STOCK
CERTIFICATES FOR NEW CERTIFICATES, EVEN AFTER THE MERGER AND CHANGE IN THE
COMPANY'S NAME. Your stock certificate will continue to represent the same
number of shares of Peppermill common stock. After the merger you will receive a
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certificate representing the stock dividend of four additional shares of
Peppermill common stock for every share you own. If you prefer, after the merger
you can send your old stock certificate to the transfer agent, with any required
documentation, and receive a new stock certificate containing the new name of
the company for a fee of $15.00 per transaction. If you have a brokerage account
and would like your certificates transferred to your account electronically,
please contact the company's transfer agent at:
Florida Atlantic Stock Transfer, Inc.
7130 Nob Hill Road
Tamarac, Florida 33321
(954) 726-4954
(954) 726-6305 (Facsimile)
YOU DO NOT HAVE TO EXCHANGE VARNER STOCK CERTIFICATES FOR PEPPERMILL STOCK
CERTIFICATES [VARNER DOCUMENT ONLY]
When the merger is completed, each certificate representing shares of
Varner voting common stock or non-voting common stock will represent an equal
number of shares of Peppermill common stock. Each certificate representing
shares of Varner preferred stock will represent an equal number of shares of
Peppermill preferred stock. There is no need to exchange your current Varner
certificates, and they will be treated as certificates for shares of Peppermill.
You will be issued additional certificates representing the balance of
Peppermill common stock and Peppermill preferred stock that you own after the
merger. If you prefer, after the merger is complete, you can send your old
Varner stock certificates to the transfer agent, with any required
documentation, and receive new certificates, for a fee of $15.00 per
transaction. If you have a brokerage account and would like your certificates
transferred to your account electronically, please contact the company's
transfer agent at:
Florida Atlantic Stock Transfer, Inc.
7130 Nob Hill Road
Tamarac, Florida 33321
(954) 726-4954
(954) 726-6305 (Facsimile)
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following are the material United States federal income tax
consequences of the merger. The following discussion is based on and subject to
the Internal Revenue Code of 1986, the regulations promulgated thereunder,
existing administrative interpretations and court decisions and any related
laws, all of which are subject to change, possibly with retroactive effect. This
discussion does not address all aspects of United States federal income taxation
that may be important to you in light of your particular circumstances or if you
are subject to special rules, such as rules relating to:
o shareholders who are not citizens or residents of the United
States
o financial institutions
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o tax exempt organizations
o insurance companies
o dealers in securities
o shareholders who acquired their shares of Varner or Peppermill
common stock pursuant to the exercise of options or similar
derivative securities or otherwise as compensation
This discussion assumes you hold your shares of Varner or Peppermill
capital stock as capital assets within the meaning of Section 1221 of the
Internal Revenue Code.
Both Peppermill and Varner have discussed the tax consequences of the
merger with their respective legal and accounting advisors. No opinion, however,
has been sought or obtained regarding material United States federal income tax
consequences of the merger.
Varner has determined that the merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, and Varner and Peppermill will each be a party to that
reorganization within the meaning of Section 368(b) of the Internal Revenue
Code.
TAX IMPLICATIONS TO PEPPERMILL SHAREHOLDERS [PEPPERMILL DOCUMENT ONLY]
Current shareholders of Peppermill should not recognize gain or loss for
United States federal income tax purposes as a result of the merger.
TAX IMPLICATIONS TO VARNER SHAREHOLDERS [VARNER DOCUMENT ONLY]
Varner shareholders should not recognize gain or loss for United States
federal income tax purposes when they exchange Varner voting common stock or
non-voting common stock solely for Peppermill common stock or they exchange
their Varner preferred stock solely for Peppermill preferred stock pursuant to
the merger. The aggregate tax basis of the Peppermill stock they receive as a
result of the merger will be the same as the aggregate tax basis in the Varner
stock they surrender in the exchange. The holding period of the Peppermill stock
received as a result of the exchange will include the period during which the
Varner stock exchanged in the merger was held.
TAX IMPLICATIONS TO PEPPERMILL AND VARNER
Peppermill and Varner will not recognize gain or loss for United States
federal income tax purposes as a result of the merger.
THIS FOREGOING DISCUSSION IS NOT INTENDED TO BE A COMPLETE ANALYSIS OR
DESCRIPTION OF ALL POTENTIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OR
ANY OTHER CONSEQUENCES OF THE MERGER.
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IN ADDITION, THIS DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES WHICH MAY VARY
WITH, OR ARE CONTINGENT ON, YOUR INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS
DISCUSSION DOES NOT ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL
TAX CONSEQUENCES OF THE MERGER. ACCORDINGLY, YOU ARE STRONGLY URGED TO CONSULT
WITH YOUR TAX ADVISOR TO DETERMINE THE PARTICULAR UNITED STATES FEDERAL, STATE,
LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES TO YOU OF THE MERGER.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE MERGER
Neither Peppermill nor Varner is aware of any material governmental or
regulatory approval required for completion of the merger, other than compliance
with applicable corporate laws of Missouri and Nevada.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF PEPPERMILL AND VARNER
The shares of Peppermill common stock to be issued in connection with the
merger will be registered under the Securities Act of 1933, and will be freely
transferable under the Securities Act, except for shares of Peppermill common
stock issued to any person who is deemed to be an "affiliate" of either of
Varner or Peppermill. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, are under common
control with either entity, which may include some of our officers and
directors, as well as our principal shareholders. Affiliates may not sell their
shares of Peppermill common stock acquired in connection with the merger except
pursuant to:
o an effective registration statement under the Securities Act
covering the resale of those shares
o an exemption under Rule 144 under the Securities Act
o any other applicable exception under the Securities Act
Peppermill's registration statement on Form S-4, of which this Proxy
Statement-Prospectus forms a part, does not cover the resale of shares of
Peppermill preferred stock or shares of Peppermill common stock to be received
by our affiliates in the merger.
CONDITIONS TO COMPLETION OF THE MERGER
Our respective obligations to complete the merger and the other
transactions contemplated by the merger agreement are subject to the
satisfaction or waiver of each of the following conditions before completion of
the merger:
o Peppermill's registration statement on Form S-4 must be effective
o the merger agreement must be adopted by the holders of a majority
of the outstanding shares of Peppermill common stock
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o no action, suit or proceeding shall be threatened or pending
which has the effect of prohibiting completion of the merger
substantially on the terms contemplated by the merger agreement
o the Peppermill shares will be listed on the NASD OTC Bulletin
Board
o all applicable approvals and consents required to complete the
merger must be received, the failure of which would have a
material adverse effect on Peppermill or Varner or would result
in a violation of any laws
o the parties' respective representations and warranties must be
true and correct as of the date the merger is to be completed,
and must conform or comply in all material respects with all of
their obligations required by the merger agreement
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to completion of
the merger, whether before or after adoption of the merger agreement by
Peppermill shareholders:
o by mutual consent of Peppermill and Varner;
o by Varner, upon a material breach of any covenant or agreement on
the part of Peppermill which is set forth in the merger
agreement, or if any of Peppermill's representations or
warranties are or become untrue or inaccurate so that the
corresponding condition to completion of the merger would not be
met; or
o by Peppermill, upon a material breach of any covenant or
agreement on the part of Varner which is set forth in the merger
agreement, or if any of Varner's representations or warranties
are or become untrue or inaccurate so that the corresponding
condition to completion of the merger would not be met.
EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
We may amend the merger agreement at any time before or after Peppermill
shareholders' approval of the merger, provided that the amendment does not
require further shareholder approval.
OPERATIONS AFTER THE MERGER
Following the merger, Varner will continue its operations as a Nevada
corporation. The board of directors of Peppermill which are currently in office
will remain in office after the merger. The shareholders of Varner will become
shareholders of Peppermill and their rights as shareholders will be governed by
Peppermill's Articles of Incorporation, as currently in effect,
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Peppermill by-laws and the laws of Nevada. See "Comparison of Rights of Holders
of Varner Capital Stock and Peppermill Capital Stock" on page ____.
DISSENTER'S AND APPRAISAL RIGHTS
[PEPPERMILL DOCUMENT ONLY]
Under Nevada law, if you are a Peppermill shareholder and you comply with
certain requirements of Nevada law, you are entitled to dissenter's rights in
the merger. However, it is a condition of each of our obligations to consummate
the merger that shareholders holding no more than 1% of Peppermill's common
stock exercise dissenters' rights.
You have the right to dissent to the approval of the merger pursuant to
Section 92A.380 of the Nevada Act and the right to be paid the "fair value" of
your shares in cash by complying with the procedures set forth in Sections
92A.420 and 92A.440 of the Nevada Act. To qualify, you must dissent with respect
to all of the shares beneficially owned by you. You may assert dissenters'
rights as to fewer than all the shares recorded in your name only if you dissent
with respect to all shares beneficially owned by any one person and notify
Peppermill in writing of the name and address of each person on whose behalf you
assert dissenters' rights. If you partially dissent, your rights are determined
as if the shares as to which dissent is made and the remaining shares were
recorded in the name of different shareholders. If you are the beneficial owner
of shares, you may dissent only if the record owner consents in writing and you
give that consent to Peppermill. Set forth below is a summary of the procedures
relating to the exercise of dissenters' rights. This summary does not purport to
be a complete statement of the provisions of Sections 92A.380, 92A.420 and
92A.440 of the Nevada Act and is qualified in its entirety by reference.
To assert dissenter's rights, you must:
(1) deliver to the corporation, before __________, written notice of
your intent to demand payment for your shares if the merger is
effectuated; and
(2) not vote your shares in favor of the merger.
If the proposed merger creating dissenters' rights is authorized, the
corporation shall deliver a written dissenters' notice to all shareholders who
satisfied the above requirements (1)-(2). The dissenters' notice must be sent no
later than 10 days after the effectuation of the merger, and must:
(1) state where the demand for payment must be sent and where and
when certificates, if any, for shares must be deposited;
(2) inform the holders of shares not represented by certificates to
what extent the transfer of the shares will be restricted after
the demand for payment is received;
(3) supply a form for demanding payment that includes the date of the
first announcement to the news media or to the shareholders of
the terms of the proposed action and requires that the person
asserting dissenters' rights certify whether or not he acquired
beneficial ownership of the shares before that date;
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(4) set a date by which the corporation must receive the demand for
payment, which may not be less than 30 nor more than 60 days
after the date the notice is delivered;
(5) be accompanied by a copy of Sections 92A.300 to 92A.500.
A shareholder to whom a dissenters' notice is sent must:
(1) demand payment;
(2) certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenters'
notice for this certification; and
(3) deposit his certificates, if any, in accordance with the terms of
the notice.
A shareholder who demands payment and deposits his certificates, if any,
before the proposed merger occurs retains all other rights of a shareholder
until those rights are canceled or modified by the taking of the proposed
merger. The shareholder who does not demand payment or deposit his certificates
where required is not entitled to payment for his shares.
Within 30 days after receipt of a demand for payment, Peppermill shall pay
each dissenter who complied with (1)-(3) above the amount the company estimates
to be the fair value of the shares, plus accrued interest.
If you withdraw the written demand to be paid the fair value of your
shares, or if the merger is abandoned or terminated, or if a court determines
that the holders of Peppermill common stock are not entitled to receive payment
in exchange for shares, or if you otherwise lose your dissenter's rights, then
you will be reinstated to all of your rights as a holder of Peppermill common
stock as of the filing of your written objection.
A dissenter may notify Peppermill in writing of his own estimate of the
fair value of his shares and the amount of interest due, and demand payment of
his estimate, or reject the company's offer and demand payment of the fair value
of his shares and interest due, if he believes that the amount paid is less than
the fair value of his shares or that the interest due is incorrectly calculated.
A dissenter waives his right to demand payment unless he notifies
Peppermill of his demand in writing within 30 days after Peppermill made or
offered payment for his shares.
If a demand for payment remains unsettled, Peppermill shall commence a
proceeding within 60 days after receiving the demand and petition the court to
determine the fair value of the shares and accrued interest. If Peppermill does
not commence the proceeding within the 60-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
25
<PAGE>
BUSINESS OF PEPPERMILL
HISTORICAL OVERVIEW OF PEPPERMILL
Peppermill Capital Corporation, a Nevada corporation, was incorporated on
April 9, 1998. Peppermill has no subsidiaries and no affiliated companies.
Peppermill's executive offices were located at 2500-1177 West Hastings Street,
Vancouver, B.C., Canada, V6E 2K3. After the stock purchase, the offices were
moved to Varner's offices located at 1819 Clarkson Road, Suite 205,
Chesterfield, Missouri 63017.
Peppermill has obtained quotation on the OTC Bulletin Board and its common
stock commenced trading under the symbol PEPM on November 25, 1999. The market
maker for Peppermill is Emerson Bennett & Associates, LLC, 6261 N.W. 6th Way,
Suite 207, Fort Lauderdale, Florida, USA 33309.
Peppermill has not been subject to bankruptcy, receivership or any similar
proceedings.
Peppermill is engaged in the exploration and development of mineral
properties. Peppermill presently has the mineral rights to certain mineral
claims located in the Princeton area of British Columbia, Canada and undertook
exploration activities on its mineral claims in February, 1999 in order to
maintain the claims in good standing with the Gold Commission of British
Columbia and to adhere to the recommendations put forth in the June 16, 1998
geological report prepared by James W. McLeod, P. Geo. as more fully described
below.
Peppermill has no revenue to date from the development of its mineral
claims, and its ability to effect its plans for the future will depend on the
availability of financing. It is anticipated that after the merger, management
efforts will be focused primarily on the business of Varner and that at least
for the immediate future little or no effort will be made to develop
Peppermill's mining business further.
Peppermill has a 100% interest in certain mineral claims known as the Star
mineral claims situated 12 miles north of the Village of Princeton, British
Columbia, Canada. The claims area totals approximately 587 acres.
Peppermill completed an exploration program on its mineral claims in
February 1999 that was undertaken by Mr. Edward Skoda, mining consultant. The
program, as performed and reported upon by Mr. Skoda comprised the following.
"In preparation for a proposed geological and geophysical survey, as
per the recommendations in the June 16, 1998 Geological Report by Mr. James
W. McLeod, P. Geo., line cutting and grid establishment was commenced on
February 4, 1999.
The baseline was brushed out and stations were horizontally chained-in
every 100 meters. Chaining was completed using 10 meter intervals and flagged.
The baseline totals were 1,581 meters.
The grid sampling lines were brushed out with stations horizontally
chained-in and flagged every 10 meters, for a total distance of 2,949 meters.
26
<PAGE>
To date the combined gridding for the baseline and gridline layout is 4,530
meters.
On February 8, 1999 the above exploration work was filed with Canada's
Ministry of Energy and Mines under a Statement of Work, Section 29, 30, 31 and
50 of the Canadian Minerals Act. All 11 of the Star Claims were therefore
maintained in good standing. Six of the claims expired on February 16, 2000, and
five of the claims expire on June 22, 2000.
OTHER MINERAL PROPERTIES
Peppermill has not identified any other mineral properties either for
staking or purchasing. It is not contemplated that Peppermill will seek other
mineral properties in the near future in order to diversify its holdings into
other areas of interest and minerals. Peppermill has not yet inaugurated any
steps toward the investigation of any mineral claims, and does not presently
have the financial capacity to do so and it is not anticipated that Peppermill
will commence its mining operations in the near future.
EMPLOYEES
As of the date of this Proxy Statement/Prospectus, Peppermill had one
employee, Clayton W. Varner, its President. Peppermill is not a party to any
employment contracts or collective bargaining agreements. The British Columbia
area has a relatively large pool of people experienced in exploration and
development of mineral properties; being mainly geologists and mining
consultants. In addition, there is no lack of people who have experience in
working on the mineral claim either as laborers or prospectors.
PEPPERMILL'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General.
Peppermill has not yet received revenues from operation. After the merger
it is anticipated that management's primary focus will be on the business of
Varner and that Peppermill's operations will not be developed further at least
for the immediate future.
Plan of Operation.
Peppermill's management to date concentrated on the Star Claims. Peppermill
has had limited operations and no revenues to date.
Liquidity and Capital Resources.
Peppermill had no assets and no liabilities as of December 31, 1999.
Peppermill will require significant additional financing in order to
continue on with either the Varner or mining business. No financing has been
arranged. If Peppermill is unable to raise additional capital, it will not be
able to engage in any future operations.
An analysis of the expenses for the period from inception, being April 9,
1998, to December 31, 1998, and for the year ended December 31, 1999, are as
follows:
27
<PAGE>
<TABLE>
<CAPTION>
From April 9, 1998 For the Quarter
(date of inception) to For the Year Ended Ended
December 31, 1998 December 31, 1999 March 31, 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
Accounting and audit $ 3,050 $ 2,798 $10,307
Assessment work 1,800 -- --
Bank charges 119 36 --
Consulting fees 7,800 13,200 --
Filing Fee - EDGAR -- 1,634 $ 1,349
Incorporation costs written off 640 -- --
Amortization of Mining Rights -- 2,129 --
Legal 2,500 -- --
Office and miscellaneous 727 267 --
Report preparation 619 -- --
Salary -- -- --
Transfer agent's fees 2,777 1,435 --
Travel 3,000 -- --
------- ------- -------
TOTAL EXPENSES $23,032 $21,499 $11,656
======= ======= =======
</TABLE>
An analysis of the above expenses is as follows:
Accounting and Audit.
Peppermill has expended funds for accounting and auditing in connection
with a Form 15C-211B submitted to NASD in connection with the listing of its
common stock on the OTC Bulletin Board. Peppermill has also been required to
file quarterly reports on Form 10-QSB.
Amortization of Mining Rights.
Peppermill has amortized costs of obtaining mining rights which were
previously capitalized.
Assessment Work.
Peppermill engaged the services of Edward Skoda to perform certain
exploration work on the property more fully described above. This work was
assigned in December but was not performed and filed with the Gold
Commissioner's Office until February 1999.
Bank Charges.
Represents bank service charges during the period.
Consulting Fees.
Consulting fees include payments for (i) preparation of various securities
subscription agreements, Offering Memoranda, corporate minutes and various other
documents required by Peppermill, and (ii) expenses incurred in identifying a
market maker for Peppermill.
28
<PAGE>
Incorporation Costs Written Off.
Peppermill decided to write off the cost of incorporation rather than
capitalize it.
Legal.
Legal fees were incurred in obtaining a tradeability letter on the issued
shares of Peppermill. This letter was filed along with the Form 15C-211.
Office and Miscellaneous.
Office and miscellaneous represents charges paid for photocopying, faxing
and delivery.
Report Preparation.
James McLeod was paid the sum of $619 for the preparation of his geological
report on the Star Claims dated June 16, 1998.
Transfer Agent's Fees.
Transfer agent's fees include an annual fee of $1,200, printing of share
certificates and obtaining CUSIP.
Travel.
Peppermill reimbursed its former President, Brent Vickers, for travel costs
to Florida to meet with Peppermill's market maker. This expense was incurred
subsequent to the resignation of Brent Vickers as President and Director of
Peppermill.
Peppermill has no contractual obligations for either leased premises,
employment agreements or work commitments on the Star Claims and has made no
commitments to acquire any asset of any nature.
The majority of the general and administrative expenses relate to filing
costs, transfer agent's fees and audit and accounting.
To date, Peppermill has spent $2,129 for exploration and development of the
Star Claims. This expenditure has enabled Peppermill to maintain all its mineral
claims in good standing to maturity.
Management does not believe Peppermill's operations have been materially
affected by inflation.
29
<PAGE>
SECURITY OWNERSHIP IN PEPPERMILL OF CERTAIN BENEFICIAL OWNERSHIP AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of each person who is known to be an executive officer,
director or the beneficial owner of more than 5% of Peppermill's Common Stock as
of the date of this Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent
of Beneficial Owner Ownership(1)(2) Ownership
------------------- --------------- ---------
<S> <C> <C>
Varner Technologies, Inc. 10,116,000 90%
1809 Clarkson
Suite 205
Chesterfield, MO 63017
Clayton W. Varner 4,252(3) *
Tjody Varner 0(4) *
Robert W. Rapp 0(5) *
All Officers and Directors as a group 2 4,252 *
persons
</TABLE>
----------
* Less than 1%.
(1) As of the date of this Proxy Statement/Prospectus, there were 11,239,700
common shares outstanding. Unless otherwise noted, the security ownership
disclosed in this table is of record and beneficial.
(2) Under Rule 13-d under the Exchange Act, shares not outstanding but subject
to options, warrants, rights, conversion privileges pursuant to which such
shares may be acquired in the next 60 days are deemed to be outstanding for
the purpose of computing the percentage of outstanding shares owned by the
persons having such rights, but are not deemed outstanding for the purpose
of computing the percentage for such other persons.
(3) Mr. Varner is the beneficial owner of 7,292,210 shares, comprising
approximately 30%, of Varner Technologies, Inc. common stock.
(4) Ms. Varner is the beneficial owner of 601,000 shares, comprising
approximately 2.45 percent, of Varner Technologies, Inc. common stock.
(5) Mr. Rapp is the beneficial owner of 1,707,408 shares, comprising
approximately 7%, of Varner Technologies, Inc. common stock.
30
<PAGE>
DESCRIPTION OF SECURITIES
Peppermill's Articles of Incorporation currently provide that Peppermill is
authorized to issue 200,000,000 shares of common stock, par value $0.001 per
share. As of the date of this Proxy Statement/Prospectus, 11,239,700 shares were
outstanding. Peppermill shareholders will be voting on an amendment to
Peppermill's Articles of Incorporation that would authorize 600,000,000 shares
of common stock, par value $0.001 per share and 100,000,000 shares of preferred
stock, par value $0.001 per share. See Annex B.
Common Stock.
Each holder of record of Peppermill's common stock is entitled to one vote
per share in the election of Peppermill's directors and all other matters
submitted to Peppermill's stockholders for a vote. Holders of Peppermill's
common stock are also entitled to share ratably in all dividends when, as, and
if declared by Peppermill's board of directors from funds legally available
therefor, and to share ratably in all assets available for distribution to
Peppermill's stockholders upon liquidation or dissolution subject in both cases
to any preference that may be applicable to any outstanding preferred stock.
There are no preemptive rights to subscribe to any of Peppermill's securities,
and no conversion rights or sinking fund provisions applicable to the common
stock.
Neither Peppermill's Articles of Incorporation nor its bylaws provide for
cumulative voting. Accordingly, persons who own or control a majority of the
shares outstanding may elect all of the board of directors, and persons owning
less than a majority could be foreclosed from electing any.
Preferred Stock.
Holders of Peppermill preferred stock, when authorized and issued, will
have rights equal, to the extent possible, to those of holders of Varner
preferred stock. See "Comparison of Rights of Holders of Varner Capital Stock
and Peppermill Capital Stock."
Options Outstanding.
There are currently no options, warrants or rights to purchase Peppermill's
common stock.
MARKET INFORMATION
Peppermill's common stock began trading on the National Association of
Securities Dealers, Inc. ("NASD") Bulletin Board on November 25, 1999.
31
<PAGE>
The high and low bid prices for Peppermill's common stock since that period
is as follows:
Period High Low
------ ---- ---
November 25, 1999 (the inception of
trading) to December 31, 1999 $10.00 $4.875
January 1, 2000 to March 31, 2000 $ 7.250 $5.00
April 1, 2000 to May 31, 2000 $ 5.00 $2.00
Peppermill's market maker is Emerson, Bennett & Associates, LLC, 6261 North
West 6th Way, Suite 207, Fort Lauderdale, Florida 33309.
HOLDERS
The number of record holders of Peppermill common stock as at March 31,
2000, was 32 of which one was a director.
DIVIDENDS
Peppermill has never paid cash dividends on its common stock and does not
intend to do so in the foreseeable future.
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be equity securities that has a market price
(as defined) of less than $5.00 per share, subject to certain exemptions.
Peppermill's common stock may be deemed to be a "penny stock" and thus, may
become subject to rules that impose additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors, unless the common stock is listed on The
NASDAQ SmallCap Market.
Consequently, the "penny stock" rules may restrict the ability of
broker/dealers to sell Peppermill's securities, and may adversely affect the
ability of holders of Peppermill's common stock to resell their shares in the
secondary market. (See "Risk Factors - Sales of Peppermill's Securities may be
Subject to the Penny Stock Rules.")
LEGAL PROCEEDINGS
There are no legal proceedings to which Peppermill is a party or to which
its property is subject, nor to the best of management's knowledge are any
material legal proceedings contemplated.
32
<PAGE>
DISAGREEMENT WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
From inception to April 7, 2000, Peppermill's principal accountant was
Andersen Andersen & Strong, L.C. of Salt Lake City, Utah. On April 10, 2000,
Peppermill voluntarily changed its independent accountants from Andersen
Andersen & Strong, L.C. to Kaufman, Rossin & Co. This change was approved by
Peppermill's board of directors. The financial statements for the year ended
December 31, 1999 were audited by Kaufman, Rossin & Co. The report of Andersen
Andersen & Strong, L.C. for the period from inception to February 28, 1999
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or application of accounting principles.
The reports of Andersen Andersen & Strong, L.C. and Kaufman, Rossin & Co.
contain an explanatory paragraph that states that the developmental state of
Peppermill and the need for additional working capital for its planned
activities, raise substantial doubt about its ability to continue as a going
concern. Through the date of replacement, there were no disagreements with
Andersen Andersen & Strong, L.C. on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
VARNER'S BUSINESS
OVERVIEW
Varner Technologies, Inc. is a Missouri corporation, incorporated on
November 17, 1994, with headquarters at 1819 Clarkson Road, Suite 204,
Chesterfield, Missouri 63017, telephone number (636) 530-4532. Our Internet site
on the World Wide Web is located at www.varner.com and www.npwt.com.
Varner plans to distribute, promote and market Internet services,
e-commerce, long distance services, wireless services and products, pre-paid
calling cards, and the latest in communications services to the public. Varner
also develops proprietary software for license. Funds for corporate development
to date have been raised privately. We established our corporate infrastructure,
selected products, and conducted technological development during 1996. In March
of 1997, we founded a marketing arm, Networking People with Technology, LLC, or
NPWT, to test distribution of products and services, by network marketing
through independent representatives. Networking People with Technology, LLC has
spread the sale of our products and services into forty-nine (49) states. Our
greatest market share is in Illinois and Missouri with a majority of Internet
users located in those states. Varner has established pockets of influence in
Maryland, Pennsylvania, Virginia, Nebraska, Arkansas and California. Varner
works with twelve (12) Internet service networks and thirty-four hundred (3400)
points of presence in North America. We service approximately 60,000 Internet
and e-mail accounts.
COMPANY BACKGROUND AND BUSINESS
Varner is an Internet service provider, or ISP, offering a range of
Internet access services to organizations and individuals by means of the
Company's developing computer network. The Company's focus is on the so-called
"dial-up" (i.e., individual) market. Varner's goal has been to create a
reliable, high speed and low-cost network allowing local access to the Internet
across the United States. In addition to Internet access services, Varner also
offers prepaid phone cards.
33
<PAGE>
Varner was established for the purpose of providing low- and fixed-cost
access for individuals and organizations to the Internet. Varner offers
unlimited Internet access for $9.95 per month, which must be paid for one year
in advance. Varner charges a $30 setup fee for Local Access Service and a $60
setup fee for 800 Nationwide Access Service.
A critical success factor for any ISP is the ability to expand and maintain
local access capabilities. It is very important that ISPs provide subscribers
local access (i.e., local, not long-distance, telephone calls). Within the ISP
market this capability is referred to as points of presence, or POPs. Varner
currently has approximately 3,400 POPs in North America. Varner owns twelve POPs
and has entered into agreements with other ISPs for access to the remaining
POPs. Varner's individual and corporate subscriber base consists of
approximately 60,000 Internet and e-mail accounts as of December, 31, 1999.
Varner licenses the right to market Varner products and services to NPWT.
NPWT then enters into agreements with independent representatives who market
Varner's products and services. NPWT currently has 10,000 Independent
Representatives. Accordingly, all revenue is generated in NPWT and paid out to
Varner as a royalty. The diagram below outlines Varner's structure:
-----------------------------
Varner Technologies, Inc.
----------------------------- --------------------------
| | Licenses right to use
| | Varner name and sell
| |---------------- Varner products and
| | services in return for
| \ / royalty payment.
------------------------------------------ --------------------------
Metworking People With Technology, LLC
------------------------------------------
|
|
-------------------------------
Independent Representatives
-------------------------------
|
|
-------------------------------
End Users
-------------------------------
In addition to Internet access, Varner offers low cost long distance rates
through the use of prepaid calling cards, prepaid computer usage cards, and
computer hardware.
34
<PAGE>
Further, Varner has agreements in place to provide Voice over the Internet
technology, and prepaid cellular phone cards.
PRODUCTS AND SERVICES
Varner's goal with the Internet via the service it calls Income Online are:
(1) to create a nationwide Internet network through consolidation of ISPs; (2)
to develop nationwide high-speed access; (3) to provide voice over the Internet;
(4) to standardize protocols for commerce and telecommunications; (5) to allow
consumers to earn income through the Internet at their home (virtual
employment); (6) to customize information via phone, personal computer and home
network computer; and (7) to provide multiple interfaces to allow consumers and
business to access the Internet.
One of Varner's products is Income Online, which has been developed based
on the assumption that individuals will be able to make money at home using Web
sites in the future. Management of Varner believes that the advertising
community will, over the medium- to long-term, compensate consumers to come to a
given site in the Internet, thus allowing the consumer to make Income Online.
Varner currently has two principal services available:
1. Local Nationwide Internet Access:
Varner operates as an ISP providing low cost local service in major
metropolitan areas. Internet installation disks are distributed by independent
representatives for ease of subscription. Varner offers high speed Internet
access through 128K and ISDN links. Varner works with twelve (12) networks and
thirty-four hundred (3400) POPs in North America. Varner has accumulated
approximately 60,000 Internet and e-mail accounts. To provide Internet access
nationwide we have entered into a number of strategic alliances and contractual
arrangements providing access to over 3,400 POPs nationwide through PSINet,
Southnet, OneMain.Com, Millenium, Starnet, and UUNet.
2. Prepaid Calling Card Services
Varner offers a wide variety of pre-paid calling card options. Varner
Pre-Paid calling cards range in prices from 5 to 8.9 cents per minute for
domestic calls. Competitive international rates are also offered. Cards are
marketed as Clean Cards with no connection and service charges.
35
<PAGE>
MARKET AND COMPETITION.
Internet Use and Technology Trends
In February of 1999, International Data Corporation ("IDC") of Framingham,
Massachusetts released a report entitled "IDC Predictions '99: The "Real"
Internet Emerges". Excerpts from the report are outlined below.
o The number of Internet users will increase 28%, to 147 million.
o Internet commerce will more than double, to US$69 billion.
o Small businesses will take off as a key online business community
o Personalization / customization will be the "ante" for successful
Internet sites.
The Computer Almanac Industry estimated in April of 1999 that at the end of
1998 there were 364.4 million personal computers in use globally. The report
also ranked the top fifteen personal computer markets around the world. The U.S.
topped the list with 129 million personal computers in use, followed by Japan,
Germany, the UK and France.
Determining how many users are connected to the Internet is still an
inexact science, and experts and those who constantly monitor the markets differ
with respect to exact numbers. According to Internet surveys by NUA Ltd. ("NUA")
of New York, New York and Dublin, Ireland, the vast majority of Internet users
are located in North America, with over 179 million currently connected to the
Internet worldwide. Approximately two-thirds of Internet users and hosts reside
in Canada and the U.S. Nielsen/Net Ratings estimates that in June 1999, 105
million people in the US were online, up 3.2% from May at 101.0 million and
April at 95.8 million.
============================
Millions of Users
----------------------------
Africa 1.14
----------------------------
Asia/Pacific 26.97
----------------------------
Europe 42.69
----------------------------
Middle East 0.88
----------------------------
Canada/USA 102.03
----------------------------
Latin America 5.29
----------------------------
World Total 179.00
----------------------------
Source: NUA Internet
Surveys: How Many
Online? June 1999
============================
36
<PAGE>
Analysts project that worldwide usage will increase as PC penetration
increases outside North America, new telecommunications infrastructures are
developed, and increased bandwidth technology is introduced.
According to a January 1999 study released by InfoBeads, a subsidiary of
Ziff-Davis Inc., there were over 67.5 million personal computers connected to
the Internet in the U.S., a 50% increase over January 1998. IntelliQuest
Research recently reported that average time spent per month online is up an
hour, from 6.0 to 7.0, over last year. Home viewing ran at 206.5 pages per month
in 1998 and 293.1 in 1999. The average home user is spending five hours a month
online at home. IntelliQuest Research also noted that an additional 41 million
people plan to go online at some point in the future - 17.2 million within the
next year. IntelliQuest Research reports that users are spending more time
online, averaging 12.1 hours per week (i.e., at home and work), as compared to
10.9 hours per week a year ago.
IntelliQuest Research also noted that there is an increase in online
shopping and purchasing activity, with 56 million people, or nearly 70% of the
online population, shopping online in the last three months. At the same time,
23.5 million, or 28% of the population, reported that they actually made a
purchase online in the past three months.
Although the number of Web users is increasing in many foreign countries,
Internet commerce is currently U.S.-centric. In 1998, 56% of Web users resided
outside the United States; however, non-U.S. Internet commerce accounted for
only 26% of worldwide spending. By 2003, IDC estimates 65% of Web users will be
international, and non-U.S. countries will account for just less than half of
worldwide Internet commerce.
Internet Service Provider Market
According to a recent article from the online news source InternetNews.com
entitled "ISPs Threatened by Cable Access Encroachment" the international
technologies research firm Arthur D. Little Inc. ("ADL") reported that there is
a growing preference in the U.S for cable access for those subscribers desiring
high speed Internet access.
ADL reports that in the U.S. consumers favor cable modem Internet access by
a 2:1 margin over Digital Subscriber Line ("DSL") services. ADL further reports
that cable access providers report that more than one million cable modems have
been installed in U.S. homes to date.
Cable modem access may be a small fraction of the 38 million households
currently utilizing online services, but the ADL study found that up to 28
percent of U.S. households would subscribe to a cable access provider and pay
$40 a month for the service. As much as 43 percent of these households would
drop their current dial-up ISP, rather than pay $10 extra to be able to continue
to use their ISP's e-mail service, chat, and other features in addition to cable
access. According to the report, 21 percent of the same households would pay the
extra fee to connect through both their cable and dial-up access providers. As
much as 25 percent of those surveyed, said they would postpone adoption of the
cable modem service in order to wait for their ISP to offer a comparable
high-speed Internet access solution.
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<PAGE>
Peter D. Shapiro, ADL's communications practice principal, noted the
following: "America Online Inc. and other dial-up ISPs are vulnerable. This is a
major reason they are campaigning around the country and in Washington to win
direct access to cable modem users," Shapiro said. "There are good business
reasons for both AOL and cable companies to resolve their differences now. AOL
faces a steady erosion of their subscriber base as this process goes forward. On
the cable side, they need to build their infrastructure to be the network of
choice."
Gartner Group's Dataquest unit and Frost & Sullivan of New York, New York
report that while ISP subscription fees from US households are currently
estimated at a rate of $7 billion per year, as the Internet continues to evolve,
ISPs must examine other revenue-generating opportunities to remain competitive.
Dataquest reports on two emerging trends in the ISP marketplace:
1. "A serious issue for ISPs to consider is the rapid decline in the
growth at which new households will become subscribers," said Dr.
Harry Hoyle, vice president for Dataquest's e-Home: Telecom and
Online Services US program. "This alone will result in the lower
growth rate of consumer expenditure on home PC-based Internet
access from 39 percent annually from 1996 to the middle of 1999,
to a projected 8 percent annual growth through 2001."
2. The expanding "free-to-user" mentality. Dataquest analysts said
more US consumers will expect free Internet access in the future.
"Free Internet access at conventional modem speeds is already
offered by e-mail only services, as well as some smaller ISPs,"
Hoyle said. "While it's unlikely that US households will migrate
en masse to free access providers, the growth in households with
free Internet access will accelerate due to the intense
competition for the remaining new subscribers and the need to
retain existing subscribers."
The trend towards free Internet access is currently more prevalent in Europe
than in the United States. In Europe, ISPs have focused on reducing customer
acquisition costs in an effort to drive down Internet subscriber fees.
In many instances, ISPs are forming relationships with brick-and-mortar
brands such as banks and retailers through outsourcing agreements or
co-branding. "These new relationships offer established brick-and-mortar
retailers an opportunity to quickly launch a presence on the Internet," says Dr.
Harry Hoyle, a Dataquest Vice President. "Conversely, it offers ISPs a way of
enriching their sites to attract more transaction income that will replace the
revenue lost from Internet access subscriptions."
In a report entitled "US Internet Value Added Services Market", Frost and
Sullivan noted that ISPs and Web hosting firms must distinguish themselves from
the 4,000 competitors in the marketplace in order to succeed. "It is not enough
any more just to offer Internet access," said Frost & Sullivan analyst Generosa
Litton. "Services such as Web hosting and application hosting are both key
value-added services that enable a firm to stand out in a 'noisy' market."
38
<PAGE>
Frost & Sullivan reports that Internet value-added services generated $1.47
billion in 1998, a 316 percent increase over 1997. The report also found the
value-added services market to be poised for tremendous growth, led by the
increasing use of the Internet as a marketing and distribution tool, the need
for management and support services, and new technologies.
According to a recent report from International Data Corp. ("IDC") of
Framingham, Massachusetts, the US ISP market will continue to grow through the
year 2003. The report, entitled "Internet Service Provider Market Review and
Forecast, 1998-2003," projects that the US ISP market will generate almost $4.5
billion-worth of extra revenue annually over the next three years.
However, IDC projects that a significant portion of this growth will be
realized by market leaders, which IDC identifies as America Online, Inc. ("AOL")
and MCI WorldCom. IDC predicts revenues in the US ISP market will increase 41%
from $10.7 billion in 1998 to $15.1 billion in 1999. According to IDC, revenues
will increase at a compound annual growth rate of 28 percent through 2003 to
$37.4 billion, making the ISP market the fastest-growing telecommunications
market ever.
IDC's report splits the ISP market into four market segments: corporate
access, individual access, wholesale, and value-added services. In 1998 the
individual access segment was the largest, with $4.7 billion in revenues.
According to Mark Winther, IDC's Group Vice President of Worldwide
Telecommunications, the individual market looks set to maintain its position as
the largest segment until 2003, when value-added services will become the
largest segment. According to the report, AOL owns the largest share of the
overall market, with 23% and MCI WorldCom is second, with 17%.
IDC is also projecting competition to increase in the market. Mr. Winther
was quoted as saying "Access will become a commodity and vendors will have
limited opportunity to differentiate or compete other than on cost. To maintain
growth and competitiveness into the first decade of the 21st century, ISPs will
have to invest in value-added services,". According to Winther, the key growth
drivers in the near term are a mix of new customers and existing customers'
expanded spending.
Telecommunications Market
The use of prepaid calling cards began in the 1970's in Europe. After a
successful development of the market in Europe, companies in the United States
began the use of the prepaid cards in 1991. Sales of prepaid cards grew from
$500,000 in 1991 to an estimated $1.5 billion in 1996. We have recently entered
into contracts to market prepaid calling cards nationwide for international and
domestic calls at competitive rates.
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COMPETITION
Internet Service Industry
Current estimates of the ISP market in the U.S. place the number of ISPs at
over 4,000. Many of these are small local or regional ISPs that offer dial up
services only for a small regional area. However, the growth in the Internet
usage rates and the cost associated with developing a network have also resulted
in a number of large, national ISPs. Outlined below is a small sample of some of
the direct competitors to the Company.
America Online, Inc. ("AOL") of Dulles, Virginia. Its more than 19 million
subscribers make AOL the world's #1 provider of online services. AOL's 1998
acquisition of CompuServe (now subsidiary CompuServe Interactive Services),
which has more than 2 million subscribers, helped to secure AOL's dominance. AOL
appeals to those seeking entertainment, but CompuServe is geared toward
professionals and small-business owners. Its purchase of Netscape Communications
in 1999 brought the popular Navigator Web browser and the Netcenter Internet
portal into the AOL fold. The company is also launching an interactive TV
service (AOL TV) via the DIRECTV satellite service and has forged an alliance
with computer maker Gateway.
MindSpring Enterprise, Inc. ("MindSpring") of Atlanta, Georgia. MindSpring
has relied on acquisitions to move into the top tier of US ISPs, and by merging
with rival EarthLink the company will become the number two ISP in the U.S.
behind AOL. Dial-up Internet access (more than 1 million subscribers) accounts
for nearly 85% of MindSpring's sales. The company also provides Web hosting
(45,000 accounts) and dedicated access lines for business customers. MindSpring,
is beginning to offer high-speed cable modem Internet access over leased
networks.
EarthLink Network, Inc. ("ENI") of Pasadena, California. EarthLink Network
has more than 1 million customers throughout the US and Canada. Upon the merger
with MindSpring, the combined company will be the #2 US ISP behind AOL. The
company's TotalAccess software package works with third-party browsers and is
marketed through distribution agreements.
Prodigy Communications Corporation ("Prodigy") of White Plains, New York.
Prodigy offers its Internet subscribers Internet access, Web hosting, and
e-commerce services. Prodigy still offers its original online services,
including e-mail and chat groups, as Prodigy Classic. Prodigy, which has a total
of 1.2 million subscribers, which includes 150,000 for Prodigy's Mexican ISP
service. The company has agreed to combine its Internet access operations with
those of SBC Communications (650,000 customers). Prodigy will own 57% of the
partnership, which will operate under the Prodigy brand name; SBC will own 43%.
PSINet, Inc. ("PSINet") of Herndon, Virginia. PSINet offers a variety of
access services, Web-site design and hosting, electronic commerce, and security
programs. PSINet has offices in 11 countries and serves 26,500 corporate
customers. PSINet is no longer an Internet service provider (ISP) for individual
consumers, but it does allow other consumer-based ISPs to use its networks for a
fee. PSINet has assembled a worldwide fiber-optic network with 600 points of
presence (POPs), serving 22 countries in North and South America, Europe, and
the Asia/Pacific region.
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Network Marketing
We are subject to competition in the recruiting of independent
representatives from other network marketing organizations that market long
distance services, health products, cosmetics, and food and dietary supplements
such as Excel, Amway, American Communications Network, TDG Communications,
BeautiControl Cosmetics, Inc., Herbalife International, Inc. and Mary Kay, Inc.
ACN and Excel representatives sell long distance services. Amway independent
representatives sell "1-plus" long distance service for MCI, and TDG sells MCI
Paging Services and the MCI Vnet Calling Card.
MARKETING PLAN
Varner plans to increase the number of subscribers for its Internet service
through the acquisition of independent ISPs across the United States and through
the continuing efforts of its network of independent representatives.
Varner is planning to expand its business in the future by offering
additional or add-on services including the following:
o Offering computer hardware and software to our Internet users and
independent representatives to make it easier to take advantage
of the latest technology in setting up their communications
systems for the Internet.
o Providing Voice over Internet, converting the ISP to an Internet
Local Exchange Carrier making it possible to make long distance
calls over the Internet with only a connection fee and no cost
per minute.
o Establishing a Computer Pal support center to aid the growing
number of PC users in obtaining the advice of hardware, software,
and Internet technicians and experts through the use of a prepaid
service plan.
o Providing Internet Emergency Backup Service allowing systems to
backup computers anywhere on the Internet.
o Providing an E-Commerce and Account Processing Service to market
services and products:
o Increasing services available over the Internet including Banking
Services, Prepaid Telephone Services, Voice X-Net, Computer
Hardware/Software, High Speed 2000, and Internet Service.
o Establishing Lay-It-Away, a service permitting customers to
purchase a product for the future and pay for it over a period of
time with an identified delivery date.
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o Establishing 2nd Trade, a conduit for matching buyers and sellers
of business interests.
o Promoting E-Commerce to generate revenues through transactions
across the Internet for proprietary products.
STRATEGIC MERGERS AND ACQUISITIONS.
Varner hopes to grow and expand by creating opportunities for acquiring
other Internet providers and subscribers. A number of opportunities have been
identified and are being pursued. We will seek to acquire compatible ISPs and
companies in related industries, thereby improving our profits and margins
through a larger customer base, increased revenues, and larger sales force.
While expenses will increase with acquisitions, economies of scale and our
method of operations are anticipated to create a decrease in the ratio of
expenses to revenues.
MARKETING
Networking People with Technology, LLC or NPWT, is a wholly-owned
subsidiary of Varner. NPWT has spread the sale of our products and service
through network marketing into forty-nine (49) states. Our greatest market share
is in Illinois and Missouri with a majority of users located in those states. We
have established pockets of influence in Maryland, Pennsylvania, Virginia,
Nebraska, Arkansas, and California. We have implemented creative motivational
packages and will continue to improve them by providing prizes and incentives
including Mercedes automobiles, Rolex watches, vacations, and cash prizes. We
have developed entertaining and motivational conferences to increase interest in
being a part of our team, as well as to make it not only profitable, but
personally challenging to participate as a Varner independent representative.
We plan, in addition to our current network marketing strategy, to utilize
traditional marketing strategies, including but not limited to advertising on
television, radio and print, as well as utilizing the infinite capacities of
telecommunications.
NETWORK MARKETING
NPWT currently markets our Internet and telecommunications products and
service through a network of independent representatives. Varner does not
restrict marketing regions or geographical territories for its independent
representatives. The Company provides independent representatives with ongoing
training and management support services.
Our marketing plan encourages independent representatives to enroll
customers with whom the independent representative have an ongoing relationship
as a result of being a family member, friend, business associate, neighbor, or
otherwise. The network marketing strategy has been selected because it reduces
net marketing cost and customers will be more likely to remain with us because
they have been enrolled by someone with whom they have an ongoing relationship.
We also believe that the network marketing system will continue to build a base
of potential customers
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for additional services and products. We do not require a person to be an
independent representative in order to be a customer.
Persons enter the compensation plan as Independent Representatives and as
they sponsor other independent representatives and sell products they reach
higher levels in the program. The levels in order are Independent
Representative, Manager Director, Regional Manager, and Executive Manager. At
each higher level, independent representatives are entitled to purchase certain
products, like prepaid phone cards, at an increasingly higher discount.
Independent representatives receive retail profits equal to the difference
between the price they sell the products to customers and the discounted price
they paid for the product. Independent representatives also earn wholesale
commissions on products purchased by other independent representatives sponsored
by the independent representative, equal to the difference between the price at
which the independent representative is entitled to purchase product and the
price at which the downline independent representative purchased the product.
Certain levels of independent representatives are also entitled to receive
additional compensation payments of 2% to 5% of the retail sales volume of
certain products or services, like Internet usage fees, sold by their downline
independent representatives.
Independent representatives also receive bonus payments for assisting their
sponsored independent representatives in attaining specified levels of sales and
recruitment during their initial sixty (60) days in the business. Upper levels
of independent representatives are also eligible to participate in these
bonuses.
Our sales growth is based upon the continued development of our independent
representative force and strives to maintain an active and motivated network
through a combination of quality products, discounts, commissions and bonus
payments, sales conventions and training, personal recognition and a variety of
publications and promotional materials.
Our marketing plan and its commission structure is designed to provide our
independent representatives an opportunity for income which compares favorably
with the income opportunities available from other network marketing
organizations.
One of the typical characteristics of network marketing companies is a high
attrition rate of independent representatives. The method of measuring attrition
used by the Direct Selling Association is calculated by dividing the number of
independent representatives who leave the network during the year by the sum of
the independent representatives at the beginning of the year plus the new
independent representatives who sign up during the year. It is not unusual for a
company to have attrition rates in excess of 50%. We believe that our level of
attrition is comparable to that experienced by other companies that use direct
selling to market their products and services. As a result, we have an ongoing
emphasis on recruiting new independent representatives both to replace
independent representatives who quit and to grow the company. We will make an
effort to reduce attrition by bundling services which encourage independent
representatives to remain active.
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Varner establishes a suggested retail price for each of our products, but
representatives are free to determine the price at which they will sell our
products. Independent representatives are not assigned territories and there are
no restrictions on marketing areas.
MANAGEMENT OF INDEPENDENT REPRESENTATIVES
Because independent representatives are independent contractors, and not
our employees, we are unable to provide them the same level of direction and
oversight as we could to our employees. While we will develop policies and rules
to govern independent representatives' behavior as part of our network marketing
plan, it is difficult to enforce such policies and rules for the independent
representatives since they are not employees. Violations of these policies and
rules could reflect negatively on us and have led to complaints to various
federal and state regulatory authorities at other network marketing companies.
We will seek to limit statements that independent representatives make
about our business by requiring independent representatives giving presentations
to potential new independent representatives to adhere to the guidelines
developed by us and documented in our network marketing plan policy and
procedures. Each independent representatives will receive policies and
procedures that must be followed in order to maintain the independent
representatives status in the organization. These policies and procedures forbid
independent representatives from making representations to potential independent
representatives about possible earnings, other than statements prepared by us
indicating the potential range of earnings by independent representatives.
Independent representatives will also be prohibited from creating any marketing
literature that has not been pre-approved by us. We rigorously enforce these
policies and procedures by either suspending or terminating violators.
TRAINING AND MARKETING SUPPORT
We provide training to all independent representatives either directly or
through existing independent representatives. We also plan to offer for sale a
wide variety of marketing tools, audio and videotapes, visual aids, disk
accessories, and clothing and novelty items designed to assist independent
representatives in their marketing efforts and to promote name recognition of
Varner. Varner personnel also participate throughout the country in meetings
that current independent representatives and potential new independent
representative attend to learn more about Varner.
EMPLOYEES
As of the date of this Proxy Statement/Prospectus,Varner and all
subsidiaries had approximately ten full-time employees, comprised of 5
executives, 2 technical support, 3 clerical and administrative support, as well
as 2 part-time employees.
MARKET INFORMATION
Varner's capital stock is not presently traded or listed on any public
market.
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HOLDERS
The number of record holders of Varner's capital stock as of the date of
this Proxy Statement/Prospectus, including holders of common stock, non-voting
common stock, and preferred stock was approximately 400.
DIVIDENDS
Varner has never paid cash dividends on its common stock and does not
intend to do so in the foreseeable future. We currently intend to retain any
earnings for the operation and expansion of our business.
LEGAL PROCEEDINGS
We are not involved in any material pending legal proceedings.
VARNER MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING IS A DISCUSSION OF CERTAIN FACTORS AFFECTING VARNER
TECHNOLOGIES, INC.'S RESULTS FOR THE TWO FISCAL YEARS ENDING DECEMBER 31, 1999
AND 1998, AND ITS LIQUIDITY AND CAPITAL RESOURCES. THIS DISCUSSION SHOULD BE
READ ALONG WITH THE FINANCIAL STATEMENTS AND NOTES. THESE RESULTS ARE NOT
NECESSARILY INDICATIVE OF ANY FUTURE RESULTS.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING
THOSE SET FORTH UNDER "RISK FACTORS". THE FOLLOWING DISCUSSION AND ANALYSIS
SHOULD BE READ IN CONJUNCTION WITH "SELECTED CONSOLIDATED FINANCIAL DATA," AND
FINANCIAL STATEMENTS AND THEIR NOTES THERETO, APPEARING ELSEWHERE IN THIS
DOCUMENT.
VARNER TECHNOLOGIES, INC.'S FISCAL YEAR ENDS ON DECEMBER 31. THE YEARS
MENTIONED THROUGHOUT THIS DISCUSSION ARE FISCAL YEARS.
OVERVIEW
Varner Technologies, Inc. is a nationwide provider of consumer and business
Internet access services, and prepaid telecommunication services. Founded in
November 17, 1994, funds for corporate development were raised privately in 1995
and 1996. Varner established its corporate infrastructure, selected products,
and conducted technological development during 1996. In March of 1997, the
Company founded a marketing arm, Networking People With Technology, LLC, for
distribution of products and services, through independent representatives.
Networking People
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with Technology, LLC has spread the sale of Company products and service into
forty-nine (49) states. Varner's greatest market share is in Illinois and
Missouri with a majority of its Internet users located in those states. The
Company has established pockets of influence in Maryland, Pennsylvania,
Virginia, Nebraska, Arkansas, and California.
REVENUES
Our revenues are generated from the following sources:
o Consumer Internet access services revenues;
o Business Internet access services revenues;
o Prepaid Telecommunication services revenues;
o Sign-up fees and other revenues.
Internet access services revenues consist of annual prepaid and, to a
lesser extent, monthly subscriptions for consumer dial-up access to the
Internet. We offer prepaid and monthly subscribers a full money-back guarantee
upon cancellation of their service if made within 30 days of initiating service.
Amounts received upon the sale or renewal of prepaid annual or monthly
subscriptions are recorded as deferred revenue through the 30 day money-back
cancellation period and then amortized over the remaining period in which
service is provided. Subscribers may cancel their subscriptions at any time
following the initial 30 day period, in which case we charge the subscriber
according to our monthly service rates for services provided through the end of
the month in which the cancellation occurs, plus an additional set-up fee, and
refund any remaining prepaid amounts after such charges. Amounts received upon
the sale or renewal of prepaid internet services are recorded as deferred
revenue and then amortized over the remaining period in which service is
provided.
Business services consisting of dedicated access services also are offered
on a prepaid annual and monthly subscription basis. The revenue recognition
policies and customer guarantee practices described above for consumer access
services also apply to dedicated access business services. Revenues from the
sale of other business services typically involve set-up fees, which are
included in set-up fees and other revenues in our statement of operations, and a
service contract that provides for monthly billing. These business services
revenues are recognized as services are provided. Set-up fees are charged to new
consumer and business services customers. These one-time set-up fees are
non-refundable and are deferred and amortized over a one-year period.
Prepaid telecommunication services revenues consist of the purchase of
minutes from Varner. Sales of prepaid phone cards from third party providers for
which we act as a distributor are recorded as deferred revenue upon sale of the
card and then recognized into revenue upon usage or the card's expiration.
We also derive revenues through sign-up and renewal fees for independent
representatives in our network marketing program. Non-refundable fees are paid
by representatives in our network marketing program at the commencement of
participation in the program and for renewal of participation on each
anniversary of the representative's commencement date. Such fees are deferred
and amortized over a one-year period following the month of initial sign-up or
renewal, as
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the case may be. Sales materials in the form of Duplicator Kits are sold to
independent representatives and revenues recognized at the time of sale.
In addition, fees are generated from advertising and are recognized as
services are provided. Revenues are generated through the sale of computer
software and hardware and revenues are recognized at the time of sale.
During 1997, Varner and its major stockholder formed a limited liability
company, NPWT. This limited liability company, owned 60% by Varner, was formed
to serve as the marketing subsidiary for Varner's products and services. For
financial reporting purposes, the assets, liabilities, and operations of NPWT
have been included in Varner's financial statements. The interest owed by the
major stockholder has not been recorded as a minority interest due to the
accumulated operating losses that have been incurred by NPWT. All significant
intercompany accounts and transactions have been eliminated. As of December 31,
1999, Varner obtained the 40% of NPWT not previously owned for $1.00.
SUBSCRIBER RETENTION
During 1999, our rate of retention of existing subscribers was ____%. We
are planning on allocating substantial resources to improving customer support
and service and to continuously upgrading and improving our network and systems
to improve and maintain customer satisfaction.
SIGNIFICANT COSTS AND EXPENSES:
Varner expects sales and marketing expenses to increase in order to attract
more customers in the U.S. in order to capture market share. Information has
become a utility in a digital based economy and providing the most up to date
communication and information services creates the opportunity for future
growth. Our strategy is to increase our customer base through the sales of both
prepaid telecommunications services and Internet access, by broadening our sales
and marketing efforts in the following areas:
o Expansion of the base of independent representatives in
"Networking People with Technology";
o Direct corporate sales to businesses and partnering with related
industries; and
o Conventional direct marketing through media campaigns and mass
marketing.
By building a strong base of customers utilizing Internet access and
prepaid communications services, we plan to introduce these customers,
subscribers, and representatives to new products and services; including
advertising on our network and e-commerce (Voice over IP, 2nd Trade, and
Lay-it-Away). Direct sales efforts will be made to market telecommunications and
Internet services to businesses. We will look for opportunities to partner with
companies
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introducing and promoting new information and digital technology, and where
possible to merge or acquire such businesses. Additional financing will be
required to implement this strategy.
RESULTS OF OPERATIONS
We have incurred annual and quarterly losses from our operations since our
inception, and we expect to continue to incur operating losses on both a
quarterly and annual basis for the foreseeable future. At December 31, 1999, the
accumulated deficit was approximately $5,485,000. While revenues continue to
increase and the percentage of costs of sales and expenses is decreasing, there
can be no assurance that the increase in revenues can be maintained, or that
profitability can be achieved or sustained. See "Risk Factors".
Revenues:
Revenues for 1999 increased by $1,271,000, from $1,240,000 in 1998, to
$2,512,000, an increase of approximately 103%. This increase was due to the
continued growth in revenue from Internet dial up access customers, as well as
an increase in Varner's prepaid telephone services sales. This resulted from the
growth of the independent representatives marketing products, thereby increasing
the number of prepaid long distance minutes sold and the number of Internet
accounts subscribed. Revenues for the first quarter of 2000 increased by
$121,000 to $739,000, from $618,000 for the same quarter of 1999.
Cost of Sales:
Cost of sales for 1999 decreased by $171,000, from $1,344,000, or 108% of
revenues, in 1998, to $1,173,000, or 47% of revenues. Cost of sales is composed
mainly of the cost associated with the purchase of Internet access to Points of
Presence and purchases of long distance minutes. The percentage decrease
resulted from economies of scale, changes in Points of Presence providers, more
effective utilization of the Points of Presence, and restructuring of the
prepaid telecommunications pricing and purchasing. Costs of sales for the first
quarter of 2000 were $417,000, or 56% of revenues, as compared to $225,000, or
36% of revenues, for the same quarter of 1999.
Operating Expenses:
Total operating expenses for 1999 increased by $854,000, from $1,884,000,
or 152% of revenues, in 1998, to $2,738,000, or 109% of revenues. In 1999,
Varner hired additional employees and consultants to support the expansion of
its network and operations plus to support the continuing growth. Total
operating expenses for the first quarter of 2000 were $815,000, or 110% of
revenues, as compared to $539,000, or 87% of revenues, for the same quarter of
1999.
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Commissions:
Commissions paid to independent representatives were $1,318,000 and
$975,000 for 1999 and 1998, respectively. These expenses are directly related to
sales revenues. Commissions for the first quarter of 2000 were $474,000, as
compared to $262,000 for the same quarter of 1999.
Salaries and Compensation:
Salaries and compensation expense consists of personnel, consultants, and
related costs associated with our executive and administrative functions.
Salaries and compensation expense for 1999 increased $178,000 to $543,000, or
22% of revenues, from $365,000, or 29% of revenues, in 1998. Salary and
compensation expense for the first quarter of 2000 was $155,000, or 21% of
revenues, as compared to $107,000, or 17% of revenues, for the same quarter of
1999.
Other Operating Expenses:
Other operating expenses consist of expenses associated with support of our
Internet and prepaid telecommunications customers, including customer service
and technical support, marketing expenses, including meetings and conferences,
as well as costs related to the purchase of Peppermill common stock and costs of
implementing the merger with Peppermill. Other operating expenses in 1999
increased $325,000, to $775,000, or 31% of revenues, from $450,000, or 36% of
revenues, in 1998. Other operating expenses for the first quarter of 2000 were
$161,000, or 22% of revenues, as compared to $147,000, or 24% of revenues, for
the same quarter of 1999. While there were increases in the expenses to support
increased revenues, subscribers, independent representatives, and customers, as
a percentage of revenues the expenses decreased.
Other Income and Expense:
Varner's interest expense decreased from $7,600, in 1998 to $6,700, in
1999. The expense results from the utilization of a $100,000 line of credit and
capital lease payments. Varner earned interest income of $6,901 in 1999 as
compared to $2,118 in 1998.
Net Loss:
Varner incurred a net loss of $1,399,000 for 1999 compared to a net loss of
$1,994,000 for 1998. Net loss for the first quarter of 2000 was $493,000.
LIQUIDITY AND CAPITAL RESOURCES
Varner has not generated net cash from operations since its inception. Our
primary source of cash has come from private sales of equity securities, loan
proceeds and other financing activities. Varner also has available equipment and
working capital loans and equipment leases from major equipment vendors. Total
cash from financing activities for 1999 was $2,013,000. In 1998, total cash
provided through financing activities was $812,000.
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Varner's cash balance as of December 31, 1999 was approximately $111,000.
Private financing from the sale of preferred stock has been received totaling
$692,000 in the first quarter of 2000 and over an additional $500,000 has been
raised as of the date of this document.
Varner believes that its current funds are adequate to fund its operations
through the third quarter of 2000. Additional financing will be required to fund
operations and planned mergers and acquisitions. Public and private alternative
sources of capital will be sought based on whether the merger with Peppermill is
completed and the timing thereof.
The report of KPMG LLP covering the December 31, 1999, consolidated
financial statements contains an explanatory paragraph that states that the
Company's recurring losses from operations and accumulated deficit raise
substantial doubts about the entity's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
MATERIAL COMMITMENTS
Varner has the following material commitments in the ordinary course of
business including:
o a contract with Network Enhanced Telecom for the purchase of
prepaid minutes for resale by Varner.
o ongoing service agreements with local Internet Service Providers,
including MidAmerica Internet Services, CTNet, SocketNet,
OneMain,com, and KDSI.
o ongoing service agreements with nationwide Internet Service
Providers, including UUNet, PSINet, Millenium, MegaPops, and
SouthNet.
o capital lease obligations of $33,972 and operating lease
obligations of approximately $73,340 for the year 2000. In
addition, Varner has a 3-year operating lease for office space
for $4,900 per month.
VARNER'S MANAGEMENT
MANAGEMENT AND THE INTERRELATIONSHIP OF PEPPERMILL'S MANAGEMENT
Upon the purchase of 90% of Peppermill's common stock by Varner, Clayton
Varner was appointed as President and sole director of Peppermill. Subsequently,
Mr. Varner filled the remaining open directorships with persons who were
directors of Varner, and also appointed certain executive officers of Varner to
hold similar positions with Peppermill. After the merger, it is expected that
these persons will continue to hold these positions with Peppermill. The
following is a listing of the officers and directors of Varner and Peppermill.
All directors will hold offices until the next annual shareholders meeting of
Peppermill.
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<TABLE>
<CAPTION>
POSITION WITH
NAME AGE POSITION WITH VARNER PEPPERMILL
---- --- -------------------- ----------
<S> <C> <C> <C>
Clayton Varner 40 Chairman of the Board, Chief Chairman of the Board, Chief
Executive Officer, Director Executive Officer, Director
Robert Rapp 52 Executive Vice President, Executive Vice President,
Secretary, Director Secretary, Director
Ray Heflin 48 Chief Operating Officer, Chief Operating Officer of
Director Networking People with
Technology, L.L.C. ("NPWT")
Tjody Varner 40 President of Sales and President of Sales and
Marketing, Director Marketing of NPWT, Director
Jessica Varner 20 Vice President of Public Vice President of Public
Relations, Director Relations of NPWT
James Craig -- Director
G. Bryan Thomas -- Director
</TABLE>
The following is a description of the business experience of the
individuals who will serve as directors and officers of Peppermill after the
merger:
Clayton W. Varner was the founder and has been President, Chief Executive
Officer and a director of Varner since inception of the company and will serve
in the same capacity for the surviving company after the merger. He has more
than 20 years of experience in the areas of computer technology and information
services. Prior to forming the company, Mr. Varner was employed from October
1988 to August 1994, with Reliv' International, Inc., a network marketer of
nutritional supplements. Mr. Varner developed and managed an information system
for Reliv'. Mr. Varner studied Business Administration and Computer Science.
Robert W. Rapp has been director and Executive Vice President of Varner
since January 1997 and will hold the same positions with the surviving company
after the merger. Mr. Rapp has been self-employed as a consultant for the past
12 years in areas of capitalization and investment in start-up companies. He was
Senior Vice-President and Director of American Life Investors, a holding company
and predecessor of Reliv International, Inc.
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B. Ray Heflin has been the Chief Operating Officer of Varner since July
1998, and has been a director of Varner since November 1998, and is responsible
for information systems and operations. Mr. Heflin will act as Chief Operating
Officer of Networking People with Technology, L.L.C., a wholly-owned subsidiary
of Varner. Mr. Heflin has over 25 years of experience in executive management.
Prior to joining Varner, Mr. Heflin acted as a consultant to small and medium
sized retail, manufacturing and technology businesses since November 1994. Prior
to that, Mr. Heflin held executive positions with Federated Stores from
September 1992 to November 1994, and with Dillard Department Stores from April
1981 to September 1992. Mr. Heflin received a BSEE in Electrical Engineering
from the University of Arkansas, and received a BSBA in Management (Magna Cum
Laude) and an MBA in Management from Columbia State University.
Tjody Varner was a founding Independent Representative upon the
establishment of Varner's marketing arm, Networking People With Technology, in
March 1997, and became the leader of sales and marketing. In July 1999, Ms.
Varner was appointed President of Sales in order to implement her successful
sales and marketing techniques company-wide. Ms. Varner has 20 years of
experience in sales and marketing. Ms. Varner has owned and operated a
successful sales and marketing firm which marketed many of her own designs from
April 1990 to January 1997. She has extensive knowledge and experience in
network marketing and product development. Her most successful experience was as
a Home Interiors independent representative. Ms. Varner held accounting
positions with Milnot Company and Prairie Farms Dairy, from 1987 to 1989.
Jessica Varner holds the position of Vice President of Public Relations for
NPWT. Ms. Varner manages in-house Communication and Commissions with all
Independent Representatives, as well as overseeing necessary services such as
Customer Service and Representative Relations. Ms. Varner manages all necessary
operations as Officer Manager with Technologies, Inc. She attended Maryville
University for a degree in Communications/Public Relations. She has held
management positions with Varner since 1995.
STOCK OWNERSHIP BY MANAGEMENT AND OTHERS
The following table sets forth certain information with respect to the
beneficial ownership of Varner's capital stock, as of the date of this Proxy
Statement/Prospectus by (i) each stockholder who is known by Varner to be the
beneficial owner of more than 5% of Varner's capital stock, (ii) each director
and executive officer of Varner who owns any shares of Varner's capital stock,
and (iii) all executive officers and directors as a group. Except as otherwise
indicated, we believe that the beneficial owners of the shares listed below have
sole investment and voting power with respect to such shares.
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<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Shares of Voting Common Shares of Non-Voting Common
Stock Beneficially Stock Beneficially Percent of
Name and Address(1) Owned(2)(3) Owned(2)(3) Common Stock(2)(3)(4)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Clayton Varner 7,250,000 42,210 29.75%
----------------------------------------------------------------------------------------------------------
Robert Rapp 1,707,408 0 6.96%
----------------------------------------------------------------------------------------------------------
Tjody Varner 501,000 100,000 2.45%
----------------------------------------------------------------------------------------------------------
Ray Heflin 1,030,000 4.20%
----------------------------------------------------------------------------------------------------------
Jessica Varner 10,200 *
----------------------------------------------------------------------------------------------------------
James Craig 100,000 20,000 *
----------------------------------------------------------------------------------------------------------
G. Bryan Thomas 125,000 119,156 1.00%
----------------------------------------------------------------------------------------------------------
All directors and executive
officers as a group (7
persons) 9,683,408 1,321,566 44.89%
----------------------------------------------------------------------------------------------------------
</TABLE>
----------
* Less than one percent
(1) Except as otherwise indicated, the address of each stockholder listed above
is c/o Varner Technologies, Inc., 1819 Clarkson Road, Suite 204,
Chesterfield, Missouri 63017.
(2) As of the date of this Proxy Statement/Prospectus, there were 14,827,828
shares of common stock outstanding and 9,686,958 shares of non-voting
common stock outstanding unless otherwise noted, the security ownership
disclosed in this table is of record and beneficial.
(3) Under Rule 13-d under the Exchange Act, shares not outstanding but subject
to options, warrants, rights, conversion privileges pursuant to which such
shares may be acquired in the next 60 days are deemed to be outstanding for
the purpose of computing the percentage of outstanding shares owned by the
persons having such rights, but are not deemed outstanding for the purpose
of computing the percentage for such other persons.
(4) Calculations do not take into account up to 2,000,000 shares of Varner
preferred stock, which are convertible into shares of Varner common stock
on a one for one basis. No officer or director owns Varner preferred stock.
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EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation paid or accrued by Varner during the last three fiscal years to its
President, Chief Executive Officer and any other officer who received
compensation in excess of $100,000 ("Named Executive Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
-----------------------------------------------
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation
($) ($)
<S> <C> <C> <C> <C> <C>
Clayton Varner, 1999 $ 0 $ 0 $ 88,100(1) $ 0
President, Chief Executive 1998 $ 0 $ 0 $ 31,800(1) $ 0
Officer 1997 $ 26,100 $ 0 $ 58,163(1) $ 0
Tjody Varner, President of 1999 $ 0 $ 0 $175,900(1) $ 0
Sales of Networking People 1998 $ 0 $ 0 $123,200(1) $ 0
with Technology, L.L.C 1997 $ 0 $ 0 $119,837(1) $ 0
</TABLE>
----------
(1) Represents incentive compensation based on sales revenue.
There were no options granted to or exercised by the named executives
during 1999, and the named executives held no options at the end of 1999.
EMPLOYMENT AGREEMENTS
Varner does not currently have employment agreements with its key
executives. Varner does maintain a key man life insurance policy in the amount
of $1,000,000 on Mr. Clay Varner. Varner also maintains an Errors and Omissions
Policy covering Varner's officers and directors.
COMPENSATION OF DIRECTORS
Directors are not paid for serving as directors but are reimbursed for
travel expenses.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Not applicable.
BOARD OF DIRECTORS AFFILIATIONS AND RELATED TRANSACTIONS
During 1999, Varner converted a subordinated debt of $487,000 owing to an
affiliate of Clay Varner into 3,000,000 shares of voting common stock.
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In June 2000, Varner sold 1,000,000 shares of voting common stock to Clay
Varner, 1,000,000 shares of voting common stock to Robert Rapp, and 900,000
shares of non-voting common stock to Ray Heflin, all at a price of $.10 per
share.
In June 2000, Varner also issued a total of 2,385,000 shares of its
non-voting common stock at a price of $.10 per share to 8 directors and/or
consultants of the Company and a total of 416,667 shares of non-voting common
stock to a consultant at a price of $.01 per share.
COMPARISON OF RIGHTS OF HOLDERS OF
VARNER CAPITAL STOCK AND
PEPPERMILL CAPITAL STOCK
This section describes certain differences between the rights of holders of
Varner Technologies Inc. common stock and Peppermill Capital Corporation common
stock. It will also discuss the rights of the holders of Peppermill preferred
stock which, to the extent possible, will be equal to the rights of current
holders of Varner preferred stock. While this description covers the material
differences between the two, this summary may not contain all of the information
that is important to you. You should carefully read this entire document and the
other documents referred to for a more complete understanding of the difference
between being a shareholder of Varner and being a shareholder of Peppermill.
Varner shareholders are governed by Varner's Articles of Incorporation, as
currently in effect, and Varner's bylaws, both of which adhere to the
requirements of Missouri law as stipulated in the Missouri Business Corporation
Act (the "Missouri Act"). After completion of the merger, Varner shareholders
will become shareholders of Peppermill. As a Peppermill shareholder, your rights
will be governed by Peppermill's Articles of Incorporation and Peppermill's
bylaws, both of which adhere to the requirements of Nevada law as stipulated in
the Nevada Act.
CLASSES OF COMMON STOCK OF VARNER AND PEPPERMILL
Varner has two classes of common stock, which include 17,000,000 authorized
shares of Voting common stock, $.01 par value, and 10,000,000 authorized shares
of non-voting common stock, $.01 par value. Peppermill has one class of common
stock which consists of 200,000,000 authorized shares.
STOCK OPTIONS AND WARRANTS
At present, Varner has no options and warrants outstanding.
There are no outstanding options or warrants to purchase Peppermill's
common stock.
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DIVIDENDS
The board of directors of Varner and Peppermill may, from time to time at
any regular or special meeting, declare and each company may pay dividends on
its outstanding shares in the manner, and upon the terms and conditions provided
by law and the Articles of Incorporation. Dividends may be paid in cash, in
property or in shares of the capital stock. Before payment of any dividend,
there may be set aside out of any funds available for dividends such sum as the
directors of Varner or Peppermill think proper as a reserve or reserves to meet
contingencies or for such other purpose as the directors shall think conducive
to the interests of the corporation.
VOTING RIGHTS
At any Varner or Peppermill meeting, only business specified in the notice
of the meeting or otherwise directed by the board of directors may be
transacted. As a shareholder of Varner or Peppermill, each outstanding share
entitled to vote shall be entitled to one vote upon each matter submitted to a
vote at a meeting of the shareholders.
At all meetings of shareholders of Varner or Peppermill, a shareholder may
vote in person or by proxy executed in writing by the shareholder or by his duly
authorized attorney in fact. Such proxy shall be filed with the Secretary of the
corporation before or at the time of the meeting. Pursuant to Missouri law, no
proxy shall be valid after eleven months from the date of its execution, unless
otherwise provided in the proxy. Under Nevada law, no such proxy is valid after
the expiration of 6 months from the date of its creation.
A majority of the outstanding shares of Varner or Peppermill entitled to
vote, represented in person or by proxy, shall constitute a quorum at any
meeting of shareholders. For Varner, a majority of such quorum shall be valid as
a corporate act unless a different vote is required by law, the Articles of
Incorporation or bylaws. Pursuant to Peppermill's bylaws, when a quorum is
present or represented at any meeting, the vote of the holders of 10% of the
stock having voting power, present in person or represented by proxy, shall be
sufficient to elect directors or to decide any question brought before such
meeting, unless the question is one upon which by express provision of the
statute or of the Articles of Incorporation, a different vote shall govern and
control the decision of such question.
Varner's by laws provide for cumulative voting. In all elections for
directors, such shareholders entitled to vote shall have the right to cast as
many votes in the aggregate as shall equal the number of voting shares held by
the shareholder, multiplied by the number of directors to be elected, and each
shareholder may cast the whole number of votes, either in person or by proxy,
for one candidate, or distribute them among two or more candidates; and
directors shall not be elected in any other manner. Unlike Varner, Peppermill's
shareholders shall not possess cumulative voting rights for the purpose of
electing a board of directors.
CLASSIFIED BOARD OF DIRECTORS
Both Missouri and Nevada law provide that a corporation's board of
directors may be divided into various classes with staggered terms of office.
Neither Varner nor Peppermill's
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boards of directors are divided into classes. Instead, each director shall hold
office until the next annual meeting of shareholders and until his successor
shall have been elected and qualified.
NUMBER OF DIRECTORS, QUORUM
Varner's board of directors currently consists of 8 directors. The by laws
provide that the number of directors of Varner shall be fixed from time to time
by resolution of the board of directors. Peppermill's board of directors
currently consists of 7 directors. The number of Peppermill' s directors may not
be less than one (1) and not more than eight (8), which number will be set by
the board of directors. The number of directors may be changed by a duly adopted
amendment to Peppermill's by laws by the affirmative vote of holders of a
majority of the outstanding shares or by a majority vote of the entire board of
directors.
Under both Missouri and Nevada law, a majority of the full board of
directors shall constitute a quorum for the transaction of business unless a
greater number is required by the articles of incorporation or the bylaws. The
act of a majority of the directors present at a meeting at which a quorum is
present shall be the act of the board of directors.
REMOVAL OF DIRECTORS
Under Varner's by laws, any director or directors may be removed, with or
without cause, at a meeting of the shareholders called expressly for that
purpose. The entire board of directors may be removed by a vote of the holders
of a majority of shares then entitled to vote at an election of directors. If
less than the entire board is to be removed, no one of the directors may be
removed if the votes cast against the director's removal would be sufficient to
elect the director if then cumulatively voted at an election of the entire board
of directors.
Under Peppermill's by laws, the holders of two-thirds of the outstanding
shares of stock entitled to vote may at any time peremptorily terminate the term
of office of all or any of the directors by vote at a meeting called for such
purpose or by a written statement filed with the Secretary or, in his absence,
with any other officer. Such removal shall be effective immediately, even if
successors are not elected simultaneously and the vacancies on the board of
directors resulting therefrom shall only be filled by the shareholders.
FILLING VACANCIES OF THE BOARD OF DIRECTORS
Under both Varner's and Peppermill's by laws, a majority of the remaining
members of the board of directors may fill the vacancy or vacancies until the
successor or successors are elected at a shareholders' meeting.
INTERESTED DIRECTORS
Transactions between Varner and Peppermill and interested directors are not
voidable by Varner or Peppermill and those directors are not liable to Varner or
Peppermill for any profit realized pursuant to such transaction if the nature of
the interest is disclosed at the first opportunity
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<PAGE>
at a meeting of directors, and a majority of disinterested directors or
shareholders entitled to vote ratify the transaction.
LIMITS ON SHAREHOLDER ACTION BY WRITTEN CONSENT
Under Varner's by laws, any action required to be taken at a meeting of the
shareholders, or any action which may be taken at a meeting of the shareholders,
may be taken without a meeting if consents in writing, setting forth the action
so taken, shall be signed by all of the shareholders entitled to vote with
respect to the subject matter thereof. Such consents shall have the same force
and effect as a unanimous vote of the shareholders at a meeting duly held.
Under Peppermill's by laws, any action which may be taken by the vote of
the shareholders at a meeting may be taken without a meeting if authorized by
the written consent of shareholders holding at least a majority of the voting
power, unless the provisions of the statute or the Articles of Incorporation
require a greater proportion of voting power to authorize such action, in which
case such greater proportion of written consents shall be required.
ABILITY TO CALL SPECIAL MEETINGS
Special meetings of Varner shareholders may be called by Varner's
President, by the board of directors, or by the holders of not less than a
majority of all outstanding shares of the corporation entitled to vote at a
meeting.
Special meetings of Peppermill shareholders may be called by Peppermill's
President or Secretary, by resolution of the board of directors or at the
request in writing of shareholders owning a majority in amount of the entire
capital stock of the corporation issued and outstanding and entitled to vote.
Such request shall state the purpose of the proposed meeting.
NOTICE OF SHAREHOLDER MEETING GIVEN BY THE CORPORATION
Varner and Peppermill must give their shareholders written notice of a
meeting stating the place, day and hour of the meeting and the purpose or
purposes for which the meeting is called. Unless otherwise allowed or prescribed
by statute, the written notice shall be delivered not less than ten (10) or more
than seventy (70) days before the date of the meeting in the case of Varner and
not less than ten (10) or more than sixty (60) days before the date of the
meeting in the case of Peppermill, either personnally or by mail.
AMENDMENT OF ARTICLES OF INCORPORATION
Amendments to both Varner's and Peppermill's Articles of Incorporation
require the affirmative vote of a majority of the outstanding shares entitled to
vote thereon.
AMENDMENT OF BYLAWS
The Varner bylaws may be altered, amended or replaced and new bylaws
adopted by action of a majority of the directors at any regular or special
meeting of the directors. The shareholders
58
<PAGE>
always have the power to adopt, amend or repeal bylaws, even though the board
may also be delegated such power.
The Peppermill bylaws may be amended by a majority vote of all the shares
issued and outstanding and entitled to vote at any annual or special meeting of
the shareholders, provided notice of intention to amend shall have been
contained in the notice of the meeting. In addition, the Peppermill board of
directors by a majority vote of the whole board at any meeting may amend the
bylaws, including by laws adopted by the shareholders, but the shareholders may
from time to time specify particulars of the bylaws which shall not be amended
by the board.
SHAREHOLDER RIGHT TO INSPECT BOOKS AND RECORDS
Varner shareholders may at all proper times have access to and examine the
books and records of Varner which include: the amount of assets and liabilities,
minutes of board of directors and shareholder proceedings, names and addresses
of officers, and a stock ledger which lists the names of shareholders and the
number of shares owned by them.
Peppermill shall keep books and records available at its registered office
for its shareholders to inspect including: a certified copy of its Articles of
Incorporation and bylaws and all amendments thereto as well as a stock ledger
containing the names of shareholders and the number of shares held by each. In
order to be entitled to inspect the books and records of Peppermill during
normal business hours, a person must give no less than five days written notice
and: (1) have been a shareholder of record of Peppermill for at least six months
immediately preceding the demand or (2) hold, or be authorized in writing by the
holders of, at least five percent of Peppermill's outstanding shares.
DERIVATIVE ACTIONS
Varner and Peppermill shareholders do not have a direct and individual
right to enforce rights which could be asserted by the corporation, but may do
so derivatively on behalf of the corporation. Pursuant to Missouri and Nevada
law, upon compliance with certain requirements, a shareholder may institute a
derivative suit in the right of the corporation against the present or former
officers or directors of a corporation because the corporation refused to
enforce rights that could be asserted by the corporation, if he or she was a
shareholder at the time of the transaction complained of, or if his or her stock
thereafter devolved upon him or her by operation of law from a person who was a
shareholder at that time.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Missouri Act and Nevada Act permit a corporation to indemnify its
directors or officers in respect of any loss arising or liability attaching to
them by virtue of any negligence, default, breach of duty or breach of trust
committed in good faith.
Varner's and Peppermill's bylaws provide that every person who is or was a
director or officer shall be indemnified by the corporation against any
liability, judgment, fine, amount paid in settlement, cost and expense
(including attorneys' fees) asserted or threatened against and incurred
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by such person in his capacity as or arising out of his status as a director or
officer of the corporation.
The bylaws require Peppermill to advance the expenses of directors and
officers incurred in defending a civil or criminal action, suit, or proceeding
upon the 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 that he is not
entitled to be indemnified by the corporation.
In addition, Nevada law allows, and the Articles of Incorporation of
Peppermill provide that no director or officer of Peppermill shall have any
personal liability for damages for breach of his fiduciary duty except for acts
or omissions involving intentional misconduct, fraud or a knowing violation of
law or payments of dividends in violation of Nevada law.
SHAREHOLDER LIABILITY
Shareholders of Varner and Peppermill shall be under no obligation to the
corporation or its creditors or be individually liable for any liabilities or
debt with respect to the shares held other than the obligation to pay to the
corporation the full consideration for which said shares were issued.
BUSINESS COMBINATIONS
Under the Missouri Act and Nevada Act, a "Business Combination" includes
the following transactions:
o any merger or consolidation with an interested shareholder or any affiliate
of an interested shareholder;
o any sale, lease, exchange, mortgage, pledge, transfer, or other disposition
to or with an interested shareholder or any affiliate of an interested
shareholder of assets having an aggregate market value equal to 10% or more
of the aggregate market value of all the assets of the corporation;
o any issuance or transfer of any stock, which has a market value equal to 5%
or more of the market value of all the outstanding stock, to any interested
shareholder or any affiliate of an interested shareholder;
o adoption of any plan for the liquidation or dissolution of the corporation
proposed by an interested shareholder or an affiliate of an interested
shareholder;
o any reclassification of securities, recapitalization, merger or
consolidation with any subsidiary, or any other transaction which has the
effect, directly or indirectly, of increasing the proportionate share of
any class of outstanding stock owned by an interested shareholder;
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o any receipt by such interested shareholder of any affiliate of an
interested shareholder of any loans, advances, guarantees, pledges, or
other financial assistance or any tax credits or other tax advantages
provided by or through the corporation.
Pursuant to Missouri and Nevada law, no corporation shall engage in any
business combination with any interested shareholder of such corporation for a
specified period following such interested shareholder's stock acquisition date
unless such business combination is approved by (1) the board of directors of
such corporation prior to such interested shareholder's stock acquisition date
or (2) the affirmative vote of the holders of a majority of the outstanding
voting stock not beneficially owned by such interested shareholder or any
affiliate of such interested shareholder. In Missouri, the period of time a
corporation shall not engage in a business combination with an interested
shareholder is five (5) years. In Nevada, the period is three (3) years.
In Missouri and Nevada, business combinations require the affirmative vote
of holders of a majority of the outstanding voting power not beneficially owned
by the interested stockholder.
SHAREHOLDER RIGHTS PLAN
Neither Varner nor Peppermill has a rights plan in place. A rights plan
discourages takeovers because they will cause substantial dilution to a person
or group that acquires a substantial interest in the corporation without the
prior approval of the board of directors.
EXCHANGE OF ASSETS, MERGERS AND CONSOLIDATIONS
Under the Missouri Act, a plan of merger or consolidation shall be approved
upon receiving the affirmative vote of the holders of at least two-thirds of the
outstanding shares entitled to vote at such meeting.
Under the Nevada Act, a plan of merger or exchange must be approved by a
majority of the voting power unless the articles of incorporation or the board
of directors require a greater vote.
Under both the Missouri Act and Nevada Act, written notice stating the
purpose, or one of the purposes, of the meeting is to consider the plan of
merger, together with a copy or a summary of the plan of merger, shall be given
to each shareholder of record entitled to vote at the meeting within the time
and in the manner for the giving of notice of meetings of shareholders.
SHORT FORM MERGER
Missouri law permits certain mergers without shareholder approval if at
least ninety percent of the outstanding shares of a corporation is owned by
another corporation. The corporation having such share ownership may either
merge the other corporation into itself and assume all of its obligations, or
merge itself into the other corporation without any vote of the shareholders.
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Nevada law permits certain mergers without shareholder approval if:
(1) the articles of incorporation after the merger will not differ
from the articles before the merger;
(2) each shareholder whose shares were outstanding immediately before
the effective date of the merger will hold the same number of
shares, with identical designations, preferences, limitations and
relative rights immediately after the merger;
(3) the number of voting (or participating) shares outstanding after
the merger does not exceed by more than 20 percent the total
number of voting (or participating) shares of the surviving
domestic corporation outstanding immediately before the merger.
DISSENTERS' RIGHTS
Pursuant to Missouri law, a shareholder is entitled to dissent from a sale
or exchange of all or substantially all of the property and assests of a
corporation, otherwise than in the usual and regular course of its business.
Pursuant to Nevada law, a shareholder is entitled to dissent from, and
obtain payment of the fair value of his shares in the event of any of the
following corporate actions:
o Consummation of a plan of merger to which the domestic
corporation is a party;
o Consummation of a plan of exchange to which the domestic
corporation is a party as the corporation whose subject owner's
interests will be acquired; and
o Any corporate action taken pursuant to a vote of the shareholders
to the extent that the articles of incorporation, bylaws or a
resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
PREFERRED STOCK
Varner has 2,000,000 authorized shares of preferred stock, $.01 par value.
The board of directors of Varner established by resolution one series of
preferred stock and the powers, preferences, rights, qualifications, limitations
and restrictions of the preferred stock.
Peppermill does not have preferred stock authorized and issued. The
shareholders of Peppermill will be voting to authorize two classes of preferred
stock, 10,000,000 shares of Series A and 90,000,000 shares of Series B. Upon
consummation of the merger with Varner, holders of Varner preferred stock will
receive five (5) shares of Peppermill Series A preferred stock for each share of
Varner preferred stock held. The Peppermill Series A preferred stock will have,
to the extent possible, rights and preferences equal to Varner preferred stock.
These rights are summarized below. The Series B preferred stock shall have such
rights and preferences as shall be established by the board of directors by
resolution without any further vote of shareholders.
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PEPPERMILL SERIES A PREFERRED STOCK
Non-Voting. The Series A preferred stock will be non-voting.
Liquidation Preference. Upon liquidation, each share of Series A preferred
stock will be entitled to receive up to $.40 per share (to the extent funds are
available) before any distribution is made to holders of common stock.
Dividends. Holders of Series A preferred stock shall not be entitled to
dividends.
Conversion Rights. For a period of thirty (30) days after the merger is
effective, holders of Peppermill preferred stock will be able to convert their
shares into shares of common stock of Peppermill on a one-for-one basis. After
such period, shares of Peppermill preferred stock will not be able to convert to
shares of Peppermill common stock and will not be able to be sold for a period
of one year. By converting to common stock, holders of preferred stock will
receive shares that are listed on the Nasdaq OTC/Bulletin Board, but will lose
the preferences granted to the preferred stock, including certain preemptive
rights to participate in a future public offering of Peppermill's common stock.
Preemptive Rights. The holders of Series A preferred stock shall have the
right to purchase in any initial public offering of Peppermill's common stock
that number of shares in such offering equal to the number of shares of Series A
preferred stock then held (subject to restrictions placed by the underwriter of
the public offering).
Redemption. Peppermill shall have the right upon the earlier of (i) an
initial public offering of Peppermill's common stock or (ii) two (2) years from
the date of the filing of the Certificate of Amendment establishing the Series A
preferred stock, to redeem the shares of Series A preferred stock for $.40 per
share, subject to the right of the holder to convert the shares to common stock
prior to the effective date of redemption.
This summary is subject to the terms of the Certificate of Amendment to the
Articles of Incorporation of Peppermill attached as Annex B.
LEGAL OPINION
The validity of the shares of Peppermill common stock offered by this Proxy
Statement-Prospectus will be passed upon by Merrick & Klimek, P.C., 401 South
LaSalle Street, Suite 1302, Chicago, Illinois, counsel to Varner and Peppermill.
EXPERTS
KPMG LLP, independent certified public accountants, have audited the
consolidated balance sheet of Varner Technologies, Inc. and subsidiaries as of
December 31, 1999 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the two years ended December
31, 1999. These audited financials for Varner Technologies, Inc. and
subsidiaries are included as pages F-1 to _____ of this Proxy
Statement-Prospectus. These consolidated financial statements are included
herein in reliance on their reports, given on their authority as experts in
accounting and auditing.
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Kaufman, Rossin & Co., independent certified public accountants, have
audited the balance sheet of Peppermill Capital Corporation as of December 31,
1999 and the related consolidated statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1999. Andersen, Andersen &
Strong, L.C., independent certified public accounts, have audited the balance
sheet of Peppermill Capital Corporation as of December 31, 1998, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the period from April 9, 1998 (inception) to December 31, 1998. These audited
financial statements for Peppermill Capital Corporation are included as pages
F__ to ____ of this Proxy Statement-Prospectus. These consolidated financial
statements are included herein in reliance on the respective reports of Kaufman,
Rossin & Co. and Andersen, Andersen & Strong, L.C., given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED IN OR DELIVERED WITH THIS PROXY STATEMENT-PROSPECTUS.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 after the date of this Proxy
Statement-Prospectus and before the date of the special meeting are incorporated
by reference into and to be a part of this Proxy Statement-Prospectus from the
date of filing of those documents.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this Proxy Statement-Prospectus will be deemed to
be modified or superseded for purposes of this Proxy Statement-Prospectus or any
other subsequently filed document that is deemed to be incorporated by reference
into this Proxy Statement-Prospectus modifies or supersedes the statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this Proxy Statement-Prospectus.
The documents incorporated by reference into this Proxy
Statement-Prospectus are available from us upon request. We will provide a copy
of any and all of the information that is incorporated by reference in this
Proxy Statement-Prospectus (not including exhibits to the information unless
those exhibits are specifically incorporated by reference into this Proxy
Statement-Prospectus) to any person, without charge, upon written or oral
request.
Requests for documents should be directed to:
Varner Technologies, Inc.
1819 Clarkson Road, Suite 204
Chesterfield, Missouri 63017
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Peppermill files reports, proxy statements and other information with the
Securities and Exchange Commission. Copies of its reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the SEC at:
Judiciary Plaza Citicorp Center
Room 1024 500 West Madison Street
450 Fifth Street, N.W. Suite 1400
Washington, D.C. 20549 Chicago, Illinois 60661
Reports, proxy statements and other information concerning Peppermill
may be inspected at:
The National Association of Securities Dealers
1735 K Street, N.W.
Washington, D.C. 20006
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at (800) SEC-0330. The SEC
maintains a Website that contains reports, proxy statements and other
information regarding each of us. The address of the SEC Website is
http://www.sec.gov.
Peppermill has filed a registration statement on Form S-4 under the
Securities Act with the Securities and Exchange Commission with respect to
Peppermill's common stock to be issued to Varner shareholders in the merger.
This Proxy Statement-Prospectus constitutes the prospectus of Peppermill filed
as part of the registration statement. This Proxy Statement-Prospectus does not
contain all of the information set forth in the registration statement because
certain parts of the registration statement are omitted in accordance with the
rules and regulations of the SEC. The registration statement and its exhibits
are available for inspection and copying as set forth above.
If you have any questions about the merger, please call Varner at (636)
530-4532.
THIS PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY
STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER,
SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES
PURSUANT TO THIS PROXY STATEMENT-PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATIONS THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH OR INCORPORATED INTO THIS PROXY STATEMENT-PROSPECTUS BY REFERENCE OR IN
OUR AFFAIRS SINCE THE DATE OF THIS PROXY STATEMENT-PROSPECTUS. THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS WITH RESPECT TO VARNER AND ITS
SUBSIDIARIES WAS PROVIDED BY VARNER AND THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT-PROSPECTUS WITH RESPECT TO PEPPERMILL WAS PROVIDED BY PEPPERMILL.
65
<PAGE>
STATEMENTS REGARDING FORWARD LOOKING INFORMATION
This Proxy Statement-Prospectus and the document incorporated by reference
into this Proxy Statement-Prospectus contain forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 with respect to our financial condition, results of operations and
business, and on the expected impact of the merger on Peppermill's financial
performance. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions identify
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward-looking statements.
In evaluating the merger, you should carefully consider the discussion of
risks and uncertainties in the section entitled "Risk Factors" on page ___ of
this Proxy Statement-Prospectus.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Peppermill
pursuant to the foregoing provisions or otherwise, Peppermill has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in such act, and is
therefore unenforceable.
66
<PAGE>
VARNER TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Varner Technologies, Inc.
and subsidiaries:
We have audited the accompanying consolidated balance sheet of Varner
Technologies, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years ended December 31, 1999 and 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Varner Technologies,
Inc. and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
May 1, 2000 KPMG LLP
F-2
<PAGE>
VARNER TECHNOLOGIES, INC.
Consolidated Balance Sheets
December 31, 1999 and March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
Assets 1999 2000
----------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 111,202 65,560
Accounts receivable 25,548 21,965
Inventory 23,041 37,107
Prepaid expenses 5,873 4,697
----------- -----------
Total current assets 165,664 129,329
Property and equipment, net 216,431 203,187
Other assets 112,615 161,088
----------- -----------
Total assets $ 494,710 493,604
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 483,002 402,032
Accrued expenses 130,910 72,709
Unearned revenue 318,466 240,938
Line of credit 100,000 100,000
Current installments of capital lease obligations 20,131 13,711
----------- -----------
Total current liabilities 1,052,509 829,390
Capital lease obligations, excluding current installments 13,841 12,578
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 2,000,000 authorized;
671,000 and 1,017,225 shares issued and outstanding at
December 31,1999 and March 31, 2000 respectively 6,710 10,172
Common stock - Class A voting, $.01 par value; 17,000,000
shares authorized; 12,827,828 shares issued and outstanding
at December 31, 1999 and March 31, 2000 respectively 128,279 128,279
Common stock - Class B non-voting, $.01 par value;
10,000,000 shares authorized; 5,937,333 and 5,985,291shares
issued and outstanding at December 31, 1999 and March 31, 2000
respectively 59,373 59,853
Additional paid-in capital 4,718,908 5,431,395
Retained deficit (5,484,910) (5,978,063)
----------- -----------
Total stockholders' equity (deficit) (571,640) (348,364)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 494,710 493,604
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VARNER TECHNOLOGIES, INC.
Consolidated Statements of Operations
Years ended December 31, 1998 and 1999,
and three months ended March 31, 1999 and 2000 (unaudited)
<TABLE>
<CAPTION>
Three months ended
Year ended December 31, March 31,
------------------------------ ---------------------------
1998 1999 1999 2000
----------- ---------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Sales $ 1,240,448 2,511,571 617,634 738,863
Cost of sales 1,344,277 1,173,032 225,291 417,255
----------- ---------- -------- --------
Gross profit (103,829) 1,338,539 392,343 321,608
----------- ---------- -------- --------
Operating expenses:
Commissions 974,802 1,318,298 261,632 473,523
Salaries and compensation 364,509 543,246 106,782 154,546
Depreciation and amortization 95,214 102,177 24,150 25,942
Other operating expenses 449,788 774,530 146,526 160,755
----------- ---------- -------- --------
Total operating expenses 1,884,313 2,738,251 539,090 814,766
----------- ---------- -------- --------
Loss from operations (1,988,142) (1,399,712) (146,747) (493,158)
----------- ---------- -------- --------
Other income (expense):
Interest income 2,118 6,901 22 538
Interest expense (7,569) (6,665) (1,510) (533)
----------- ---------- -------- --------
Total other income (expense) (5,451) 236 (1,488) 5
----------- ---------- -------- --------
Net loss $(1,993,593) (1,399,476) (148,235) (493,153)
=========== ========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VARNER TECHNOLOGIES, INC.
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Years ended December 31, 1998 and 1999
and March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
Common stock -
Preferred stock Class A
-------------------------- ---------------------------
Number of Number of
shares Amount shares Amount
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 -- $ -- 9,672,755 $ 96,728
Proceeds from sale of common stock -- -- -- --
Net loss -- -- -- --
--------- ---------- ---------- ----------
Balance at December 31, 1998 -- -- 9,672,755 96,728
Proceeds from sale of common stock -- -- 3,155,073 31,551
Issuance of common stock for services rendered -- -- -- --
Proceeds from sale of preferred stock 671,000 6,710 -- --
Business acquisition cost -- -- -- --
Net loss -- -- -- --
--------- ---------- ---------- ----------
Balance at December 31, 1999 671,000 6,710 12,827,828 128,279
Issuance of common stock for services rendered -- -- -- --
Proceeds from sale of preferred stock 346,225 3,462 -- --
Net loss -- -- -- --
--------- ---------- ---------- ----------
Balance at March 31, 2000 (unaudited) 1,017,225 $ 10,172 12,827,828 $ 128,279
========= ========== ========== ==========
<CAPTION>
Common stock -
Class B
------------------------ Additional
Number of paid-in Retained
shares Amount capital deficit Total
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 3,426,860 $ 34,268 2,200,564 (2,091,841) 239,719
Proceeds from sale of common stock 1,826,744 18,268 823,244 -- 841,512
Net loss -- -- -- (1,993,593) (1,993,593)
--------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 5,253,604 52,536 3,023,808 (4,085,434) (912,362)
Proceeds from sale of common stock 521,589 5,216 760,861 -- 797,628
Issuance of common stock for services rendered 162,140 1,621 98,949 -- 100,570
Proceeds from sale of preferred stock -- -- 1,135,290 -- 1,142,000
Business acquisition cost -- -- (300,000) -- (300,000)
Net loss -- -- -- (1,399,476) (1,399,476)
--------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 5,937,333 59,373 4,718,908 (5,484,910) (571,640)
Issuance of common stock for services rendered 47,958 480 23,499 -- 23,979
Proceeds from sale of preferred stock -- -- 688,988 -- 692,450
Net loss -- -- -- (493,153) (493,153)
--------- ---------- ---------- ---------- ----------
Balance at March 31, 2000 (unaudited) 5,985,291 $ 59,853 5,431,395 (5,978,063) (348,364)
========= ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VARNER TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1999
and three months ended March 31, 1999 and 2000 (unaudited)
<TABLE>
<CAPTION>
Three months ended
Year ended December 31, March 31,
-------------------------- -----------------------
1998 1999 1999 2000
----------- ---------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,993,593) (1,399,476) (148,235) (493,153)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 95,214 102,177 24,150 25,942
Compensation expense for issuance of stock -- 100,570 19,000 23,979
Loss on disposal of property, plant, and equipment 807 -- -- --
Changes in operating assets and liabilities,
exclusive of acquisition:
Accounts receivable (24,971) 35,979 (38,690) 3,583
Inventory 19,222 15,478 6,483 (14,066)
Prepaid expenses (3,373) (611) (16,390) 1,176
Other assets -- (103,439) (49,143) (49,173)
Accounts payable 483,543 (93,309) (279,820) (80,970)
Accrued expenses 178,414 (47,504) (39,363) (58,201)
Unearned revenue 390,215 (200,663) (48,111) (77,528)
----------- ---------- -------- --------
Net cash used in operating activities (854,522) (1,590,798) (570,119) (718,411)
----------- ---------- -------- --------
Cash flows from investing activities
Purchases of property and equipment (41,133) (11,337) (755) (11,998)
Cash paid for acquisition -- (300,000) -- --
----------- ---------- -------- --------
Net cash used in investing activities (41,133) (311,337) (755) (11,998)
----------- ---------- -------- --------
Cash flows from financing activities:
Payments from (advances to) stockholders (5,000) -- 280,000 --
Proceeds on borrowings from note payable -- 100,000 -- --
Proceeds from sale of stock 841,512 1,939,628 297,783 692,450
Payments on capital lease obligations (24,299) (26,291) (6,909) (7,683)
----------- ---------- -------- --------
Net cash provided by financing activities 812,213 2,013,337 570,874 684,767
----------- ---------- -------- --------
Net increase (decrease) in cash and cash equivalents (83,442) 111,202 -- (45,642)
Cash and cash equivalents, beginning of period 83,442 -- -- 111,202
----------- ---------- -------- --------
Cash and cash equivalents, end of period $ -- 111,202 -- 65,560
=========== ========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VARNER TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(1) Summary of Significant Accounting Policies
(a) Description of Business
Varner Technologies, Inc. and subsidiaries (the Company) is a Missouri
Corporation incorporated on November 17, 1994. The Company markets and
sells Internet services, e-commerce, long-distance telephone services,
wireless telephone services and products, prepaid telephone cards and
other telecommunications products and services. In March 1997, the
Company and its major stockholder founded Networking People with
Technology, L.L.C. (NPWT) to distribute products and services via the
Internet. In November 1999, the Company acquired controlling interest
in Peppermill Capital Corporation (Peppermill), a Nevada company
engaged in the business of mineral development. The Company operates
throughout the United States with its greatest market share in
Illinois and Missouri.
(b) Basis of Presentation
During 1997, the Company and its major stockholder formed a limited
liability company, NPWT. This limited liability company, owned 60% by
the Company, was formed to serve as the marketing subsidiary for the
Company's products and services. For financial reporting purposes, the
assets, liabilities, and operations of NPWT have been included in the
Company's consolidated financial statements. The interest owned by the
major stockholder has not been recorded as a minority interest due to
the accumulated operating losses that have been incurred by NPWT. All
significant intercompany accounts and transactions have been
eliminated.
On December 31, 1999, the Company obtained the 40% of NPWT not
previously owned for $1.
The Company acquired controlling interest in Peppermill as of November
22, 1999. The transaction included the purchase of 90% of the
outstanding shares of common stock of Peppermill at $0.001 per share
which resulted in a total purchase price of $300,000. The transaction
has been accounted for as a capital transaction because Peppermill was
a non-operating public shell corporation. Accordingly, no goodwill or
other intangibles were recorded in the acquisition and the investment
made by the Company to purchase the controlling interest in Peppermill
has been recorded as a reduction to additional paid-in-capital.
(c) Use of Estimates
The presentation of the consolidated financial statements in
conformity with generally accepted accounting principles 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 amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
The Company considers all short-term investments with an original
maturity of three months or less at the time of purchase to be cash
equivalents.
F-7 (Continued)
<PAGE>
VARNER TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(e) Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventory is comprised of
marketing materials and other items required in the Company's normal
course of business.
(f) Property and Equipment
Property and equipment consisting of office furniture, equipment, and
Internet hub sites are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets
of five to seven years.
(g) Revenue Recognition
Sales of prepaid phone cards from third-party providers for which the
Company acts as a distributor are recorded as deferred revenue upon
sale of the card and then recognized into revenue upon usage or the
card's expiration. Amounts received upon the sale or renewal of
prepaid Internet services are recorded as deferred revenue and then
amortized over the remaining period in which service is provided.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment dates.
(i) Unaudited Interim Financial Statements
The interim consolidated financial statements include the accounts of
Varner Technologies Inc. and its subsidiaries. In the opinion of
management, the interim consolidated financial statements contain all
adjustments, consisting of normal recurring accruals, necessary to
present fairly the consolidated financial position as of March 31,
2000 and results of operations for the three month periods ended March
31, 1999 and 2000. Interim periods are not necessarily indicative of
results to be expected for the year.
F-8 (Continued)
<PAGE>
VARNER TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(2) Liquidity
The Company's consolidated financial statements for the years ended
December 31, 1998 and 1999 and for the three month period ended March 31,
2000 have been prepared on a going concern basis which contemplates the
realization of assets and the settlement of liabilities and commitments in
the normal course of business. The Company incurred a net loss of
approximately $1,994,000, $1,399,000, and $493,000 for the years ended
December 31, 1998, 1999, and for the three month period ended March 31,
2000, respectively, and as of December 31, 1999 and March 31, 2000 had an
accumulated deficit of approximately $5,485,000 and $5,978,000,
respectively. Management recognizes the Company must generate or obtain
additional resources to enable it to continue operations.
(3) Inventory
Inventory consists of the following:
1999
-------
Promotional materials $10,797
Company products 12,244
-------
$23,041
=======
(4) Property and Equipment
Property and equipment consist of the following:
Useful life
in years 1999
----------- ----------
Furniture and fixtures 7 $ 7,175
Office equipment 5 15,855
Internet equipment 5 38,494
Computer hardware and software 5 471,100
=========== ----------
532,624
Less accumulated depreciation 316,193
----------
$ 216,431
==========
F-9 (Continued)
<PAGE>
VARNER TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(5) Line of Credit
During 1999, the Company entered into a line of credit with a commercial
bank. The line of credit bears interest at 8.5% annually and matures May
2000. The line of credit is secured by the personal guarantees of two
Officers of the Company. The line of credit was paid off by the Company in
May 2000.
(6) Income Taxes
Due to the recognition of net operating losses, no income tax expense has
been recorded for the years ended December 31, 1998 and 1999, or the three
month periods ended March 31, 1999 and 2000. Income tax benefit differed
from the amount computed by applying the statutory Federal corporate income
tax rate of 34% to income before income tax benefit as a result of the
following:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Expected income tax benefit (677,822) (475,822)
State income tax benefit (70,510) (53,192)
Meals and entertainment 212 537
Investment in NPWT 78,263 (16,063)
Change in valuation allowance 669,857 544,540
--------- ---------
Actual income tax expense -- --
========= =========
</TABLE>
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward 1,062,009 1,687,758
Accrual to cash conversion 218,998 183,541
Deferred revenue 118,361 72,610
Research credit 34,528 34,528
---------- ----------
Total gross deferred tax assets 1,433,896 1,978,437
Less valuation allowance on deferred tax assets (1,407,579) (1,952,120)
---------- ----------
Net deferred tax assets 26,317 26,317
Deferred tax liabilities - property and equipment
Principally due to differences in depreciation 26,317 26,317
---------- ----------
Net deferred tax asset/liability -- --
========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 was
approximately $1,400,000. The net change in the total valuation allowance
for the year ended December 31, 1999 was an increase of approximately
$550,000, to a balance of approximately $1,950,000. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that
F-10 (Continued)
<PAGE>
VARNER TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
some portion of all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers projected
future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable losses and
projections for future losses over the period which the deferred tax assets
are deductible, management does not believe it is more likely than not the
Company will realize the benefits of these deductible differences,
therefore a 100% valuation allowance of net deferred tax assets is
appropriate as of December 31, 1999 and 1998.
At December 31, 1999, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $4,500,000, which are
available to offset future Federal taxable income, if any. These net
operating loss carryforwards expire between 2011 and 2019. The Company also
has research credit carryforwards for Federal income tax purposes of
approximately $35,000, which are available to reduce future regular income
taxes, if any. These research tax credits expire in 2011.
(7) Leases
The Company has entered into noncancelable lease agreements for certain
computer equipment that are accounted for as a capital lease. The following
is an analysis of the leased property under capital leases by major class:
1999
-------------
Computer equipment $ 110,951
Less accumulated amortization (76,979)
-------------
$ 33,972
=============
Amortization of assets held under capital leases is included with
depreciation expense in the accompanying consolidated statements of
operations.
The Company has also entered into leases for sales and administrative
offices and various equipment which are accounted for as operating leases.
Rent expense for operating leases in 1998 and 1999 totaled approximately
$48,000 and $109,000, respectively.
F-11 (Continued)
<PAGE>
VARNER TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
At December 31, 1999, the Company's future minimum lease payments under
noncancelable operating leases and future minimum rental payments due under
capital leases were as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
<S> <C> <C>
Year ended December 31,
2000 $23,656 73,340
2001 7,272 69,716
2002 5,052 9,440
2003 4,352 6,596
------- --------
Total minimum lease payments 40,332 159,092
========
Less amount representing interest 6,360
-------
Present value of net minimum lease payments 33,972
Less current installments 20,131
-------
Capital lease obligations, excluding current installments $13,841
=======
</TABLE>
(8) Common Stock
On October 31, 1998, the Company's Articles of Incorporation were amended
to reflect a change in its capital structure as follows:
(a) an increase in the number of authorized shares of Class A voting
common stock to 17,000,000 shares at $.01 par value,
(b) an increase in the number of authorized shares of Class B non-voting
common stock to 10,000,000 shares at $.01 par value, and
(c) the authorization of 2,000,000 shares of preferred stock at $.01 par
value.
All share information in the accompanying consolidated financial statements
reflects these changes.
(9) Supplemental Cash Flow Information
For the years ended December 31, 1998 and 1999, the Company paid
approximately $9,000 and $6,000, respectively, in cash for interest
expense.
During 1999, capital lease obligations of approximately $25,000 were
incurred when the Company entered into leases for new computer equipment.
F-12 (Continued)
<PAGE>
VARNER TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(10) Commitments and Contingencies
The Company is involved in certain litigation which occurs in the normal
course of business. In the opinion of management, the ultimate results of
these matters will not have a material impact on the financial position of
the Company.
(11) Related Party Transactions
During 1998 and 1999, the Company paid consulting fees and sales based
performance commissions of approximately $155,000 and $264,000
respectively, to two officers of the Company and a family member of the
officers.
During 1999, the Company paid consulting fees of approximately $48,000 and
$47,000 to two stockholders of the Company.
During 1999, approximately $101,000 of services were provided by a
stockholder and consultant of the Company in exchange for shares of Class B
non-voting common stock of the Company. During the three month period ended
March 31, 2000 approximately $24,000 of services were provided by a
stockholder of the Company in exchange for shares of Class B non-voting
commons stock of the Company.
(12) Events Subsequent to the Balance Sheet Date
On January 31, 2000, the Company signed a letter of intent to acquire not
less than 51% of Micro Computer Technologies, Inc. (MCT) in exchange for
Class B non-voting common stock of the Company. The purchase price will be
based on the sum of the next five years of estimated MCT revenue divided by
ten. Additionally, performance based stock options will be made available
to the key employees of MCT.
In January 2000, the Company's Board of Directors approved the 1999 Varner
Technologies Inc. Stock Option Plan which authorizes the Company to issue
stock options for up to 4,000,000 shares of Class A voting common stock and
3,500,000 shares of Class B non-voting common stock of the Company to
executives, employees, directors and consultants of the Company. As of
March 31, 2000 the Company has not issued any stock options.
(13) Event Subsequent to the Independent Auditors' Report (unaudited)
Subsequent to March 31, 2000, the Company had received approximately
$507,000 through the additional issuance of preferred stock.
F-13 (Continued)
<PAGE>
ANDERSEN ANDERSEN & STRONG, L.C. 941 East 3300 South, Suite 220
Certified Public Accountants and Business Salt Lake City, Utah, 84106
Consultants Board Telephone 801-486-0096
Member SEC Practice Section of the AICPA Fax 801-486-0098
E-mail Kandersen @ msn.com
Board of Directors
Peppermill Capital Corporation
Vancouver, B.C., Canada
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheet of Peppermill Capital Corporation
(a development stage company) at February 28, 1999, and December 31, 1998 the
statement of operations, stockholders' equity, and cash flows for the two months
ended February 28, 1999 and the period from April 9, 1998 to December 31, 1998
and the period from April 9, 1998 (date of inception) to February 28, 1999.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 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 financial position of Peppermill Capital Corporation
at February 28, 1999 and December 31, 1998, and the results of operations, and
cash flows for the two months ended February 28, 1999 and the period from April
9, 1998 to December 31, 1998 and the period from April 9, 1998 (date of
inception) to February 28, 1999 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the development
stage and will need additional working capital for its planned activity, which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 5. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Salt Lake City, Utah /s/ "Andersen Andersen & Strong"
April 12, 1999
A member of ACF International with affiliated offices worldwide
F-14
<PAGE>
PEPPERMILL CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
FEBRUARY 28, 1999 AND DECEMBER 31, 1998
================================================================================
<TABLE>
<CAPTION>
Feb 28 Dec 31
ASSETS 1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 16,125 $ 1,125
Note Receivable -- 15,000
-------- --------
Total Current Assets 16,125 16,125
-------- --------
OTHER ASSETS
Mineral lease - Note 3 2,129 2,129
-------- --------
$ 18,254 $ 18,254
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - related parties $ 6,800 $ 6,800
Accounts payable 2,516 1,316
-------- --------
Total Current Liabilities 9,316 8,116
-------- --------
STOCKHOLDERS' EQUITY
Common stock
200,000,000 shares authorized, at $0.001 par
value; 11,239,700 shares issued and outstanding 11,240 11,240
Capital in excess of par value 21,930 21,930
Deficit accumulated during the development stage (24,232) (23,032)
-------- ========
Total Stockholders' Equity 8,938 10,138
-------- --------
$ 18,254 $ 18,254
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
PEPPERMILL CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 1999 AND THE PERIOD
APRIL 9, 1998 TO DECEMBER 31, 1998 AND THE PERIOD
APRIL 9, 1998 (DATE OF INCEPTION) TO FEBRUARY 28, 1999
================================================================================
<TABLE>
<CAPTION>
April 9, 1998
Feb 28, Dec 31, (date of inception)
1999 1998 to Feb 28, 1999
------- ------- -------------------
<S> <C> <C> <C>
REVENUE $ -- $ -- $ --
EXPENSES 1,200 23,032 24,232
------------ ------------ ------------
NET LOSS $ (1,200) $ (23,032) $ (24,232)
============ ============ ============
NET LOSS PER COMMON SHARE
Basic $ -- $ (0.002)
------------ ============
AVERAGE OUTSTANDING SHARES
Basic 11,239,700 11,239,700
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
PEPPERMILL CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 1999 AND THE PERIOD
APRIL 9, 1999 TO DECEMBER 31, 1998 AND THE PERIOD APRIL 9, 1998
(DATE OF INCEPTION) TO FEBRUARY 28, 1999
================================================================================
<TABLE>
<CAPTION>
Apr 9, 1998
Feb 28, Dec 31, (date of inception)
1999 1998 to Feb 28, 1999
------- ------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $ (1,200) $(23,032) $(24,232)
Adjustments to reconcile net loss to net cash provided by operating activities:
Change in accounts payable 1,200 8,116 9,316
Net Cash From Operations -- (14,916) (14,916)
-------- ======== ========
CASH FLOWS FROM INVESTING
ACTIVITIES:
Change in note receivable 15,000 (15,000) --
Purchase of mineral lease -- (2,129) (2,129)
-------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common stock -- 33,170 33,170
-------- -------- --------
Net Increase in Cash 15,000 1,125 16,125
Cash at Beginning of Period 1,125 -- --
-------- -------- --------
Cash at End of Period $ 16,125 $ 1,125 $ 16,125
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
PEPPERMILL CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 9, 1998 (DATE OF INCEPTION)
TO FEBRUARY 28, 1999
================================================================================
<TABLE>
<CAPTION>
Common Stock Capital in
------------------------- Excess of Accumulated
Shares Amount Par Value Deficit
------ ------ --------- -------
<S> <C> <C> <C> <C>
BALANCE DECEMBER 2, 1998
(date of inception) -- $ -- $ -- $ --
Issuance of common stock for cash
at $.001 - June 6, 1999 4,000,000 4,000 -- --
Issuance of common stock for cash
at $.001 - June 23, 1998 6,000,000 6,000 -- --
Issuance of common stock for cash
at $.001 - June 25, 1998 1,150,000 1,150 -- --
Issuance of common stock for cash
at $.10 - June 26, 1998 2,700 3 267 --
Issuance of common stock for cash
at $0.25 - September 17, 1998 87,000 87 21,663 --
Net operating loss for the period from
April 9, 1998 to December 31, 1998 -- -- -- (23,032)
BALANCE DECEMBER 31, 1998 11,239,700 11,240 21,930 (23,032)
Net operating loss for the two
Months ended February 28, 1999 -- -- -- (1,200)
BALANCE FEBRUARY 28, 1999 11,040,050 $ 11,240 $ 21,930 $ (24,232)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
PEPPERMILL CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. ORGANIZATION
The Company was incorporated under the laws of the State of Nevada on April 9,
1998 with authorized common stock of 200,000,000 shares at $0.001 par value.
Since its inception the company has completed two Regulation D offerings of
7,239,700 shares of its capital stock for cash.
The Company is in the development stage and was organized for the purpose of
engaging in the business of mineral development.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting, Methods
The Company recognizes income and expenses based on the accrual method of
accounting.
Dividend Policy
The Company has not yet adopted a policy regarding payment of dividends.
Income Taxes
On December 31, 1998, the Company had a net operating loss carry forward of
$23,032. The income tax benefit from the loss carry forward has been fully
offset by a valuation reserve because the use of the future tax benefit is
doubtful since the Company has no operations. The loss carryforward will expire
in the year 2019.
Earning (Loss) Per Share
Earnings (loss) per share amounts are computed based on the weighted average
number of shares actually outstanding using the treasury stock method in
accordance with FASB statement No. 128.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity,
at the time of purchase, of less than three months, to be cash equivalents.
F-19
<PAGE>
PEPPERMILL CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
Foreign Currency Translation
The transactions of the Company completed in Canadian dollars have been
translated to US dollars. Assets and liabilities are translated at the year end
exchange rates and the income and expenses at the average rates of exchange
prevailing during the period reported on.
Amortization of Capitalized Mineral Lease Costs
The Company will use the successful efforts method to amortize the capitalized
costs of any mineral leases it acquires, which provides for capitalizing the
purchase price of the project and the additional costs directly related to
proving the properties, and amortizing these amounts over the life of the
mineral deposit. All other costs will be expensed as incurred. Unamortized
capitalized costs will be expensed if the property is proven to be of no value.
Financial Instruments
The carrying amounts of financial instruments, including cash, mineral leases,
and accounts payable, are considered by management to be their estimated fair
values. These values are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of the assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing these financial statements.
3. PURCHASE OF MINERAL LEASES
On June 18, 1998 the Company acquired mineral claims known as "Star Claims"
consisting of 11 units located near the town of Merritt, British Columbia, for
$2,129 with expiration dates in 1999. The units cover 587 acres.
F-20
<PAGE>
PEPPERMILL CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
4. RELATED PARTY TRANSACTIONS
Related parties have acquired 36% of the common stock issued for cash.
The officers and directors of the Company are involved in other business
activities and they may, in the future, become involved in additional business
ventures which also may require their attention. If a specific business
opportunity becomes available, such persons may face a conflict in selecting
between the Company and their other business interests. The Company has
formulated no policy for the resolution of such conflicts.
5. GOING CONCERN
Continuation of the Company as a going concern is dependent upon obtaining
additional working capital and the management of the Company has developed a
strategy, which it believes will accomplish this objective through additional
equity funding, and long term financing, which will enable the Company to
operate in the future.
Management recognizes that, if it is unable to raise additional capital, the
Company cannot operate in the future.
F-21
<PAGE>
--------------------------------------------------------------------------------
PEPPERMILL CAPITAL CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1999
--------------------------------------------------------------------------------
F-22
<PAGE>
C O N T E N T S
Page
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT F-24
FINANCIAL STATEMENTS
Balance Sheet F-25
Statement of Operations F-26
Statement of Stockholders' Equity F-27
Statement of Cash Flows F-28
Notes to Financial Statements F-29 - F-30
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
To the Stockholders
Peppermill Capital Corporation
Chesterfield, Missouri
We have audited the accompanying balance sheet of Peppermill Capital Corporation
as of December 31, 1999, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Peppermill Capital Corporation
as of December 31, 1999, and the results of its operations, and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company does not have working capital as of December
31, 1999. This raises substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
KAUFMAN, ROSSIN & CO.
Miami, Florida
April 10, 2000
F-24
<PAGE>
PEPPERMILL CAPITAL CORPORATION
BALANCE SHEET
DECEMBER 31, 1999
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
Common stock, 200,000,000 shares authorized, at $0.001 par value;
11,239,700 shares issued and outstanding $ 11,240
Additional paid-in capital 33,291
Accumulated deficit ( 44,531)
--------------------------------------------------------------------------------
Total stockholders' equity $ --
--------------------------------------------------------------------------------
See accompanying notes.
F-25
<PAGE>
PEPPERMILL CAPITAL CORPORATION
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
REVENUE $ --
EXPENSES 21,499
--------------------------------------------------------------------------------
NET LOSS ($ 21,499)
--------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 11,239,700
--------------------------------------------------------------------------------
NET LOSS PER SHARE ($ 0.00)
--------------------------------------------------------------------------------
See accompanying notes.
F-26
<PAGE>
PEPPERMILL CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------------------- Additional Accumulated
Shares Amount Paid-in Capital Deficit Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1998 11,239,700 $ 11,240 $ 21,930 ($ 23,032) $ 10,138
Contribution of capital (Note 2) -- -- 11,361 -- 11,361
Net loss for the year ended December 31, 1999 -- -- -- ( 21,499) ( 21,499)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999 11,239,700 $ 11,240 $ 33,291 ($ 44,531) $ --
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-27
<PAGE>
PEPPERMILL CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($21,499)
-------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization 2,129
Change in accounts payable 3,245
-------------------------------------------------------------------------------
Total adjustments 5,374
-------------------------------------------------------------------------------
Net cash used in operating activities ( 16,125)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of note receivable 15,000
-------------------------------------------------------------------------------
NET DECREASE IN CASH ( 1,125)
CASH AT BEGINNING OF YEAR 1,125
-------------------------------------------------------------------------------
CASH AT END OF YEAR $ --
-------------------------------------------------------------------------------
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
-------------------------------------------------------------------------------
During 1999, certain stockholders of the Company converted
amounts owed to them into capital $11,361
------------------------------------------------------------------------------
See accompanying notes.
F-28
<PAGE>
PEPPERMILL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
Organization and Business Activity
Peppermill Capital Corporation (the Company) was incorporated in April
1998, under the laws of the State of Nevada for the purpose of
exploration and development of mineral properties. The Company was
considered to be in the development stage through December 31, 1998.
On November 22, 1999, in a private transaction, Varner Technologies,
Inc. (Varner) purchased approximately 90% of the Company's outstanding
common stock. The purchase of the shares of the Company's common stock
by Varner was done in contemplation of a business combination/merger
transaction between the two entities. The entities have entered into a
letter of intent, however, the final terms of the combination/merger
have not been finalized as of the date of this report.
At December 31, 1999, the Company had no planned operations and was
not considered to be in the development stage.
Use of Estimates
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
Income Taxes
The Company accounts for income taxes according to Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". Under the liability method specified by SFAS No. 109, deferred
income taxes are recognized for the future tax consequences of
temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities.
Net Loss Per Share
The Company applies Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (FAS 128). Net loss per share is computed by
dividing net loss by the weighted average number of common shares
outstanding during the reported period. There were no potentially
dilutive securities outstanding at December 31, 1999.
F-29
<PAGE>
--------------------------------------------------------------------------------
NOTE 2. RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------
The Company's stockholders, from time to time, pay for Company
expenses and are reimbursed by the Company. At December 31, 1999,
$11,361 was due to the stockholders, which the stockholders elected to
contribute to capital.
--------------------------------------------------------------------------------
NOTE 3. INCOME TAXES
--------------------------------------------------------------------------------
At December 31, 1999 the Company had a deferred tax asset of
approximately $17,000, resulting from net operating losses of
approximately $44,000. The deferred tax asset is offset entirely by a
valuation allowance. The net operating losses will expire in 2018 and
2019.
Deferred tax assets are reduced by a valuation allowance if, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Management's
valuation procedures consider projected utilization of deferred tax
assets prospectively over the next several years, and continually
evaluate new circumstances surrounding the future realization of such
assets.
The income tax benefit differs from the amount computed by applying
the federal statutory tax rate to loss before income taxes principally
due to an increase in the deferred tax asset valuation allowance of
approximately $8,000.
--------------------------------------------------------------------------------
NOTE 4. GOING CONCERN
--------------------------------------------------------------------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. The Company has
sustained losses and negative cash flows from inception and has no
working capital available to fund any possible future expenditures
necessary to remain in business. The Company believes any future
capital requirements will be provided by the majority stockholder.
F-30
<PAGE>
Part I. FINANCIAL INFORMATION
PEPPERMILL CAPITAL CORPORATION
CONDENSED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
====================================================================================================================================
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 2000 December 31, 1999
====================================================================================================================================
<S> <C> <C> <C>
CURRENT LIABILITIES
Accrued liabilities, to related parties (Note 2) $ 11,656 $ --
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, 200,000,000 shares authorized, at $0.001 par value;
11,239,700 shares issued and outstanding 11,240 11,240
Additional paid-in capital 33,291 33,291
Accumulated deficit (56,187) (44,531)
------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficiency) 11,656) --
------------------------------------------------------------------------------------------------------------------------------------
$ -- $ --
====================================================================================================================================
</TABLE>
See notes to condensed financial statements - unaudited.
F-31
<PAGE>
PEPPERMILL CAPITAL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
====================================================================================================================================
Three Months Ended
March 31
------------------------------------------
2000 1999
====================================================================================================================================
<S> <C> <C>
REVENUE $ -- $ --
OPERATING EXPENSES
General and administrative 11,656 1,200
------------------------------------------------------------------------------------------------------------------------------------
NET LOSS ($ 11,656) ($ 1,200)
====================================================================================================================================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 11,239,700 11,239,700
====================================================================================================================================
NET LOSS PER SHARE - BASIC AND DILUTED $ -- --
====================================================================================================================================
</TABLE>
See notes to condensed financial statements - unaudited.
F-32
<PAGE>
PEPPERMILL CAPITAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
====================================================================================================================================
2000 1999
====================================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($11,656) ($ 1,200)
Adjustment to reconcile net loss to net cash used in operating activities:
Increase in accounts payable and accrued expenses (11,656) (1,116
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities, representing the net decrease
in cash and cash equivalents for the period -- (84)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD -- 1,125
------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ -- $ 1,041
====================================================================================================================================
</TABLE>
See notes to condensed financial statements - unaudited.
F-33
<PAGE>
PEPPERMILL CAPITAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
================================================================================
NOTE 1. BASIS OF PRESENTATION
================================================================================
Basis of Presentation
The accompanying (unaudited) financial statements of Peppermill
Capital Corporation have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and, therefore, do not include
all information and footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with generally accepted accounting principles.
In the opinion of management, all adjustments considered necessary for
a fair presentation of the results of operations and financial
position have been included and all such adjustments are of a normal
recurring nature. Operations for the quarter ended March 31, 2000, are
not necessarily indicative of the results that can be expected for the
year ended December 31, 2000.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
these estimates.
The financial data at December 31, 1999 is derived from audited
financial statements which are included in the Company's form 10-KSB
and should be read in conjunction with the audited financial
statements and the notes thereto.
================================================================================
NOTE 2. RELATED PARTY TRANSACTIONS
================================================================================
Varner Technologies, Inc. (90% owner of the Company) paid certain
expenses on behalf of the Company aggregating $11,656, including
accounting and legal expenses.
================================================================================
NOTE 3. NET LOSS PER COMMON SHARE
================================================================================
Basic and diluted net loss per common share was computed by dividing
the net loss by the weighted number of shares of common stock
outstanding during each period.
================================================================================
NOTE 4. GOING CONCERN UNCERTAINTIES
================================================================================
The Company has sustained losses and negative cash flows from
inception and has no working capital available to fund any possible
future expenditures necessary to remain in business. The Company
believes any future capital requirements will be provided by the
majority stockholder.
F-34
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT entered into on June 2, 2000 by and between Peppermill Capital
Corporation, a Nevada corporation (the Buyer), and Varner Technologies, Inc., a
Missouri corporation (the Target). The Buyer and the Target are referred to
collectively herein as the Parties.
This Agreement contemplates a tax-free merger of the Target with and into
the Buyer in a reorganization pursuant to Code ss. 368. The Target Stockholders
will receive capital stock in the Buyer in exchange for their capital stock in
the Target.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows.
1. Definitions.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Buyer" has the meaning set forth in the preface above.
"Buyer Action by Consent" has the meaning set forth in ss.5(c)(ii) below.
"Buyer Common Share" means any share of the Common Stock, $.001 par value
per share, of the Buyer.
"Buyer-owned Share" means any Target Share that the Buyer owns
beneficially.
"Buyer Preferred Share" means any share of the new class of Preferred
Stock, $.001 par value per share, of the Buyer.
"Buyer Share" means any share of the Common Stock or Preferred Stock of
Buyer.
"Certificate of Merger" has the meaning set forth in ss.2(c) below.
"Closing" has the meaning set forth in ss.2(b) below.
"Closing Date" has the meaning set forth in ss.2(b) below.
"Confidential Information" means any information concerning the businesses
and affairs of the Target and its Subsidiaries that is not already generally
available to the public.
"Common Conversion Ratio" has the meaning set forth in ss.2(d)(v) below.
<PAGE>
"Definitive Buyer Proxy Materials" means the definitive proxy materials
relating to the written consent of Buyer Shareholders.
"Dissenting Share" means any Buyer Share which any stockholder who or which
has exercised his or its appraisal rights under the Nevada General Corporation
Law holds of record.
"Effective Time" has the meaning set forth in ss.2(d)(i) below.
"Exchange Agent" has the meaning set forth in ss.2(e) below.
"Fairness Opinion" has the meaning set forth in ss.5(d) below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"IRS" means the Internal Revenue Service.
"Joint Disclosure Document" means the disclosure document combining the
Prospectus and the Definitive Buyer Proxy Materials.
"Knowledge" means actual knowledge without independent investigation.
"Merger" has the meaning set forth in ss.2(a) below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice.
"Party" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"Preferred Conversion Ratio" has the meaning set forth in ss.2(d)(v).
"Prospectus" means the final prospectus relating to the registration of the
Buyer Shares under the Securities Act.
"Registration Statement" has the meaning set forth in ss.5(c)(i) below.
"Requisite Buyer Stockholder Approval" means the affirmative vote of the
holders of a majority of the Buyer Shares in favor of this Agreement and the
Merger.
"SEC" means the Securities and Exchange Commission.
2
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for taxes not yet due and payable or for taxes that the
taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Subsidiary" means any corporation with respect to which a specified Person
(or a Subsidiary thereof) owns a majority of the common stock or has the power
to vote or direct the voting of sufficient securities to elect a majority of the
directors.
"Surviving Corporation" has the meaning set forth in ss.2(a) below.
"Target" has the meaning set forth in the preface above.
"Target Preferred Share" means any share of the Preferred Stock $.01 par
value per share, of the Target.
"Target Voting Share" means any share of the voting Common Stock, $.01 par
value per share, of the Target.
"Target Non-Voting Share" means any share of the non-voting Common Stock,
$.01 par value per share, of the Target.
"Target Share" means any share of the voting Common Stock, non-voting
Common Stock, or Preferred Stock of the Target.
"Target Stockholder" means any Person who or which holds any Target Shares.
2. Basic Transaction.
(a) The Merger. On and subject to the terms and conditions of this
Agreement, the Target will merge with and into the Buyer (the Merger) at the
Effective Time. The Buyer shall be the corporation surviving the Merger (the
Surviving Corporation).
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the Closing) shall take place at the offices of Merrick & Klimek,
P.C., 401 South LaSalle Street, Suite 1302, Chicago, Illinois 60605, commencing
at 9:00 a.m. local time on the second business day following the satisfaction or
waiver of all conditions to the obligations of the Parties to consummate the
transactions contemplated hereby (other than conditions with
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respect to actions the respective Parties will take at the Closing itself) or
such other date as the Parties may mutually determine (the Closing Date);
(c) Actions at the Closing. At the Closing, (i) the Target will deliver to
the Buyer the various certificates, instruments, and documents referred to in
ss.6(a) below, (ii) the Buyer will deliver to the Target the various
certificates, instruments, and documents referred to in ss.6(b) below, (iii) the
Buyer and the Target will file with the Secretary of State of the States of
Nevada and Missouri a Certificate of Merger (the Certificate of Merger), and
(iv) the Buyer will deliver to the Exchange Agent in the manner provided below
in this ss.2 the certificates evidencing the Buyer Shares issued in the Merger.
(d) Effect of Merger.
(i) General. The Merger shall become effective at the time (the
Effective Time) the Buyer and the Target file the Certificate of Merger
with the Secretary of State of the States of Nevada and Missouri. The
Merger shall have the effect set forth in the Nevada and Missouri General
Corporation Laws. The Surviving Corporation may, at any time after the
Effective Time, take any action (including executing and delivering any
document) in the name and on behalf of either the Buyer or the Target in
order to carry out and effectuate the transactions contemplated by this
Agreement.
(ii) Certificate of Incorporation. The Certificate of Incorporation of
the Buyer in effect at and as of the Effective Time will remain the
Certificate of Incorporation of the Surviving Corporation, as amended, in
accordance with the Certificate of Amendment as attached to the Definitive
Buyer Proxy Materials.
(iii) Bylaws. The Bylaws of the Buyer in effect at and as of the
Effective Time will remain the Bylaws of the Surviving Corporation without
any modification or amendment in the Merger.
(iv) Directors and Officers. The directors and officers of the Buyer
in office at and as of the Effective Time will remain the directors and
officers of the Surviving Corporation (retaining their respective positions
and terms of office).
(v) Conversion of Target Shares. At and as of the Effective Time, (A)
each Voting and Non-Voting Target Share (other than Buyer-owned Share)
shall be converted into the right to receive three (3) Buyer Common Shares
(the ratio is referred to herein as the Common Conversion Ratio), (B) each
Target Preferred Share shall be converted into the right to receive five
(5) Series A Buyer Preferred Shares (the ratio is referred to as the
Preferred Conversion Ratio), and (C) each Buyer-owned Share shall be
canceled; provided, however, that the Conversion Ratio shall be subject to
equitable adjustment in the event of any stock split, stock dividend,
reverse stock split, or other change in the number of Target Shares
outstanding. No Target Share shall be deemed to be outstanding or to have
any rights other than those set forth above in this ss.2(d)(v) after the
Effective Time.
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(vi) Buyer Common Shares. Each Buyer Common Share issued and
outstanding at and as of the Effective Time will remain issued and
outstanding. In addition, each current holder of one (1) Buyer Common Share
will receive a dividend of four (4) additional Buyer Common Shares.
(e) Procedure for Payment.
(i) Promptly after the Effective Time, (A) the Buyer will furnish to
its transfer agent (the Exchange Agent) stock certificates representing
that number of Buyer Shares equal to the product of (I) the applicable
Conversion Ratio times (II) the number of outstanding Target Shares (other
than Buyer-owned Shares) less the number of Target Shares currently held.
The existing certificates for each Target Voting Share and Target
Non-Voting Share will represent, after the merger, one Buyer Common Share,
and existing certificates for each Target Preferred Share will represent,
after the merger, one Buyer Preferred Share.
(ii) The Buyer may cause the Exchange Agent to return any Buyer Shares
and dividends and distributions thereon remaining unclaimed 180 days after
the Effective Time, and thereafter each remaining record holder of
outstanding Target Shares shall be entitled to look to the Buyer (subject
to abandoned property, escheat, and other similar laws) as a general
creditor thereof with respect to the Buyer Shares and dividends and
distributions thereon to which he or it is entitled upon surrender of his
or its certificates.
(iii) The Buyer shall pay all charges and expenses of the Exchange
Agent.
(f) Closing of Transfer Records. After the close of business on the Closing
Date, transfers of Target Shares outstanding prior to the Effective Time shall
not be made on the stock transfer books of the Surviving Corporation.
3. Representations and Warranties of the Target. The Target represents and
warrants to the Buyer that the statements contained in this ss.3 are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this ss.3).
(a) Organization, Qualification, and Corporate Power. Each of the Target
and its Subsidiaries is a corporation duly organized, validly existing, and in
good standing under the laws of the jurisdiction of its incorporation. Each of
the Target and its Subsidiaries is duly authorized to conduct business and is in
good standing under the laws of each jurisdiction where such qualification is
required except where the lack of such qualification would not have a material
adverse effect on the financial condition of the Target and its Subsidiaries
taken as a whole. Each of the Target and its Subsidiaries has full corporate
power and authority to carry on the businesses in which it is engaged and to own
and use the properties owned and used by it.
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(b) Capitalization. The entire authorized capital stock of the Target
consists of 17,000,000 Target Voting Shares, of which 14,827,828 Target Voting
Shares are issued and outstanding; 10,000,000 Target Non-Voting Shares of which
9,802,496 Target Non-Voting Shares are issued and outstanding and 2,000,000
Target Preferred Shares, all of which are issued and outstanding. All of the
issued and outstanding Target Shares have been duly authorized and are validly
issued, fully paid, and nonassessable except as set forth in Schedule 3(b).
(c) Authorization of Transaction. The Target has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder. This Agreement constitutes
the valid and legally binding obligation of the Target, enforceable in
accordance with its terms and conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which any of the Target and its Subsidiaries is
subject or any provision of the charter or bylaws of the Target and its
Subsidiaries or (ii) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument or other arrangement to which
any of the Target and its Subsidiaries is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets) except where the violation, conflict, breach,
default, acceleration, termination, modification, cancellation, failure to give
notice, or Security Interest would not have a material adverse effect on the
financial condition of the Target and its Subsidiaries taken as a whole or on
the ability of the Parties to consummate the transactions contemplated by this
Agreement except as set forth on Schedule 3(d). None of the Target and its
Subsidiaries needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement, except where the failure to give notice, to file, or to obtain any
authorization, consent, or approval would have a material adverse effect on the
Target and its Subsidiaries taken as a whole or on the ability of the Parties to
consummate the transactions contemplated by this Agreement.
(e) Financial Statements. The audited financial statements for the year
ended December 31, 1999 (including the related notes and schedules) have been
prepared in accordance with GAAP which were applied on a consistent basis
throughout the periods covered thereby, and present fairly the financial
condition of the Target and its Subsidiaries as of the indicated dates and the
results of operations of the Target and its Subsidiaries for the indicated
periods.
(f) Disclosure. The Target Prospectus will comply with the Securities
Exchange Act in all material respects. The Target Prospectus will not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they will be made, not misleading; provided, however,
that the Target makes no representation or warranty with respect to any
information that the Buyer will supply specifically for use in the Target
Prospectus. None
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of the information that the Target will supply specifically for use in the
Registration Statement, or the Definitive Buyer Proxy Materials, will contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they will be made, not misleading.
4. Representations and Warranties of the Buyer. The Buyer represents and
warrants to the Target that the statements contained in this ss.4 are correct
and complete as of the date of this Agreement and will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this ss.4).
(a) Organization. The Buyer is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation.
(b) Capitalization. The entire authorized capital common stock of the Buyer
consists of 600,000,000 Buyer Common Shares, of which 11,239,700 Buyer Common
Shares are issued and outstanding. All of the Buyer Shares to be issued in the
Merger have been duly authorized and, upon consummation of the Merger, will be
validly issued, fully paid, and nonassessable.
(c) Authorization of Transaction. The Buyer has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder; provided, however, that the
Buyer cannot consummate the Merger unless and until it receives the Requisite
Buyer Stockholder Approval. This Agreement constitutes the valid and legally
binding obligation of the Buyer, enforceable in accordance with its terms and
conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Buyer is subject or any provision of
the charter or bylaws of the Buyer or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument or other arrangement
to which the Buyer is a party or by which it is bound or to which any of its
assets is subject and the Buyer does not need to give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any government
or governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement, except where the failure to give notice, to
file, or to obtain any authorization, consent or approval would have a material
adverse effect on the Buyer or on the ability of the parties to consummate the
transactions contemplated by this Agreement.
(e) Disclosure. The Registration Statement, the Prospectus, and the
Definitive Buyer Proxy Materials will comply with the Securities Act and the
Securities Exchange Act in all material respects. The Registration Statement,
the Prospectus, and the Definitive Buyer
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Proxy Materials will not contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they will be made, not misleading;
provided, however, that the Buyer makes no representation or warranty with
respect to any information that the Target will supply specifically for use in
the Registration Statement, the Buyer Prospectus, and the Definitive Buyer Proxy
Materials. None of the information that the Buyer will supply specifically for
use in the Target Prospectus will contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
made therein, in the light of the circumstances under which they will be made,
not misleading.
5. Covenants. The Parties agree as follows with respect to the period from
and after the execution of this Agreement.
(a) General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary , proper, or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
ss.6 below).
(b) Notices and Consents. The Target will give any notices (and will cause
each of its Subsidiaries to give any notices) to third parties, and will use its
reasonable best efforts to obtain (and will cause each of its Subsidiaries to
use its reasonable best efforts to obtain) any third party consents, that the
Buyer reasonably may request in connection with the matters referred to in
ss.3(d) above.
(c) Regulatory Matters and Approvals. Each of the Parties will (and the
Target will cause each of its Subsidiaries to) give any notices to, make any
filings with, and use its reasonable best efforts to obtain any authorizations,
consents, and approvals of governments and governmental agencies in connection
with the matters referred to in ss.3(d) and ss.4(d) above. Without limiting the
generality of the foregoing:
(i) Securities Act, Securities Exchange Act, and State Securities
Laws. The Buyer will prepare and file with the SEC a registration statement
under the Securities Act relating to the offering and issuance of the Buyer
Shares (the Registration Statement) and preliminary proxy materials or
information statement materials under the Securities Exchange Act relating
to the Buyer Action by Consent. Buyer will use its reasonable best efforts
to respond to the comments of the SEC thereon and will make any further
filings (including amendments and supplements) in connection therewith that
may be necessary. Each party will provide the other party, with whatever
information and assistance in connection with the foregoing filings that
the other Party reasonably may request. The Buyer will take all actions
that may be necessary, proper, or advisable under state securities laws in
connection with the offering and issuance of the Buyer Shares.
(ii) Missouri and Nevada General Corporation Law. The Buyer will call
a special meeting of its stockholders or, if permitted by applicable
securities and corporation law, obtain the consent of the Shareholder's,
without the necessity of calling a meeting (the
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Buyer Action by Consent) as soon as reasonably practicable in order that
the stockholders may consider and vote upon the adoption of this Agreement
and the approval of the Merger in accordance with the Nevada General
Corporation Law. The Parties will mail the Joint Disclosure Document to
their respective stockholders simultaneously and as soon as reasonably
practicable. The Joint Disclosure Document will contain the affirmative
recommendations of the respective boards of directors of the Parties in
favor of the adoption of this Agreement and the approval of the Merger;
provided, however, that no director or officer of either Party shall be
required to violate any fiduciary duty or other requirement imposed by law
in connection therewith.
(d) Fairness Opinion. The Buyer will obtain on or before the date the Joint
Disclosure Document is mailed (i) an opinion of Evans & Evans, Inc. as to the
fairness of the Merger to the Buyer's Stockholders from a financial point of
view (the Fairness Opinion).
(e) Listing of Buyer Common Shares. The Buyer will use its reasonable best
efforts to cause the Buyer Common Shares that will be issued in the Merger to be
approved for listing on the OTC Bulletin Board, prior to the Effective Time.
(f) Operation of Business. The Buyer will not (and will not cause or permit
any of its Subsidiaries to) engage in any practice, take any action, or enter
into any transaction outside the Ordinary Course of Business. Without limiting
the generality of the foregoing:
(i) the Buyer will not authorize or effect any change in its charter
or bylaws except as are proposed in the Definitive Buyer Proxy Materials;
(ii) Buyer will not grant any options, warrants, or other rights to
purchase or obtain any of its capital stock or issue, sell, or otherwise
dispose of any of its capital stock;
(iii) the Buyer will not declare, set aside, or pay any dividend or
distribution with respect to its capital stock (whether in cash or in
kind), or redeem, repurchase, or otherwise acquire any of its capital
stock, in either case outside the Ordinary Course of Business;
(iv) the Buyer will not issue any note, bond, or other debt security
or create, incur, assume, or guarantee any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
and
(v) the Buyer will not commit to any of the foregoing.
(g) Full Access. Each party will (and will cause each of its Subsidiaries
to) permit representatives of the other party to have full access to all
premises, properties, personnel, books, records (including tax records),
contracts, and documents of or pertaining to each party. Each party will treat
and hold as such any Confidential Information it receives from the other party
in the course of the reviews contemplated by this ss.5(g), will not use any of
the Confidential
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Information except in connection with this Agreement, and, if this Agreement is
terminated for any reason whatsoever, agrees to return to the providing party
all tangible embodiments (and all copies) thereof which are in its possession.
(h) Notice of Developments. Each Party will give prompt written notice to
the other of any material adverse development causing a breach of any of its own
representations and warranties in ss.3 and ss.4 above. No disclosure by any
Party pursuant to this ss.5(h), however, shall be deemed to amend or supplement
the Disclosure Schedule or to prevent or cure any misrepresentation, breach of
warranty, or breach of covenant.
(i) Options. The Target will negotiate amendments to its outstanding option
agreements so that the options will be exercisable for Buyer Shares, subject to
the Common Conversion Ratio.
6. Conditions to Obligation to Close.
(a) Conditions to Obligation of the Buyer. The obligation of the Buyer to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) the Target and its Subsidiaries shall have procured all of the
third party consents specified in ss.5(b) above;
(ii) the representations and warranties set forth in ss.3 above shall
be true and correct in all material respects at and as of the Closing Date;
(iii) the Target shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iv) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would
(A) prevent consummation of any of the transactions contemplated by this
Agreement, (B) cause any of the transactions contemplated by this Agreement
to be rescinded following consummation, (C) affect adversely the right of
the Surviving Corporation to own the former assets, to operate the former
businesses, and to control the former Subsidiaries of the Target, or (D)
affect adversely the right of any of the former Subsidiaries of the Target
to own its assets and to operate its businesses (and no such injunction,
judgment, order, decree, ruling, or charge shall be in effect);
(v) the Target shall have delivered to the Buyer a certificate to the
effect that each of the conditions specified above in ss.6(a)(i)-(v) is
satisfied in all respects;
(vi) the Registration Statement shall have become effective under the
Securities Act;
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(vii) the Buyer Common Shares that will be issued in the Merger shall
have been approved for listing on the OTC Bulletin Board;
(viii) the Parties shall have received all other authorizations,
consents, and approvals of governments and governmental agencies referred
to in ss.3(d) and ss.4(d) above;
(ix) all actions to be taken by the Target in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form
and substance to the Buyer.
The Buyer may waive any condition specified in this ss.6(a) if it executes
a writing so stating at or prior to the Closing.
(b) Conditions to Obligation of the Target. The obligation of the Target to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) this Agreement and the Merger shall have received the Requisite
Buyer Stockholder Approval;
(ii) the Registration Statement shall have become effective under the
Securities Act;
(iii) the Buyer Common Shares that will be issued in the Merger shall
have been approved for listing on the OTC Bulletin Board;
(iv) the representations and warranties set forth in ss.4 above shall
be true and correct in all material respects at and as of the Closing Date;
(v) the Buyer shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(vi) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would
(A) prevent consummation of any of the transactions contemplated by this
Agreement, (B) cause any of the transactions contemplated by this Agreement
to be rescinded following consummation, (C) affect adversely the right of
the Surviving Corporation to own the former assets, to operate the former
businesses, and to control the former Subsidiaries of the Target, or (D)
affect adversely the right of any of the former Subsidiaries of the Target
to own its assets and to operate its businesses (and no such injunction,
judgment, order, decree, ruling, or charge shall be in effect);
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(vii) the Parties shall have received all other authorizations,
consents, and approvals of governments and governmental agencies referred
to in ss.3(d) and ss.4(d) above;
(viii) all actions to be taken by the Buyer in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form
and substance to the Target.
The Target may waive any condition specified in this ss.6(b) if it executes
a writing so stating at or prior to the Closing.
7. Termination.
(a) Termination of Agreement. Either of the Parties may terminate this
Agreement with the prior authorization of its board of directors (whether before
or after stockholder approval) as provided below:
(i) the Parties may terminate this Agreement by mutual written consent
at any time prior to the Effective Time;
(ii) the Buyer may terminate this Agreement by giving written notice
to the Target at any time prior to the Effective Time (A) in the event the
Target has breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, the Buyer has notified
the Target of the breach, and the breach has continued without cure for a
period of 30 days after the notice of breach or (B) if the Closing shall
not have occurred on or before September 30, 2000, by reason of the failure
of any condition precedent under ss.6(a) hereof (unless the failure results
primarily from the Buyer breaching any representation, warranty, or
covenant contained in this Agreement);
(iii) the Target may terminate this Agreement by giving written notice
to the Buyer at any time prior to the Effective Time (A) in the event the
Buyer has breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, the Target has
notified the Buyer of the breach, and the breach has continued without cure
for a period of 30 days after the notice of breach or (B) if the Closing
shall not have occurred on or before September 30, 2000, by reason of the
failure of any condition precedent under ss.6(b) hereof (unless the failure
results primarily from the Target breaching any representation, warranty,
or covenant contained in this Agreement);
(b) Effect of Termination. If any Party terminates this Agreement pursuant
to ss.7(a) above, all rights and obligations of the Parties hereunder shall
terminate without any liability of any Party to any other Party (except for any
liability of any Party then in breach); provided, however, that the
confidentiality provisions contained in ss.5(g) above shall survive any such
termination.
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8. Miscellaneous.
(a) Survival. None of the representations, warranties, and covenants of the
Parties (other than the provisions in ss.2 above concerning issuance of the
Buyer Shares) will survive the Effective Time.
(b) Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement without the prior written approval of the other Party; provided,
however, that any Party may make any public disclosure it believes in good faith
is required by applicable law or any listing or trading agreement concerning its
publicly-traded securities (in which case the disclosing Party will use its
reasonable best efforts to advise the other Party prior to making the
disclosure).
(c) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; provided, however, that the provisions in ss.2
above concerning issuance of the Buyer Shares are intended for the benefit of
the Target Stockholders.
(d) Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement between the Parties and supersedes any
prior understandings, agreements, or representations by or between the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(e) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
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If to the Target::
Peppermill Capital Corporation
1809 Clarkson Road, Suite 204
Chesterfield, Missouri 63017
If to the Buyer:
Varner Technologies, Inc.
1809 Clarkson Road, Suite 204
Chesterfield, Missouri 63017
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Party notice in the manner herein set forth.
(i) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Nevada without giving effect
to any choice or conflict of law provision or rule.
(j) Amendments and Waivers. The Parties may mutually amend any provision of
this Agreement at any time prior to the Effective Time with the prior
authorization of their respective boards of directors; provided, however, that
any amendment effected subsequent to stockholder approval will be subject to the
restrictions contained in the Nevada General Corporation Law. No amendment of
any provision of this Agreement shall be valid unless the same shall be in
writing and signed by both of the Parties. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(k) Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(l) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
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(m) Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word "including" shall mean including without limitation.
(n) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on [as
of] the date first above written.
TARGET: BUYER:
VARNER TECHNOLOGIES, INC. PEPPERMILL CAPITAL CORPORATION
/s/ Clayton Varner /s/ Clayton Varner
---------------------------------- ------------------------------------
Clayton Varner, Chairman and Clayton Varner, Chairman and
Chief Executive Officer Chief Executive Officer
15
<PAGE>
APPENDIX B
CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION
FOR PEPPERMILL CAPITAL CORPORATION
Pursuant to the provisions of NRS 78.385 and 78.390 of the Nevada
Corporation Act, Peppermill Capital Corporation ("Corporation") executes the
following Certificate of Amendment to its Articles of Incorporation.
1. The name of the corporation is:
PEPPERMILL CAPITAL CORPORATION
2. The Articles have been amended as follows:
a. The name under Article One of the Corporation's Articles of
Incorporation has been changed from Peppermill Capital Corporation to Varner
Technologies, Inc.
b. Article Four of the Corporation's Articles of Incorporation is restated
as follows:
(i) Article Four [Capital Stock]. The Corporation shall have the authority
to issue an aggregate of (1) six hundred million (600,000,000) Common
Capital Shares, par value $.001 per share; (2) ten million
(10,000,000) Series A Preferred Capital Shares, par value $.001 per
share; and (3) ninety million (90,000,000) Series B Preferred Capital
Shares, par value $.001 per share; for a total capitalization of Seven
Hundred Thousand Dollars ($700,000).
(ii) The holders of shares of Common Capital Shares of the Corporation
shall not be entitled to pre-emptive or preferential rights to
subscribe to any unissued stock or any other securities which the
Corporation may now or hereafter be authorized to issue except as
specifically provided herein. The Corporation's Common Capital Shares
may be issued and sold from time to time for such considerations as
may be fixed by the Board of Directors, provided that the
consideration so fixed is not less than par value. The stockholders
shall not possess cumulative voting rights at all shareholders
meetings called for the purpose of electing a Board of Directors.
(iii) The Series A Preferred Stock shall be designated as a single class
having the following rights and preferences:
(1) Voting. The holders of Series A Preferred Stock shall be non-
voting and, therefore, shall have no right to vote on corporate matters.
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(2) Liquidation Preference.
(a) The shares of Series A Preferred Stock shall have a liquidation
preference, whereby in the event of voluntary or involuntary liquidation
(whether complete or partial), dissolution or winding up of the
Corporation, the holders of Series A Preferred Stock shall be entitled to
be paid out of assets of Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, an amount in cash
per share equal to $.40. No distributions shall be made on any Common Stock
of the Corporation by reason of any voluntary or involuntary liquidation
(whether complete or partial), dissolution or winding up of the Corporation
unless each holder shall have received the full amount of the liquidated
value with respect to all shares of Series A Preferred Stock held by such
holder. The holders of the Series A Preferred Stock shall have no right to
participate in distributions on liquidation in excess of the $.40
liquidation preference. The consolidation or merger of the Corporation into
or with any other entity or entities which results in the exchange of
outstanding shares of the Corporation for securities or other consideration
issued or paid or caused to be issued or paid by any such entity or
affiliate thereof, where the holders of a majority of the Company's capital
stock before the consolidation or merger do not own a majority of the
capital stock of the surviving entity or where the members of the board of
directors before the consolidation or merger do not represent a majority of
the board of directors of the surviving company shall be deemed a
liquidation, dissolution or winding up of the Corporation. The sale or
transfer by the Corporation of all or substantially all of its assets,
shall also be deemed a liquidation, dissolution or winding up of the
Corporation.
(b) If a merger or consolidation of the Corporation is not deemed a
liquidation, dissolution or winding up under Section 2(a) above, as a
condition to such merger or consolidation, provision shall be made so that
the holders of Series A Preferred Stock receive securities in the surviving
company which, to the greatest extent possible, provide them with the same
rights in the surviving company they had as holders of Series A Preferred
Stock.
(c) If upon any dissolution, liquidation (whether complete or
partial), or winding up of the Corporation, the assets of the Corporation
available for distribution to the stockholders shall be insufficient to pay
the holders of outstanding capital Series A Preferred Stock the full amount
to which they shall be entitled, each holder of Series A Preferred Stock
shall be entitled to receive an amount equal to the product derived by
multiplying the total amount available for distribution by a fraction, the
numerator of which shall be the number of shares of Series A Preferred
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<PAGE>
Stock then held by such person, and the denominator of which shall be the
total number of shares of Series A Preferred Stock then outstanding.
(3) Dividends. The holders of Series A Preferred Stock shall have no
right to receive dividends.
(4) Conversion Rights.
(a) Conversion Rights and Procedure.
(i) Right of Conversion. Each holder of shares of Series A
Preferred Stock shall be entitled to exercise all or a portion of the
conversion rights provided herein at any time after [one year from the
filing of this Certificate of Amendment] issuance and shall terminate
[two (2) years from the filing of this Certificate of Amendment].
(ii) Rate of Conversion. Upon exercise of the right of conversion
hereunder with respect to shares of Series A Preferred Stock, the
holder thereof shall be entitled to receive that number of shares of
Common Stock equal to the number of shares of Series A Preferred Stock
held. The shares of Common Stock to be issued upon conversion of
shares of Series A Preferred Stock as provided herein are referred to
herein as "Conversion Shares."
(iii) Method of Conversion. A holder of shares of Series A
Preferred Stock shall exercise such holder's conversion rights
hereunder by (i) delivering or mailing to the Corporation, by
certified or registered mail, return receipt requested, a written
notice stating such holder's intention to exercise such rights and
specifying the number of shares of Series A Preferred Stock as to
which the conversion right is exercised and (ii) accompanying such
notice with a certificate or certificates representing such shares
duly endorsed in blank or accompanied with a stock power duly endorsed
in blank. The right of exercise shall be deemed to have been exercised
on a date ninety (90) days after such notice shall be delivered to the
Corporation or mailed in accordance with this section ("Exercise
Time").
(iv) Delivery of Certificates. Certificates for Conversion Shares
shall be delivered to the holder named therein within ten (10) days
after the Exercise Time. Unless all of the Series A Preferred Stock
evidenced by the certificate delivered to the Corporation shall have
been converted or redeemed, the Corporation shall within such ten (10)
day period prepare a new certificate, substantially identical to that
surrendered, representing the balance of the shares of Series A
Preferred Stock formerly represented by the certificate which shall
not have been converted or redeemed and shall
3
<PAGE>
within the said ten (10) day period deliver such certificate to the
person designated as the holder thereof.
(v) Restrictions. The Conversion Shares shall not be subject to
sale or transfer for a period of one year from [the date of the filing
of this Certificate of Amendment]. The certificates representing the
Conversion Shares shall contain a restrictive legend setting forth the
restrictions on transfer.
(vi) The Corporation covenants and agrees that:
(A) At all times during which any shares of Series A
Preferred Stock are issued and outstanding, the Corporation shall
reserve and maintain a sufficient number of authorized and
unissued shares of Common Stock sufficient to issue shares of
Common Stock upon conversion of all of the then issued and
outstanding Series A Preferred Stock, including additional shares
which may become issuable by reason of an adjustment in the
conversion rate pursuant to this section hereof. The Corporation
shall not issue any shares of Common Stock if, after the issuance
thereof, the number of authorized and unissued shares of Common
Stock would then be insufficient to issue shares of Common Stock
to holders of the then issued and outstanding Series A Preferred
Stock if all of such holders were to exercise their rights of
conversion hereunder;
(B) The Conversion Shares issuable upon any conversion of
any shares of Series A Preferred Stock shall be deemed to have
been issued to the person exercising such conversion privilege at
the Exercise Time, and the person exercising such conversion
privilege shall be deemed for all purposes to have become the
record holder of such Common Stock shares at the Exercise Time.
(C) All Conversion Shares which may be issued upon any
conversion of any shares of Series A Preferred Stock will, upon
issuance, be fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue thereof.
(b) Subdivision or Combination of Stock. In case at any time the
Corporation shall in any manner subdivide its outstanding shares of
Common Stock into a greater number of shares (including stock splits
or stock dividends) or combine such shares of Common Stock into a
smaller number of shares, then the conversion rights of Series A
Preferred Stock shall be adjusted accordingly.
4
<PAGE>
(5) Preemptive Rights. The shares of Series A Preferred Stock shall have
the preemptive right to purchase shares of Common Stock in an initial public
offering of the Company's Common Stock (an "Initial Public Offering"). Each
share of Series A Preferred Stock shall grant the holder the right to purchase
one share of Common Stock in the Initial Public Offering at the price offered to
the public. The pre-emptive rights granted to the Series A Preferred Stock shall
be subject to any purchase limitations placed by any underwriter in the Initial
Public Offering. In the event a holder of Series A Preferred Stock is unable to
purchase all shares he has elected and is entitled to due to underwriter's
limitations, he shall have the right to purchase shares in any subsequent public
offering of the Company's Common Stock to the extent of any short fall.
(6) Redemption.
(a) Right to Redeem. Upon the earlier to occur of (i) an Initial
Public Offering and (ii) [two (2) years from the filing of this Certificate
of Amendment], the Corporation shall have the right to redeem all or any
part of the then outstanding shares of Series A Preferred Stock at any time
or from time to time expressed by resolution of its Board of Directors, in
the manner prescribed in this Section 6.
(b) Redemption Notice. Before making any redemption of Series A
Preferred Stock hereunder, the Corporation shall mail by certified or
registered mail, return receipt requested, to each record holder of any
Series A Preferred Stock at the address shown on the Corporation's records,
a written notice ("Redemption Notice") stating: (i) the number of shares of
Series A Preferred Stock held by record by such holder which the
Corporation proposes to redeem, (ii) the date (herein called the
"Redemption Date") on which the Corporation proposes to pay the Redemption
Price for the shares to be redeemed, (iii) the Redemption Price which is to
be paid for each share repurchased; and (iv) the place at which the shares
to be redeemed may be surrendered in exchange for the Redemption Price for
such shares. Upon the mailing of a Redemption Notice, subject to the right
of the holder to convert the shares to be redeemed to Common Stock as
provided herein, the Corporation shall have the right, and shall become
obligated, to redeem the Series A Preferred Stock specified in such notice
on the date specified in such notice as the Redemption Date. Each
Redemption Notice shall be mailed at least 35 days before the Redemption
Date, provided that if the Corporation fails to pay the Redemption Price on
such date, the Redemption Date shall be the date on which the Corporation
actually pays the Redemption Price.
(c) Allocation of Redeemed Shares. With respect to any redemption, the
Corporation shall designate, by resolution of its Board of
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Directors, the aggregate number of shares of Series A Preferred Stock to be
redeemed. The number of shares of Series A Preferred Stock to be redeemed
from each holder thereof in any redemption shall be determined by
multiplying the aggregate number of shares of Series A Preferred Stock to
be redeemed by a fraction, the numerator of which shall be the total number
of shares of Series A Preferred Stock held by such holder and the
denominator of which shall be the total number of shares of Series A
Preferred Stock then outstanding.
(d) Right of Holder to Convert. Notwithstanding the provision of this
Section 6, a holder of shares of Series A Preferred Stock shall have the
right to convert the shares of Series A Preferred Stock as to which a
Redemption Notice shall have been give to such holder by converting such
shares to Common Stock at any time prior to the Redemption Date in
accordance with the provisions of Section 4 hereof. Any notice of
conversion of shares of Series A Preferred Stock made by a holder after the
date of a Redemption Notice and prior to the Redemption Date shall be
deemed to be conversion of the shares to be redeemed pursuant to the
Redemption Notice and, thereafter, (i) with respect to such shares, the
Corporation shall not have the right or obligation to redeem such shares
and (ii) the aggregate number of shares to be redeemed by the Corporation
shall be reduced by the number of shares converted to Common Stock by such
holder.
(e) Redemption Price.
(i) For each share of Series A Preferred Stock which shall be
redeemed by the Corporation at any time, the Corporation shall be
obligated to pay to the holder of such share an amount (herein called
the "Redemption Price") equal to $.40.
(ii) Each holder of Series A Preferred Stock shall be entitled to
receive on or at any time after the Redemption Date the full
Redemption Price for each share of Series A Preferred Stock held by
such holder which the Corporation shall be obligated to redeem on such
Redemption Date upon surrender by such holder at the Corporation's
principal office of the certificate representing such share duly
endorsed in blank or accompanied by appropriate form of assignment
duly endorsed in blank. After payment by the Corporation of the full
Redemption price for any share of Series A Preferred Stock redeemed
all rights of the holder of such share shall (whether or not the
certificate representing such share shall have been surrendered for
cancellation) cease and terminate with respect to such share.
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<PAGE>
(iv) The Series B Preferred Stock shall have such rights and
preferences as shall be designated by the Corporation's Board of
Directors by resolution.
3. The above amendments were adopted by the Corporation's Board of
Directors and were approved by the holders of an excess of 10,116,000 shares of
the Corporation's Common Stock representing over 90% of the Corporation's issued
and outstanding Common Stock.
4. Signatures:
--------------------------- -------------------------------
President or Vice President Secretary or Asst. Secretary
7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
Section 78.751 of the Nevada General Corporation Law allows domestic
corporations such as Peppermill to indemnify any person who was or is threatened
to be made a party to any threatened, pending, or completed action, suit, or
proceeding, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee, or agent of any corporation,
partnership, joint venture, trust, or other enterprise. Peppermill's Bylaws
provide that such persons shall be indemnified and held harmless to the fullest
extent permitted by Nevada law.
Nevada law permits domestic corporations such as Peppermill to advance
expenses in connection with defending any such proceedings, provided that the
person being indemnified undertakes to repay any such advances if it is later
determined that he was not entitled to be indemnified by the corporation.
Peppermill's Bylaws requires that Peppermill advance such funds upon receipt of
such an undertaking with respect to repayment.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of Peppermill
pursuant to the foregoing provisions or otherwise, Peppermill has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in such act, and is
therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules
(a)
Exhibits Description
-------- -----------
2.1 Stock Purchase Agreement, dated as of November 19, 1999, between
Varner Technologies, Inc. and certain Peppermill Capital Corporation
shareholders
2.2 Agreement and Plan of Merger, dated as of June 2, 2000, between
Peppermill Capital Corporation and Varner Technologies, Inc. (included
as Appendix A to the proxy statement-prospectus forming a part of this
Registration Statement and incorporated herein by reference).
3.1 Bylaws of Peppermill Capital Corporation(1)
3.2 Articles of Incorporation of Peppermill Capital Corporation(1)
3.3 Form of Certificate of Amendment to Articles of Incorporation for
Peppermill Capital Corporation (included as Appendix B to the proxy
statement-prospectus forming a part of this Registration Statement and
incorporated herein by reference).
<PAGE>
Exhibits Description
-------- -----------
4.1 Text of Common Stock Certificate for Peppermill Capital Corporation
(renamed Varner Technologies, Inc.).
4.2 Text of Preferred Stock Certificate for Peppermill Capital Corporation
(renamed Varner Technologies, Inc.)
5.1 Opinion of Merrick & Klimek, P.C. as to the legality of the shares of
Peppermill Capital Corporation Common Stock being registered hereby.
10.1 Valuation and Related Fairness Opinion prepared by Evans & Evans, Inc.
16.1 Letter of Andersen, Andersen & Strong re: change in certified
accountant.(3)
23.1 Consent of KPMG, LLP.
23.2 Consent of Merrick & Klimek, P.C. (included as part of its opinion
filed as Exhibit 5.1 and incorporated herein by reference).
23.3 Consent of Andersen, Andersen & Strong.(2)
23.4 Consent of Kaufman Rossin & Co.
24.1 Power of Attorney (contained in signature page).
25.1 Financial Data Schedule.
99.1 Text of Proxy Card.
----------
(1) Incorporated by reference from Peppermill's Registration Statement on Form
10-SB File No.000-25989, filed on May 6, 1999.
(2) To be filed by amendment.
(3) Incorporated by reference from Peppermill's Current Report on Form 8-K
dated April 7, 2000.
(b) Financial Statement Schedules.
Item 22. Undertakings
Peppermill hereby undertakes:
(1) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of
this Form S-4 under the Securities Act of 1933, within one business
day of receipt of any such request, and to send the incorporated
documents by first class mail or other equally prompt means, including
information contained in documents filed after the effective date of
the registration statement through the date of responding to such
request.
(2) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration
statement when it became effective; and
<PAGE>
(3) insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons
of Peppermill pursuant to the provisions described in Item 20 above,
or otherwise, Peppermill 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. If a claim of indemnification against such liabilities
(other than the payment by Peppermill of expenses incurred or paid by
a director, officer or controlling person of Peppermill in a
successful defense of any action, suit or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, Peppermill 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Peppermill had duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of
Chesterfield, State of Missouri, on the 7th day of July, 2000.
Peppermill Capital Corporation
By: /s/ Clayton W. Varner
------------------------------------
Clayton W. Varner,
Chief Executive Officer and Chairman
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Clayton W. Varner his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof. This power of attorney may be executed in counterparts.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Clayton W. Varner Chairman, Chief Executive July 7, 2000
------------------------ Officer, Chief Financial
Clayton W. Varner Officer, Director
/s/ Tjody Varner President of Sales and
------------------------ Marketing of Networking
People with Technology,
L.L.C., Director July 7, 2000
/s/ Robert Rapp Executive Vice President,
------------------------ Secretary, Director July 7, 2000
<PAGE>
EXHIBIT INDEX
Exhibits Description
-------- -----------
2.1 Stock Purchase Agreement, dated as of November 19, 1999, between
Varner Technologies, Inc. and certain Peppermill Capital Corporation
shareholders
2.2 Agreement and Plan of Merger, dated as of June 2, 2000, between
Peppermill Capital Corporation and Varner Technologies, Inc. (included
as Appendix A to the proxy statement-prospectus forming a part of this
Registration Statement and incorporated herein by reference).
3.1 Bylaws of Peppermill Capital Corporation(1)
3.2 Articles of Incorporation of Peppermill Capital Corporation(1)
3.3 Form of Certificate of Amendment to Articles of Incorporation for
Peppermill Capital Corporation (included as Appendix B to the proxy
statement-prospectus forming a part of this Registration Statement and
incorporated herein by reference).
4.1 Text of Common Stock Certificate for Peppermill Capital Corporation
(renamed Varner Technologies, Inc.).
4.2 Text of Preferred Stock Certificate for Peppermill Capital Corporation
(renamed Varner Technologies, Inc.)
5.1 Opinion of Merrick & Klimek, P.C. as to the legality of the shares of
Peppermill Capital Corporation Common Stock being registered hereby.
10.1 Valuation and Related Fairness Opinion prepared by Evans & Evans, Inc.
16.1 Letter of Andersen, Andersen & Strong re: change in certified
accountant(3).
23.1 Consent of KPMG, LLP.
23.2 Consent of Merrick & Klimek, P.C. (included as part of its opinion
filed as Exhibit 5.1 and incorporated herein by reference).
23.3 Consent of Andersen, Andersen & Strong.(2)
23.4 Consent of Kaufman Rossin & Co.
24.1 Power of Attorney (contained in signature page).
25.1 Financial Data Schedule.
99.1 Text of Proxy Card.
----------
(1) Incorporated by reference from Peppermill's Registration Statement on
Form 10-SB File No.000-25989, filed on May 6, 1999.
(2) To be filed by amendment.
(3) Incorporated by reference from Peppermill's Current Report on Form 8-K
dated April 7, 2000.
