1
As Filed With the Securities and Exchange Commission on June __, 1999
Registration No._____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM-10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
COUNTRY MAID FINANCIAL, INC.
(Name of Registrant in its charter)
WASHINGTON 34-1471323
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
COUNTRY MAID FINANCIAL, INC.
2500 SOUTH MAIN STREET
LEBANON, OREGON 97355
(541) 451-1414
(Address, including zip code and telephone number, including
area code, of Registrant's principal executive offices)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
None None
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
2
TABLE OF CONTENTS
Page No.
--------
Item 1. Business 1
Item 2. Financial Information 16
Item 3. Properties 22
Item 4. Security Ownership of Certain Beneficial Owners and Management 24
Item 5. Directors and Executive Officers 25
Item 6. Executive Compensation 26
Item 7. Certain Relationships and Related Transactions 27
Item 8. Legal Proceedings 31
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters 31
Item 10. Recent Sales of Unregistered Securities 35
Item 11. Description of Registrant's Securities to be Registered 38
Item 12. Indemnification of Directors and Officers 39
Item 13. Financial Statements and Supplementary Data 39
Item 14. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 63
Item 15. Financial Statements and Exhibits 63
3
ITEM 1
BUSINESS
COUNTRY MAID FINANCIAL, INC. ("Country Maid Financial" or the
"Company"), through its operating subsidiary Territorial Inns Management, Inc.,
a Nevada corporation ("TIM"), is engaged in the business of management and
operation of motel properties. The Company's portfolio currently consists of
seventeen motel properties in eight different states (Florida, Georgia,
Illinois, Kansas, Missouri, Oregon, Texas and Washington) and is negotiating to
acquire another ten properties. See "Item 2. Financial Information-Management's
Discussion and Analysis." The Company plans to continue to acquire management
agreements and motel operating leases with purchase options from motel owners
throughout the United States and potentially Canada. The Company has launched a
strategic plan to identify certain motel properties that can be acquired at a
value equivalent to approximately two and one-half to three times the annual
gross room revenue. The owners of certain motels have expressed a willingness to
accept a payment of approximately twenty percent (20%) of the motel's current
value in the form of preferred stock of the Company, as consideration for the
purchase option, and fixed annual lease payments in an amount equal to, on
average, approximately seven and one-fifth percent (7.2%) of the current value.
The Company's management believes these motel properties can be operated in such
a manner as to attain an average yield of approximately thirty-three percent
(33%) of the annual gross room revenue as net operating income. See "Item 1.
Business--Risk Factors." Unless otherwise noted, references to the Company
relate to Country Maid Financial and its subsidiary TIM, collectively.
The Company's principal executive offices are located at 2500 South Main
Street, Lebanon, Oregon, 97355 and its telephone number is (541) 451-1414.
THIS REGISTRATION STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN "ITEM 1. BUSINESS--RISK FACTORS"
AND ELSEWHERE IN THIS REGISTRATION STATEMENT. IN ADDITION TO THE OTHER
INFORMATION IN THIS DOCUMENT, ANY PROSPECTIVE INVESTOR IN SECURITIES OF THE
COMPANY SHOULD CAREFULLY CONSIDER "BUSINESS--RISK FACTORS" IN EVALUATING THE
COMPANY AND ITS BUSINESS.
BUSINESS DEVELOPMENT AND BACKGROUND
The Company was incorporated in April 1984 in the State of Washington
under the name Raywheel, Inc., a Washington corporation. The Company commenced
operations in Toledo, Ohio and moved its offices to Portland, Oregon in 1989.
The Company's name was changed to American Citadel, Inc. in December 1989. The
Company had a wholly-owned subsidiary, Security Bar, Inc., a Washington
corporation ("Security Bar"), which was engaged in the manufacturing and
marketing of a patented security alarm and lock bar to provide security for
sliding doors and windows. Security Bar was sold to an unrelated third party in
December 1993. In a transaction effective July 1, 1992, the Company acquired all
of the outstanding common stock of Country Maid Farms, Inc., a Nevada
corporation ("Country Maid Farms"). See "Item 7. Certain Relationships and
Related Transactions." Between 1994 and 1997, the Company, through its
wholly-owned subsidiary Country Maid Farms, was engaged in the production of
poultry eggs for the domestic wholesale egg market, and for the manufacture of
mayonnaise and other egg products. In March 1994, the Company's name was changed
to Country Maid Foods, Inc. to signify the Company's primary business of food
production.
Country Maid Farms had suffered losses for the fiscal years of 1996,
1997 and 1998. Although the Company had suffered losses prior to 1996 due to the
general downturn of the egg industry, the Company's wholesale egg business began
to fail mainly due to the damage to one farm in Puxico, Missouri from an ice
storm and a subsequent snow storm which forced the farm to cease operation
completely. Country Maid Farms had two other operating farms in Redfield, South
Dakota, of which one
1
4
was a "layer farm" and the other was a "pullet farm." In 1997, Country Maid
Farms was the target of a claim for damages by an unrelated party, Dakota Best,
Inc., a South Dakota corporation. Although the officers of Country Maid Farms
did not agree with the claim, they determined that the costs and potential risks
of the lawsuit would far exceed the value of the "pullet farm" and agreed to
deed it to Dakota Best, Inc.
During the 1996 fiscal year, Country Maid Farms began marketing its eggs
to a breaker plant operated by another wholly-owned subsidiary of the Company,
Country Maid Egg Products, Inc., a Nevada corporation. The eggs were broken and
processed into basic ingredients to be sold to food production companies to
produce mayonnaise and other products that used eggs. However, on December 27,
1996, the owner of the breaker plant leased by an unrelated third party was
forced into a bankruptcy. The Company attempted to purchase the plant from the
bankruptcy trustee to continue its egg processing business which was, at that
time, the main source of revenue for Country Maid Farms. The District Court
ruled in favor of another purchaser and the Company, which had few alternatives
at the time, ceased the egg processing business.
As of July 31, 1998, Country Maid Farms had outstanding liabilities in
the estimated amount of $257,720. The assets of Country Maid Farms on October 6,
1998 consisted of the "layer farm" in Redfield, South Dakota, valued in
September 1998 at approximately $10,000, with a mortgage of approximately
$13,928.87, and the damaged farm and real estate in Puxico, Missouri which was
estimated to be worth approximately $60,000.
After a last attempt to restart the egg business by planning to market
gourmet eggs in 1998, which was never realized, the Company decided to change
its business.
During the third quarter of 1998, the Company entered into a Stock
Purchase Agreement with the shareholders of Territorial Inns Management, Inc., a
Nevada corporation, effective October 12, 1998, for the acquisition from its
shareholders of all of the outstanding and issued shares of Territorial Inns
Management, Inc., a Nevada corporation. Certain of the shareholders of TIM were
affiliates, officers, and employees of the Company. TIM was formed in August
1998 and had acquired the assets of Territorial Inns Management, Inc., an Oregon
corporation, which consisted of eleven motel management agreements. See "Item 7.
Certain Relationships and Related Transactions."
The Directors of the Company determined that the acquisition of TIM
provided the means for the Company to obtain significant assets and a lead to
the growing lodging industry, which had, according the industry analysts, been
generally successful in increasing its revenue per available room ("RevPAR")
since 1992, generating dramatic increases in profit growth over the previous ten
years. See "Item 1. Business--Industry Information" and "--Risk Factors."
INDUSTRY INFORMATION
LODGING INDUSTRY
The lodging industry had suffered a decline in the late 1980s when the
supply of hotels and other lodging facilities were outgrowing demand which lead
to the decrease of profitability of the industry. Since 1992, however, the
industry in general has returned to profitability and the estimated revenue and
profitability amount per available room ("RevPAR") has been steadily increasing:
2
5
TOTAL U.S. LODGING INDUSTRY - ESTIMATED REVENUE & PROFITABILITY
AMOUNT PER AVAILABLE ROOM - 1992-1999(1)
(Thousands of Dollars)
1992 1993 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ----------- -----------
Revenue $19.0 $19.5 $20.3 $21.1 $22.7 $24.3 $23.0-$25.0 $24.0-$26.0
GOP 29.5% 30.5% 36.2% 37.0% 38.2% 40.2% 42.9% 43.0%
Pre-Tax Inc $ 0.0 $ 0.7 $ 1.7 $ 2.6 $ 3.7 $ 4.8 $ 5.6 $ 6.2
- ----------
GOP - Percent of Revenue
(1) "Lodging Outlook," Smith Travel Research, endorsed by the American Hotel
and Motel Association, December 1998. It should be noted that Smith
Travel Research has not provided any form of consultation, advice or
counsel regarding any aspects of, and is in no way associated, with this
Registration Statement.
The first quarter of 1999 compared with the same period in 1998 shows a
growth of 3.7% in room demand, RevPAR at 3.5% and room revenues at 7.5%.
3
6
FIRST QUARTER RESULTS, 1999 V. 1998(1)
(1) "Lodging News" Newsletter, May 14, 1999 (data provided by Smith Travel
Research).
OPERATING STRATEGY
CAPITALIZATION OF EFFICIENT OPERATIONS
The Company seeks to maximize revenues through its marketing and
acquisition strategies and, more importantly, the delivery of quality
accommodations and motel services that result in satisfied and loyal guests. The
experience of the officers of the Company in the management of lodging
facilities provides the Company with an advantage in controlling the elements of
operation, including increasing revenue per room over cost of service,
purchasing, hiring, and the marketing to corporate and individual guests, all of
which are essential for achieving attractive returns for the Company.
Management is also experienced in other aspects of the ownership of
lodging properties such as accounting and asset and risk management. Combining
polished management skills with the ability to incorporate ownership issues in
its decision making, the Company strives to provide a full range of services to
motel owners and to operate facilities leased by the Company in a cost-effective
manner.
SERVICE EMPHASIS
The Company hires on-site managers and staff who are personable,
experienced and hands-on in all aspects of motel operation. The Company directs
its managers to be accessible and available to guests at all possible times. For
certain of the Company's properties, there are corporate clients who may
contract with the motels to provide lodging for their employees at a fixed or
discounted price. Other than common management tasks, on-site managers are
responsible for the marketing and contact with prospective corporate clients for
the motels. The managers are encouraged to participate in local business and
chamber of commerce activities to network with local companies to promote the
properties.
EXPERIENCED, HIGH QUALITY MANAGEMENT PERSONNEL
The Company believes that it has highly qualified and experienced
executives in its senior management positions. The Company's executive officers,
including the Chief Executive Officer, President, and Secretary/Director of
Operations, have worked together for an extended period of time to develop,
operate and manage motel properties. The Company provides hands-on training for
site managers during which the motel owner or the departing manager will
familiarize the new manager with the property first, followed by a review of the
Company's policies and procedures personally conducted by the Company's Director
of Operations. The Company believes that direct training on-site provides the
most detailed and applicable information to the managers and is more
advantageous than a formal group
4
7
off-site training class. The Company believes that the quality and experience of
its key executives and motel personnel are important components of its ability
to consistently provide outstanding service to motel guests and motel owners
which will likely lead to strong financial results for its shareholders.
FRANCHISES
Certain of the Company's properties are franchises of national motel
chains. Of the seventeen motel properties currently operated and managed by the
Company, there is one Best Western, two Select Inns and nine Best Inns
franchises. The franchises provide marketing and a toll-free reservation system
for the motels. Customers have standard expectations and familiarity with
national franchises in certain regions. The motel franchisers may also have
agreements with suppliers and vendors for maintenance and furnishings in which
the individual motel franchise is invited to participate. The motels are
required to conform to the standards of the franchises. The fee paid to the
franchisers usually entails an enrollment fee and a fixed percentage of the
gross revenue of the motel thereafter payable on a monthly basis.
GROWTH STRATEGY
STRATEGIC MODEL
The Company plans to increase the number of properties in its portfolio
mainly through acquisitions of motel properties on a long-term lease basis with
rights of renewal in five-year intervals up to twenty years and an option to
purchase the property from the motel owner within the lease term for a fixed
price determined at the commencement of the lease. Management believes that, in
addition to acquiring traditional management agreements, its strategy of
acquiring motel operating leases with purchase options enables the Company to
achieve, through efficient and effective management, an expedient and
advantageous market penetration of the motel industry, which in turn increases
profitability for the Company. See "Item 1. Business--Risk Factors, History of
Substantial Losses, No Assurance of Profitability, and Uncertain Tax Effects of
Leases."
The options to purchase also enable the Company to compete effectively
for expansion opportunities to increase profitability and to provide a
competitive advantage over other management companies that do not offer such
purchase option terms to motel owners. The Company has identified certain motel
properties that can be acquired at a value, on average, equivalent to
approximately two and one-half to three times the annual gross room revenue.
Certain motel owners have expressed a willingness to accept, as consideration
for the purchase option, payment of approximately twenty percent (20%) of the
motel's current value, payable to the motel owners in the form of preferred
stock, convertible into common stock after twelve months of issuance, in private
offerings as permitted by the Securities Act of 1933 and rules and regulations
promulgated thereunder. See "Item 1. Business--Risk Factors, Competition, and
- --Uncertain Tax Effects of Lease" and "Item 11. Description of Registrant's
Securities to Be Registered."
The annual lease payments will generally equal approximately seven and
one-fifth percent (7.2%) of the motel value. Based on information provided by
certain owners of the motels, the Company's management believes that these motel
properties can be managed to attain an average yield of approximately
thirty-three percent (33%) of the annual gross room revenue as net operating
income. The diagram below shows a hypothetical example based on the financial
model of the Company's strategic plan to build a profitable structure. See "Item
1. Business--Risk Factors, Competition, and --Uncertain Tax Effects of Lease"
and "Item 11. Description of Registrant's Securities to Be Registered."
5
8
LONG-TERM LEASE AGREEMENTS WITH PURCHASE OPTIONS
- ----------------------------
COUNTRY MAID FINANCIAL, INC.
- ----------------------------
|
---------------- -----------------------
MOTEL OWNER
TERRITORIAL INNS ----------------------------------
MANAGEMENT, INC. Lease with Option to Purchase Motel valued at 275%
("TIM") of gross revenue
(100+ rooms)
---------------- -----------------------
| |
- -------------------------------- ----------------------------------
REVENUE TO COMPANY PAYMENTS TO MOTEL OWNER:
Room Sales: $1,000,000 (1) Annual lease payments:
Operating Expenses: $ 670,000 7.2% of current value
Lease Payment: $ 198,000
Net Income (2) Purchase option consideration:
Before Taxes: $ 132,000 stock equal to 20% of total
(per motel) value of motel
- -------------------------------- ----------------------------------
The Company's leases with options to purchase (the "Leases") generally
will be on a long-term basis with rights of renewal in five-year increments up
to twenty years exercisable at the Company's election. Lease payments generally
will either consist of a fixed annual amount, payable monthly, with no
additional rent based on the gross revenue or of a straight percentage lease
payment consisting of approximately twenty percent (20%) of the monthly gross
revenue of the property without a minimum payment. The Leases will be triple net
leases that require the Company to maintain the leased motels in good condition
and repair, and in conformity with all applicable legal requirements. The Leases
will provide that the motel owner be solely obligated to pay any outstanding
mortgages or liens on the properties.
The Leases generally will provide that the Company is responsible for
obtaining adequate and standard insurance for the properties and the Company may
be required to indemnify the motel owner for losses due to any failure to
maintain insurance or for other liabilities caused by the actions of the Company
or third parties on the property.
Motel owners may terminate the Leases upon an event of default, which
includes the failure to remit lease payments and any other uncured default of
the terms of the lease. Upon a termination due to an event of default, the
Company may be liable for the payments that would have been payable for the
remainder of the unexpired term of the lease unless the motel owners thereafter
lease the property to other tenants and the proceeds received are used to offset
amounts due under the terms of the Leases.
The Leases also will contain an option to purchase the properties for a
fixed price determined on the commencement date of the lease. The Company
generally may elect to exercise this option during the terms of the Leases upon
payment of the full price to motel owners. As consideration for the purchase
option, motel owners will receive a designated number of shares of preferred
stock or other securities of the Company, convertible into the common stock of
the Company twelve months after the date of issuance. The value of the preferred
stock ("Subscription Price"), and the number of shares of common for which the
preferred stock is convertible ("Conversion Shares"), is generally equal to
approximately twenty percent (20%) of the motel's market value at the
commencement of the lease. The preferred stock
6
9
is convertible into the nearest whole number of shares of common stock the
Subscription Price would be able to purchase at the Company's average common
stock price ("Average Stock Price") which will be equivalent to the mean between
the closing bid and asked quotations for the Company's common stock in the
over-the-counter market as quoted on the National Association of Securities
Dealers Automated Quotation system ("Nasdaq"), or any other reliable quotation
system if the common stock is not listed on NASDAQ, for the sixty (60) trading
days last preceding the date of conversion. The preferred stock holder may be
entitled to a dividend of eight percent (8%) of the value of the preferred stock
payable either in monthly cash payments or quarterly issuance of the Company's
common stock. See "Item 11. Description of Registrant's Securities to Be
Registered."
MOTEL OWNERS
The Company believes that its strategic model will attract motel owners
who have the desire to sell the motels at the current market price but who may
be subjected immediately to high capital gains tax and/or recapture of
depreciation which tax the gain of the sale of the personal property as income.
The structure offered by the Company may be a tax delaying or saving transaction
to the motel owners who have substantial equity in the property. If the lease
with option to purchase is structured outside of the definition of a sale by the
Internal Revenue Code (the "Code"), the lease transaction will not trigger the
traditional capital gains tax until the option to purchase is exercised by the
Company. The motel owners may receive from the Company a consideration for the
grant of the option in an amount equal to about twenty percent (20%) of the
value of the property in the form of preferred stock of the Company. To the
extent the transaction qualifies under the Code, and depending on the liquidity
of the stock received by the motel owners, the lease with option to purchase may
allow the motel owners to receive some amount of cash flow as early as twelve
months after the date of the closing of the transaction without the burden of
taxes resulting from a sale of the property. Additionally, the motel owners will
be released of the motel management responsibilities and receive ongoing income
from the lease payments for the term of the lease. See "Item 1. Business--Risk
Factors, Uncertain Tax Effects of Leases and Dependence on Management Agreements
and On Certain Motel Owners."
THE COMPANY'S PORTFOLIO
BEST INNS
On or about November 9, 1998, the Company and Best Inns, Inc., a Kansas
corporation ("Best Inns Kansas"), executed a Letter of Intent which set forth
the terms for the Company to lease with an option purchase nine Best Inns motel
properties to be effective, as amended by the parties, March 1, 1999. The terms
of the Letter of Intent provide that the Company will receive the gross revenue
generated by the properties and pay to Best Inns a fixed annual lease payment of
$1,980,000 payable monthly, and the Company has an option to purchase the
properties for the total amount of $24,000,000. As consideration to Best Inns
for the option to purchase, the Company agreed to issue securities of the
Company with an aggregate value of $3,000,000.
On March 1, 1999, the previous management company of the Best Inns
properties voluntarily resigned from their duties and the Company assumed the
operation of the nine Best Inns properties pursuant the terms of the Letter of
Intent. The lenders for Best Inns Kansas and the Company are currently
negotiating the remaining terms of the agreement.
MANAGEMENT AGREEMENTS
The Company operates eight other motel properties and an apartment
complex under individual management agreements which set the management fee at a
fixed percentage, generally five percent (5%) of the gross revenue received from
the property. The motel owners are obligated to pay all expenditures with
limited authority to the Company to pay recoverable expenditures on the owners'
7
10
behalf up to a limit amount of $5,000.
SUMMARY OF PORTFOLIO
The following table sets forth, as of April 30, 1999, certain
information with respect the Company's properties:
PROPERTIES
Best Western I-35 Inn 78 Units Best Inns 91 Units
4014 Miller St. 1529 West Walnut Ave.
Bethany, MO 64424 Dalton, GA 30720
Select Inn 91 Units Best Inns 83 Units
100 Bulldog Blvd. 1209 North Keller Dr.
Borger, TX 79007 Effingham, IL 62401
Willow Springs 44 Units Best Inns 110 Units
5 "B" Street 8220 Dix Ellis Trail
Cheney, WA 99004 Jacksonville, FL 32256
Village Inn 27 Units Best Inns 116 Units
1110 W. Fm 468 1255 Franklin Rd.
Cotulla, TX 78014 Marietta, GA 30067
Nendels Inn & Suits 60 Units Best Inns 104 Units
2523 E. Wyatt Earp Blvd. 2700 W. DeYoung
Dodge City, KS 67801 Marion, IL 62959
Nendels Inn 106 Units Best Inns 153 Units
2811 West 2nd Ave. 222 S. 44th St.
Kennewick, WA 99336 Mt. Vernon, IL 62864
Select Inns 37 Units Best Inns 75 Units
Rt. 1 Box 60 2738 Graves Rd.
Tulia, TX 79088 Tallahassee, FL 32303
Colonial Motor Inn 53 Units Best Inns 89 Units
1405 North 1st St. 31 N. Green Bay Rd.
Yakima, WA 98901 Waukegan, IL 60085
Best Inns 107 Units Summer Hill Apartments 28 Units
1905 W. Market St. 1110 W. Fm 468
Bloomington, IL 61701 Cotulla, TX 78014
(Apartment Complex)
COMPETITION IN THE LODGING INDUSTRY
The lodging industry is highly competitive. The Company's management of
motel properties competes with other national limited and full-service
management and acquisition companies and with various regional and local
well-known motel chains such as Travelodge, Motel 6 and Super 8.
8
11
Although the Company is not aware of any direct competitors who are
currently approaching motel properties with a plan similar to the Company's
lease with option to purchase terms, there are numerous other management
companies who are competing with the Company for the management of the same
properties. Some of the more commonly known national management companies with
which the Company competes, either directly or indirectly, include The Peninsula
Group, Vista Host, Outrigger Hotels & Resorts, Hostmark Management Group, GF
Management, and Linchris Hotel Corp. The Company's targeted smaller,
economy-scale motel properties with an average size of approximately 100 rooms,
also compete with local, independently owned motel properties for travelers'
business. The Company anticipates that competition within this industry segment
will increase in the foreseeable future. A number of the Company's competitors
are larger, operate more motels and hotels, and have substantially greater
financial and other resources than the Company. In addition, some of the
Company's competitors operate properties that have locations superior to those
of the Company's properties. Competitive factors in the lodging industry include
room rates, quality of accommodations, name recognition, service levels and
convenience of location. There can be no assurance that demographic, geographic
or other changes in markets in which the Company's properties are located will
not adversely affect the convenience or desirability of certain of the Company's
motels. Furthermore, there can be no assurance that new or existing competitors
will not significantly lower rates or offer greater conveniences, services or
amenities, or significantly expand or improve facilities in a market in which
the Company's motels compete, thereby adversely affecting the Company's results
of operations.
The Company may also compete for acquisition, development and franchise
opportunities. The Company competes for these expansion opportunities with
national and regional motel companies, some of which have greater financial and
other resources than the Company. Competitive factors for expansion
opportunities include relationships with motel and lodging property owners and
investors, the availability of capital, financial performance, management fees,
lease payments, brand name recognition, marketing support, reservation system
capacity, and the willingness and ability to provide funds in connection with
new management and lease arrangements. The Company's failure to compete
successfully for expansion opportunities or to attract and maintain
relationships with motel owners and investors could adversely affect the
Company's results of operations. See "Item 1. Business--Risk Factors, Risks
Associated with Expansion."
FINANCIAL INFORMATION
The Company was not profitable in the last five fiscal years. See "Item
2. Financial Information--Selected Consolidated Financial Data" and "Item 13.
Financial Statements and Supplementary Data." Management believes that the
performance of the Company as reflected in the financial information provided in
this Registration Statement for the fiscal years ending March 31, 1995, 1996,
1997, 1998 and December 31, 1998 may not be indicative of current or future
operations of the Company because it ceased the operation of the egg business
and entered the lodging industry in October 1998. See "Item 1.
Business--Business Development and Background." The interim financial
information provided for March 31, 1999 may be more closely indicative of the
Company's current and future earning potential, however, the Company expects the
revenue to grow substantially as it acquires more motel properties in its
portfolio. See "Item 1. Business--Risk Factors and --Forward-Looking Statements"
and "Item 2. Financial Information--Management's Discussion and Analysis."
RESEARCH AND DEVELOPMENT
During the fiscal years ended March 31, 1997, March 31, 1998, and
December 31, 1998, the Company did not incur costs related to research and
development activities.
9
12
GOVERNMENT REGULATIONS
The Company is not currently subject to direct regulation by any
government agency, other than employment, environmental, and business laws
applicable generally. There are currently few laws or regulations solely
applicable to motel management. There can be no assurance that the enactment of
laws affecting real estate in general will not decrease the growth of the
lodging industry, which in turn could decrease the profitability and demand for
the Company's services, increase the cost of doing business, or otherwise have
an adverse effect on the Company's business, operating results or financial
condition. The Company cannot predict the impact, if any, that future regulation
or regulatory changes might have on its business.
PROPRIETARY RIGHTS
The Company currently has no trademark or service mark applications
pending. It may be possible for unauthorized third parties to copy aspects of,
or otherwise obtain and use, the Company's business names, including but not
limited to Country Maid Financial and Territorial Inns Management. The Company
does not have any confidentiality agreements with its officers or employees.
Furthermore, there can be no assurance that any confidentiality agreements
entered into between the Company and its employees will provide meaningful
protection for the Company's proprietary information in the event of any
unauthorized use or disclosure of such proprietary information.
The failure to do any of the foregoing could have a material effect upon
the Company. In addition, there can be no assurance that the Company will have
the financial or other resources necessary to enforce or defend a proprietary
rights violation action. The Company has not undertaken any professional
searches to determine whether the names used by the Company to conduct business
infringe on the proprietary rights of other companies. Moreover, if the
Company's services infringe patents, trademarks or proprietary rights of others,
the Company could, under certain circumstances, become liable for damages, which
could have a material adverse effect on the Company.
SUBSIDIARY
The Company conducts its operations through its wholly-owned subsidiary,
Territorial Inns Management, Inc., a Nevada corporation ("TIM"), incorporated in
August 1998 and acquired in October 1998. TIM markets, operates, maintains and
provides the management services for the Company. All employees of the Company
are employed by TIM.
EMPLOYEES
As of April 30, 1999, the Company had approximately twenty-five (25)
full-time employees and thirty-three (33) part-time employees in administration,
on-site operations and property management. The Company's future success will
depend, in part, on its ability to continue to attract, retain and motivate
highly qualified management and operations personnel, for whom competition is
intense. From time to time, the Company may employ independent consultants or
contractors to support its property management and administrative organizations.
The Company's employees are not represented by any collective bargaining unit
and the Company has never experienced a work stoppage. The Company believes its
relations with employees are good. See "Item 1. Business--Risk Factors, Risks
Associated with Expansion."
RISK FACTORS
The following factors, and information provided elsewhere, should be
considered carefully in evaluating the forward-looking statements made by the
Company in this Registration Statement and in evaluating the Company's business
before making a decision concerning the purchase of its securities.
10
13
HISTORY OF SUBSTANTIAL LOSSES; NO ASSURANCE OF PROFITABILITY
In the past three fiscal years, the Company has suffered losses. See
"Item 2. Financial Information." The Company experienced increased revenues for
the first quarter of 1999 but had not reached profitability. In the first three
months of 1999, the Company's gross revenue was $68,890. The Company's auditor
has indicated that the Company will continue as a going concern. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies attempting to penetrate a new industry. To
address these risks, the Company must, among other things, respond to
competitive bids on the properties the Company targets, continue to attract,
retain and motivate qualified persons, and improve service to customers. There
can be no assurance that the Company will be successful in addressing these
risks or that the Company can be operated profitably, which depends on many
factors, including the success of the Company's marketing program, the control
of expense levels and the success of the Company's business activities.
POSSIBLE UNDERCAPITALIZATION AND NEED FOR FUTURE FINANCING
In order to continue its operating and growth strategies, the Company
will be seeking equity and debt financing. If the Company is unable to obtain
financing, there can be no assurance that the Company will be able to
successfully implement its business plan or meet its working capital
requirements. In addition, the Company may experience rapid growth and may
require additional funds to expand its operations or enlarge its organization.
While the Company intends to explore a number of options in order to secure
alternative financing in the event anticipated financing is not obtained or is
insufficient, there can be no assurance that additional financing will be
available when needed or on terms favorable to the Company. The failure to
obtain sufficient financing may materially affect the Company's ability to
expand or to remain in business. See "Item 9. Market Price of and Dividends on
the Registrant's Common Equity and Related Stockholder Matters."
DEPENDENCE ON MANAGEMENT
Shareholders of the Company are fully dependent on management to conduct
the Company's business. Success of the business depends on the skills and
efforts of management and, to a large extent, on the active participation of the
Company's executive officers and key employees. Furthermore, the Company has not
entered into employment agreements with these officers and employees. The
inability to attract, retain and motivate qualified senior management, property
managers or other skilled employees could adversely affect the Company's
business.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The Company's business is subject to the operating risks inherent in the
lodging industry. These risks include changes in general and local economic
conditions, cyclical overbuilding in the lodging industry, varying levels of
demand for rooms and related services, competition from other motels, changes in
travel patterns, the recurring need for renovation, refurbishment and
improvement of motel properties, changes in governmental regulations that
influence or determine wages, prices and construction and maintenance costs,
changes in interest rates, the availability of financing for operating or
capital needs and changes in real estate taxes and other operating expenses.
Regulatory compliance, downturns or prolonged adverse conditions in real estate
or capital markets or in national or local economies will have a material
adverse effect on the Company's results of operations. See "Item 1.
Business--Competition in the Lodging Industry."
UNCERTAIN TAX EFFECTS OF LEASES
The success of the Company's plan to obtain leases with options to
purchase motel properties maybe materially affected by several tax related
issues. A motel owner who has substantial equity in the motel may be subjected
to high capital gains tax (and/or income tax from the recapture of depreciation)
\ 11
14
on the equity if the property is sold at a market value that far exceeds the
owner's basis. If a motel owner leases the property to the Company in a
transaction that is not later determined as a sale under Internal Revenue Code
Section 1001, a motel owner may be able to delay or save the capital gains tax
until the exercise of the purchase option.
The Internal Revenue Service ("IRS") may under certain circumstances
define a lease with option to purchase as an installment sale, which will render
the amount received by the motel owner as consideration for the purchase option
and the lease payments taxable. The IRS and case law indicate that the
characterization of a transaction as a lease or a sale is based on facts and
circumstances surrounding the transaction. The factors used to characterize a
transaction as a lease include, but are not limited to: (i) the intent of the
parties; (ii) business reasons for the lease; (iii) the amount of the exercise
price of the option; (iv) consistency of treatment of transaction as a lease for
tax purposes; and (v) the form of rent to be paid. Other factors that have been
used to hold the transaction as an installment sale include, but are not limited
to: (i) the allocation of the risk of loss to tenant, (ii) the tenant's intent
to purchase the property, (iii) whether the sum of the lease payments and the
option price equal the fair market value of the property at the commencement of
the lease, and (iv) whether the tenant has the benefits and burdens of
ownership. These factors are not determinant jointly or severally. The Company
does not intend or expect the leases to be determined as installment sales
instead of operating leases, since the proposed terms appear to denote an
operating lease instead of a sale. However, there is no assurance nor can the
Company determine whether any one factor of the lease transactions contemplated
will be used by the IRS to characterize the transaction as an installment sale
so as to remove one of the incentives of the transaction to the motel owners.
Under the generally accepted accounting principles ("GAAP"), certain
lease transactions may be classified as a capital lease by an auditor based on a
number of factors which will negatively affect the parties' ability to
depreciate and amortize the motel for tax deduction purposes. If a lease meets
any of the factors, GAAP will treat the transaction as a capital lease and not
an operating lease. In the event that a transaction is determined as a capital
lease, it may be considered a factor in the characterization of the lease of the
transaction by the IRS or otherwise negatively affect the tax burden of the
parties.
If the transaction is characterized as a sale, the motel owner may also
be required to recapture the depreciation of the amount allocated to the
building and personal property so as to trigger a tax burden at the commencement
of the lease.
The Company has not sought the specific approval or guidance of the IRS
by way of a private letter ruling regarding the tax effects of the lease
transactions contemplated by the Company. The IRS may determine on a
case-by-case basis whether a specific lease and the facts surrounding the
transaction constitute a sale instead of a lease. There is no assurance that any
one transaction will not be defined or otherwise determined by the IRS as a sale
and, therefore, removing the tax deferring benefits of the transactions to a
motel owner. The Company may not be successful in its attempt to provide other
incentives to the motel owner sufficient to acquire the operation of the
property. The failure of the Company to continue to acquire more properties in
its portfolio will adversely and materially affect its profitability and results
of operation.
RISKS ASSOCIATED WITH EXPANSION
The Company's revenues, net income, obligations and liabilities may grow
substantially in the next several years as a result of adding new management
agreements, leases with options to purchase and from other incidental business
opportunities. The Company intends to continue to pursue an aggressive growth
strategy for the foreseeable future, but there can be no assurance that the
Company will successfully achieve its growth objectives. The Company is subject
to a variety of business risks generally associated with growing companies. The
Company's ability to pursue successfully new growth
12
15
opportunities will depend on many factors, including, among others, the
Company's ability to identify suitable growth opportunities, finance
acquisitions and renovations and successfully integrate new motels into its
operations. While the Company believes that it can obtain sufficient capital to
fund its growth strategy in the near term, this belief is primarily premised on
adequate cash being generated from operations. There can be no assurance that
the Company will generate adequate cash from operations. In addition, the
Company may seek additional debt or equity financing, depending upon the amount
of capital required to pursue future growth opportunities or address other
needs. There can be no assurance that such increase or additional financing will
be available to the Company on acceptable terms.
In addition, there can be no assurance that the Company will be able to
integrate successfully the new motels into its portfolio, or that the leases and
the management agreements will achieve revenue and profitability levels.
Furthermore, the Company's expansion could adversely affect the financial
performance of the Company's existing portfolio or its overall results of
operations. Acquiring the operation of new properties may present operating and
marketing challenges that are different from those currently encountered by the
Company. There can be no assurance that the Company will anticipate all of the
changing demands that expanding operations will impose on its management,
management information and reservation systems, and the failure to adapt its
systems and procedures could have a material adverse effect on the Company's
business.
DEPENDENCE ON MANAGEMENT AGREEMENTS AND ON CERTAIN MOTEL OWNERS
Management agreements are acquired, terminated, and renegotiated in the
ordinary course of the Company's business. The Company's Chief Executive Officer
and Director, C. Richard Kearns, who currently owns approximately fifty-three
percent (53%) of the Company's issued and outstanding common stock, has
interests in five motels managed by the Company. Nine of the seventeen motel
properties operated by the Company are owned by Best Inns, Inc., a Kansas
corporation. A material deterioration in the operating results of one or more of
these motel properties and/or a loss of the related management agreements could
adversely affect the value of the Company's investment in such motel properties.
In addition, the Company historically has relied on the affiliates of the
Company's executive officers who are motel owners and investors for various
acquisition, renovation, development and other expansion opportunities. Although
the Company believes that it enjoys satisfactory relationships with such motel
owners and investors, there can be no assurance that such relationships will
remain satisfactory or that such owners and investors will continue to provide
expansion opportunities in the future.
CONFLICTS OF INTEREST
The Company's Chief Executive Officer and Director, C. Richard Kearns,
and his affiliates are, collectively, parties to certain management agreements
as well as other business arrangements with the Company. In addition, Mr. Kearns
and certain of his affiliates were founders and principal shareholders of TIM
prior to the acquisition by the Company. See "Item 7. Certain Relationships and
Related Transactions--Acquisition of Territorial Inns Management, Inc."
Although the Company believes that its management agreements with these
persons are on terms no less favorable to the Company than those that could have
been obtained from unaffiliated third parties, there can be no assurance that
these parties will continue to transact business with the Company or that their
ownership positions with the Company will not influence the terms on which they
transact business with the Company in the future. The shareholders of the
Company also recently approved a Stock Redemption Agreement wherein the Company
will redeem up to 2,500,000 shares of common stock from Mr. Kearns, without cash
consideration, in an amount equal to the number of shares of common stock sold
to certain selected investors who are creditors of Mr. Kearns. See "Item 7.
Certain Relationships and Related Transactions." The foregoing could give rise
to conflicts of interest.
13
16
The Board of Directors of the Company usually requires that any material
transaction between the Company and related parties be approved by a majority of
the directors not affiliated with the transaction (the "Independent Directors"),
if any, based upon such Directors' determination that the terms of the
transaction are no less favorable to the Company than those that could have been
obtained from unrelated third parties. The Directors may also seek the approval
of the shareholders of the Company to ratify any transaction that may involve a
conflict of interest.
RISKS ASSOCIATED WITH OWNING OR LEASING REAL ESTATE
The Company is planning to acquire lease agreements with purchase
options in its portfolio. Accordingly, the Company will be subject to varying
degrees of risk generally related to leasing and managing real estate. These
risks include, among others, changes in national, regional and local economic
conditions, local real estate market conditions, changes in interest rates and
in the availability, cost and terms of financing, liability for long-term lease
obligations, inclement regional weather conditions, the potential for uninsured
casualty and other losses, the impact of present or future tax and environmental
legislation and compliance with environmental laws, and adverse changes in
zoning laws and other regulations, many of which are beyond the control of the
Company. In addition, real estate investments are relatively illiquid,
therefore, the ability of the Company to vary its portfolio in response to
changes in economic and other conditions may be limited.
SIGNIFICANT LEASE OBLIGATIONS
The Company's continuing efforts to lease motel properties will cause
the Company to incur significant financial obligations. There is no assurance
that the gross revenue it receives from the operation of the properties will be
sufficient to meet the terms of the leases. The degree to which the Company is
leveraged, as well as its lease payment obligations, could have important
consequences to holders of common stock, including: (i) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii) a
substantial portion of the Company's cash flow from operations may be dedicated
to the payment of lease payments, thereby reducing the funds available to the
Company for its operation; and (iii) certain of the Company's future
indebtedness may contain financial and other restrictive covenants, including
those restricting the incurrence of additional indebtedness, the creation of
liens, the payment of dividends and sales of assets and imposing minimum net
worth requirements. There can be no assurance that the Company's operating
results and revenue will be sufficient for the payment of the Company's
indebtedness. In addition, the Company's liabilities could increase its
vulnerability to adverse general economic and lodging industry conditions and
could impair the Company's ability to take advantage of significant business
opportunities that may arise.
CONTROL BY PRINCIPAL SHAREHOLDERS
As of April 30, 1999, the Company's Chief Executive Officer and
Director, C. Richard Kearns, beneficially owned approximately fifty-three
percent (53%) of the outstanding shares of the Company's common stock and the
Company's officers and directors collectively owned an aggregate of seventy
percent (70%) of the outstanding shares of the Company's common stock. The
Articles and Bylaws of the Company provide that the Board of Directors is
elected and shareholder action is taken pursuant to the majority votes of the
common stock shareholders. The ownership of the common stock by Mr. Kearns and
other officers and directors of the Company ensure such parties' ability to
control the election of the members of the Board of Directors and will enable
such parties to control the management and affairs of the Company.
See "Item 7. Certain Relationships and Related Transactions."
COMPETITION
As discussed above, the market for economy motels and lodging properties
is highly
14
17
competitive. There are no substantial barriers to initial entry, and the Company
expects competition to persist, intensify and increase in the future. By adding
more motel properties to its portfolio, the Company will gain more experience
and recognition in the lodging industry. There can be no assurance that
competitors will not develop management terms or models that render the
Company's plans obsolete or less marketable, or that the Company will be able to
compete successfully. See "Item 1. Business--Competition in the Lodging
Industry."
LACK OF DIVERSIFICATION
The Company does not intend to invest at this time in any other assets,
businesses or securities other than what is described in this Registration
Statement. The Company will be subject to the risks associated with lack of
diversification.
SEASONALITY AND QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The lodging industry is seasonal in nature. Quarterly earnings may be
adversely affected by events beyond the Company's control, such as poor weather
conditions, economic factors and other considerations affecting travel. In
addition, the loss of one or several management agreements or leases and the
timing of achieving incremental revenues from additional motels also may
adversely impact earnings. If the Company loses a management agreement or lease
that has capitalized acquisition costs, the Company may record a write-off of
the remaining book value of such capitalized costs, which could have a material
adverse effect on the operating results during the period in which the write-off
occurred.
ENVIRONMENTAL MATTERS
Under various federal, state, local and foreign environmental laws,
ordinances and regulations ("Environmental Laws"), a current or previous owner
or operator of real property may be liable for the cost of removal or
remediation of hazardous or toxic substances on, under or in such property. Such
laws often impose liability without regard to whether the owner or operator knew
of, or was responsible for, the release of such hazardous or toxic substances.
The presence of contamination from hazardous or toxic substances, or the failure
to remediate such contaminated property properly, may adversely affect the
owner's ability to sell or rent such real property or to borrow using such real
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances also may be liable for the cost of removal or
remediation of such substances at the disposal or treatment facility, whether or
not such facility is or ever was owned or operated by such person.
The operation and removal of certain underground storage tanks also are
regulated by federal and state laws. In connection with the operation of its
motel properties, including those leased or managed by the Company, it could be
held liable for the cost of remedial action with respect to such regulated
substances and storage tanks and claims related to them. In addition to clean-up
actions brought by federal, state and local agencies, the presence of hazardous
or toxic substances on a motel property also could result in personal injury or
similar claims by private plaintiffs.
The Company has not performed, or received the results from, any
environmental investigations on any of its leased or managed properties.
Additionally, environmental laws and conditions are subject to frequent change.
There can be no assurance that environmental liabilities or claims will not
arise and adversely affect the Company in the future.
FORWARD-LOOKING STATEMENTS
"SAFE HARBOR" STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
A number of the matters and subject areas discussed in the preceding
"Risk Factors" section, and elsewhere in this Registration Statement, that are
not historical or current facts deal with potential future circumstances and
developments. The discussion of these matters and subject areas is qualified by
the
15
18
inherent risks and uncertainties surrounding future expectations generally, and
also may materially differ from the Company's actual future experience involving
any one or more of these matters or subject areas. The operation and results of
the Company's business also may be subject to the effect of other risks and
uncertainties in addition to the relevant qualifying factors identified in the
"Risk Factors" section, and elsewhere in this Registration Statement, including
but not limited to the following:
The ability of the Company to maintain the expected level of revenue of
each property, the economy of the lodging industry, the adequacy of the
Company's systems and infrastructure to meet the Company's expansion, marketing
plans and customer demand, the success of efforts to improve and satisfactorily
address issues relating to the management and the operations of the properties;
The ability of the Company to obtain a profitable margin based on the
number of motel properties managed and leased by the Company and the sufficiency
of the gross revenue of the properties to provide financial viability to the
Company's business; and
The Company's competitors' decision to enter into similar markets and
their ability to use resources to acquire motel properties ahead of the Company.
ITEM 2
FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
FISCAL YEAR END DATA
The following table sets forth certain selected consolidated financial
data for the Company. The selected statement of operations data and balance
sheet data of the Company for the fiscal year ended March 31, 1995 are derived
from the Company's unaudited Combined Financial Statements. The selected
statement of operations and balance sheet data of the Company for the fiscal
years ended March 31, 1996, 1997 and 1998, and December 31, 1998, are derived
from the Company's audited Financial Statements, of which, the fiscal years
ended March 31, 1998 and December 31, 1998, are included elsewhere in this
Registration Statement.
The selected consolidated financial data set forth below should be read
in conjunction with, and are qualified in their entirety by, the Consolidated
Financial Statements and related Notes, Management's Discussion and Analysis of
Financial Condition and other financial information included elsewhere in this
Registration Statement.
16
19
YEAR ENDED YEAR ENDED MARCH 31
------------ ----------------------------------------------------
December 31,
1998(1) 1998 1997 1996 1995
------------ ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Egg revenues -- 0 5,715,711 3,772,678 3,586,036
Management revenues 37,515 -- -- -- --
Other revenues 0 0 0 0 0
Total revenues 37,515 0 5,715,711 3,772,678 3,586,036
Operating expenses:
Cost of egg sales (includes feed costs and
depreciation) -- -- 5,091,817 3,507,399 3,685,106
General and administrative expenses
85,979 -- 569,605 434,060 382,169
Total operating expenses 85,979 -- 5,661,422 3,941,459 4,067,275
Operating loss (48,464) -- 54,294 (168,781) (481,239)
Other income(loss) 0 0 (62,715) (152,862) (54,620)
Net loss (48,464) (1,960,324) (8,481) (321,643) (535,859)
CONSOLIDATED BALANCE SHEET DATA:
Current assets 68,180 0 1,639,860 1,922,614 797,881
Net fixed assets 0 0 334,630 356,410 948,920
Stock holdings 0 0 -- -- 1,000,000
Other assets 60,000 0 252,850 253,310 24,326
Total assets 128,180 0 2,227,340 2,532,334 2,771,127
Current liabilities 116,644 0 913,099 1,064,028 1,034,506
Long-term debt 0 0 -- -- 1,306,488
Other liabilities 1,173,695 1,742,652 1,096,564 1,312,153 0
Total liabilities 1,290,339 1,742,652 2,376,181 2,340,994
Shareholders' equity (1,162,159) (1,742,652) 217,672 156,153 1,144,119
Total liabilities and shareholders' equity
128,180 0 2,227,340 2,532,334 2,771,127
Primary Earnings (loss) per share
(.0188) (0.7606) (0.0002) (0.0070) --
(1) The Company changed the fiscal year end from March 31 to December 31,
effective October 1998.
INTERIM PERIOD DATA
The following table sets forth certain selected consolidated financial
data for the Company. The selected statement of operations and balance sheet
data of the Company for the interim period ended
17
20
March 31, 1999, are derived from the Company's unaudited first quarter 1999
Financial Statements.
The selected financial data set forth below should be read in
conjunction with, and are qualified in their entirety by, the Financial
Statements and related Notes, Management's Discussion and Analysis of Financial
Condition and other financial information included elsewhere in this
Registration Statement.
INTERIM PERIOD ENDED
March 31,1999
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Management revenues 68,890
Other revenues 0
Total revenues 68,890
Operating expenses:
Cost of egg sales (includes feed costs and 0
depreciation)
General and administrative expenses 138,623
Total operating expenses 138,623
Operating loss (69,733)
Net loss (69,733)
CONSOLIDATED BALANCE SHEET DATA:
Current assets 65,993
Net fixed assets --
Stock holdings --
Other assets 60,000
Total assets 125,993
Current liabilities 155,190
Long-term debt 0
Other liabilities 1,032,695
Total liabilities 1,187,885
Shareholders' equity (1,061,892)
Total liabilities and shareholders' equity 125,993
Primary Earnings (loss) per share (0.0271)
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Selected
Consolidated Financial Data, Financial Statements, and the related Notes thereto
included elsewhere in this Registration Statement.
OVERVIEW OF CURRENT OPERATIONS
As of March 31, 1999, the Company's revenues are derived mainly from
management fees paid for the operation of approximately seventeen motel
properties. The management agreements currently provide for the Company to
receive approximately five percent (5%) of the total gross revenue received from
each of the properties in addition to all expenses and salaries of employees
working on the
18
21
properties to be paid by the owners of the motels. The amount of management fees
collected during the first quarter of 1999 was $68,890. The total outstanding
management fees due and advances for costs and expenses to be reimbursed by the
motel owners as of March 31, 1999 was $61,444.
CHANGE OF FISCAL YEAR
Effective October 1, 1998, the Company changed its fiscal year to end on
December 31 from March 31 to make the financial records of the Company
correspond with the motel operations of TIM.
RESULTS OF OPERATIONS
During the fiscal years ending March 31, 1992 through March 31, 1997,
the Company was in the wholesale egg business. The business began to fail mainly
due to the loss of the operation of a large farm in Puxico, Missouri from a
natural disaster, the loss of the egg breaking and processing business in
December 1996, and the overall downturn of the egg industry during that period.
The Company was no longer able to sustain or continue the egg business after
1997 and ceased the egg production business in 1997. In October, 1998, the
Company sold its wholly-owned subsidiary, Country Maid Farms, to two principal
shareholders and directors of the Company who assumed the liabilities of the
Company. See "Item 7. Certain Relationships and Related Transactions--Sale of
Country Maid Farms."
In September 1998, the Company entered an agreement to acquire
Territorial Inns Management, Inc, a Nevada corporation, ("TIM") as its
wholly-owned operating subsidiary to conduct the management of motels. TIM had
eleven management contracts at the time of the Company's acquisition. As of
March 31, 1999, there were agreements to manage eighteen properties in TIM's
portfolio. The management fees collected in the last quarter of 1998 was
$37,515, and the outstanding balance of receivables and advances to properties
was $68,180.
The Company plans to acquire leases with options to purchase from motel
owners. The Company will operate the leased motels and receive the total gross
revenue from the motels. A fixed annual lease payment or a percentage,
approximately twenty percent (20%) of the gross revenue of the leased motel,
will be payable to the motel owner as rent on a monthly basis. Management
expects the gross revenue received by the Company to increase substantially upon
the acquisition of the leases. Although the Company received affirmative
responses to its proposals, there is no assurance that the Company will be able
to obtain the leases and meet the demands of the motel owners during actual
negotiation of the leases.
SALARIES AND PAYROLL TAXES
Salaries and payroll tax expenses were $47,909 for the fiscal year ended
December 31, 1998. This amount was a substantial increase from the previous
fiscal year ended March 31, 1998, during which, the Company was not operating
and, therefore, did not pay a material amount as salaries. Growth in salaries
and payroll taxes has been directly related to development and support of the
Company's entrance into the lodging industry in October 1998. The Company had
acquired the management and operation of a total of eighteen properties by the
end of the first quarter of 1999 and had twenty-five (25) full-time and
thirty-three (33) part-time employees which included administrative, management
and maintenance staff of the motel properties. The Company expects salaries and
payroll expenses to grow as it continues to acquire the operation of more motel
and lodging properties in its portfolio. The Company has no assurance that the
revenue generated by the properties will be sufficient to pay for the increased
expenses and salaries which will be dependent on the number of properties
managed and the financials demands of each property, and the revenue generated
from the motels which may vary from season to season. See "Item 1.
Business--Risk Factors, Seasonality and Quarterly Fluctuations in Operating
Results."
19
22
LIQUIDITY AND CAPITAL RESOURCES
Since October 1998, the Company has financed its operations and capital
expenditure requirements through income from the management of properties and
through private offerings of common stock. During the last quarter of 1998, the
Company received $37,515 as management fees and had raised $60,000 from an
individual investor. This is a substantial increase from the fiscal year ended
March 31, 1998 when no revenue was received and the Company did not attempt to
raise any funds.
During 1999, the Company anticipates the monthly revenue from operations
to steadily increase. This increase may be offset by the capital expenditures
related to acquiring new operations and adding new employees. The Company has a
Letter of Intent to acquire the operations of ten motel properties located in
Minnesota, North Dakota, South Dakota and Wisconsin from an unrelated third
party. The lease will be a triple net lease where the Company will pay for all
expenses and costs of operations and pay a fixed annual lease payment of
$1,750,000, payable in equal monthly installments. The Company may also elect to
exercise its option to purchase the property upon the payment of $18,000,000 to
the motel owner. The consideration for the option will be the issuance of
$3,500,000 of preferred stock with a cash dividend rate of eight percent (8%)
paid monthly and registration rights to sell $500,000 of the convertible
preferred stock at the Company's initial public offering. Concurrently, the
Company has also entered into a Letter of Intent with the same third party to
acquire thirty-five percent (35%) of its issued and outstanding stock with an
option to purchase the remaining sixty-five percent (65%) upon the payment of
$2,500,000, exercisable during the period beginning two years from the closing
date and expiring five years after the closing date. The Company is conducting
further negotiation and due diligence of the properties prior to finalizing the
transactions. In the event that the Company and motel owner do not come to an
agreement on all the terms of the lease agreement with option to purchase, the
transaction may not close within the time frame anticipated by the Company. See
"Item 1. Business--Risk Factors, Uncertain Tax Effects of Leases."
Accounts receivable of the Company totaled $68,180 at December 31, 1998,
which is comprised of receivables of management fees and amounts due for
advances to properties.
During the first quarter of 1999, the Company reduced related party debt
from $1,173,695 at December 31, 1998 to $1,053,695 at March 31, 1999. See "Item
7. Certain Relationships and Related Transactions--Shareholder Loans."
The Company anticipates future operations and capital expenditures to be
funded by private and public offerings of the Company's stock and the revenue
received from the operations of the motel properties.
EARNINGS (LOSS) PER SHARE
The Company's net loss per share at fiscal year end December 31, 1998
was ($.0188), while the net loss per share for the fiscal years ended March 31,
1997 and March 31, 1996 were ($.0002) and ($.0070), respectively. It should be
noted that these figures were somewhat impacted by the lack of operation during
the first three quarters of 1998 and the issuance of additional shares in
connection with the Company's acquisition of TIM effective October 12, 1998,
resulting in more outstanding shares at the end of fiscal year ending December
31, 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
which establishes standards for the reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general purpose financial statements ("SFAS No. 130"). SFAS No. 130 requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and
20
23
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company believes the adoption of SFAS No.
130 will have no significant impact on the Company's consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 131, "Disclosure About Segments
of an Enterprise and Related Information" (SFAS No. 131) which establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes the related
disclosures about products and services, geographic areas and major customers.
Provisions of SFAS No. 131 are effective for fiscal years beginning after
December 15, 1997. The Company believes that adoption of SFAS No. 131 will have
no significant impact on the Company's consolidated financial statements.
YEAR 2000 COMPLIANCE
Certain important operations of the Company, including but not limited
to guest registrations, accounting and employee record keeping, electronic and
telephone systems, and other computerized systems are dependent upon the proper
and continuous operation of the Company's computer systems in its principal
office and in a number of the individual properties managed by the Company. The
Company is aware of potential risks associated with programming codes at
different levels of operation in existing computer systems as the year 2000
approaches, including the real time clock, system BIOS, operating systems, and
applications. The year 2000 problem ("Y2K") is perceived to be pervasive and
complex, and the Company has no way of determining at this time the extent of
the effect when the computer systems' internal clocks turn from "99" to "00." It
is the Company's goal to ensure that computer systems in its principal office
and certain property sites are properly backed-up or otherwise able to function
properly, based on the untested opinions and representations of experts and
computer professionals, after the date change from 1999 to 2000 ("Y2K
Compliant"). However, the actual operation of computers or effects will remain
unknown until after January 1, 2000.
One issue of concern is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information may generate erroneous data or fail.
Therefore, in an attempt to minimize the effects of Y2K, the Company has taken
the following steps:
1. The Company has entered into an agreement with a third-party supplier to
replace all nine Best Inns properties with Y2K Compliant computer systems for
all aspects relating to the management of the motel facility including
reservations, guest check-in, accounting and other record keeping functions. In
March, 1999, conversion of the computer system at one Best Inns property was
completed and a conversion of the computer system at another Best Inns is
scheduled for May 1999. The Company endeavors to replace the remaining seven
computer systems at the rate of one property per month and complete the
replacements for all nine Best Inns prior to year 2000. The Company estimates
the cost for the purchase of each system at each Best Inns property to be
approximately $14,000. The Company expects to generate sufficient revenues from
the Best Inns properties to cover the costs of purchasing the replacements,
however, there is no assurance that revenues will not decrease to a level where
the Company will not be able to complete the replacements. The Company's
alternatives to purchasing the computer systems will be leasing or purchasing
the computers on credit terms, or installing enabler cards designed to allow the
computers to make the necessary Y2K conversions.
2. The Company has requested a review and proper upgrade for its Novell
server network located in its principal office in Lebanon, Oregon. The Company
has already replaced one of its computers with a
21
24
Y2K Compliant computer and expects to replace all of its principal office
computers prior to the year 2000. The Company's alternatives to purchasing the
computer systems will be leasing or purchasing the computers on credit terms, or
installing enabler cards designed to allow the computers to make the necessary
Y2K conversions.
3. The computer systems in the Best Western Franchise located in Bethany,
Missouri has been replaced with a Y2K Compliant system under the direction of
the franchisor.
4. Other than the ten properties mentioned above, the Company has seven
other motel properties that are not yet on any automated or computer systems.
All operations and record keeping tasks including accounting, reservations and
registrations of guests in these properties are conducted in manual ledgers or
other means without the assistance of computers. The Company does not believe
that the Y2K issue will affect the internal operations of these properties other
than to the extent that each of these properties are reliant on third parties,
including utilities and third party suppliers who may be subject to Y2K risks.
Significant uncertainty exists concerning the potential costs and
effects associated with Y2K compliance as applied to the Company. Even though
the Company's business is not solely dependent on computer systems, its business
may be likely affected to some extent if its systems are not Y2K Compliant by
the turn of the century or if the local utilities companies including telephone
services, electricity and gas companies, and other suppliers are not Y2K
Compliant. The Company has not made an independent review or verification with
each of its suppliers to determine whether they are Y2K Compliant. Even if the
Company has installed what it believes to be Y2K Compliant computer systems in
its principal office and the managed motel properties, due to the general lack
of knowledge regarding the Y2K issue there can be no assurances that the systems
will indeed function properly as expected. In the event that any of the
Company's or its suppliers' computer systems are not Y2K Compliant or do not
function properly, there may be material adverse effects on the Company's
business, results of operations and financial condition, including but not
limited to, the inability of each property to provide lodging services to its
guests, loss of reservation or registration data, and loss of accounting and
administrative information. Although the Company has made efforts to back up
each of its systems in its principal place of business, there is no assurance
that such effort will be successful and that the Company will not be affected.
ITEM 3
PROPERTIES
The Company leases approximately 5,020 square feet for its executive
offices located at 2500 South Main Street, Lebanon, Oregon under a five-year
operating lease that commenced on October 1, 1998 and expires October 1, 2003.
The co-owner of the building where the executive office space is located is the
Company's Chief Executive Officer, C. Richard Kearns. See "Item 7. Certain
Relationships and Related Transactions--Principal Office Lease." The Company
pays rent in the amount of $4,000 each month. The lease provides that, after
giving written notice not less than two months prior to the end of the term, the
Company may extend the lease for three additional renewal terms of five years
each, for a period of up to twenty years. The Company believes that its current
facilities are adequate and are suitable for their current use.
The Company manages and operates a total of eighteen properties. The
Company is in negotiations to obtain the Best Inns motels under an agreement
where the Company will operate the motels and receive the monthly gross revenue
of each property and pay to Best Inns, Inc. a fixed monthly payment.
Additionally, the agreement includes an option for the Company to purchase the
properties. The Company manages the remaining properties for a fixed percentage
of the gross revenue of each. See "Item 1. Business--Growth Strategy, Long-Term
Lease Agreements with Purchase Options and --The Company's Portfolio, Management
Agreements."
22
25
PROPERTIES
Best Western I-35 Inn 78 Units Best Inns 91 Units
4014 Miller St. 1529 West Walnut Ave.
Bethany, MO 64424 Dalton, GA 30720
Select Inn 91 Units Best Inns 83 Units
100 Bulldog Blvd. 1209 North Keller Dr.
Borger, TX 79007 Effingham, IL 62401
Willow Springs 44 Units Best Inns 110 Units
5 "B" Street 8220 Dix Ellis Trail
Cheney, WA 99004 Jacksonville, FL 32256
Village Inn 27 Units Best Inns 116 Units
1110 W. Fm 468 1255 Franklin Rd.
Cotulla, TX 78014 Marietta, GA 30067
Nendels Inn & Suits 60 Units Best Inns 104 Units
2523 E. Wyatt Earp Blvd. 2700 W. DeYoung
Dodge City, KS 67801 Marion, IL 62959
Nendels Inn 106 Units Best Inns 153 Units
2811 West 2nd Ave. 222 S. 44th St.
Kennewick, WA 99336 Mt. Vernon, IL 62864
Select Inns 37 Units Best Inns 75 Units
Rt. 1 Box 60 2738 Graves Rd.
Tulia, TX 79088 Tallahassee, FL 32303
Nendels Inn 53 Units Best Inns 89 Units
1405 North 1st St. 31 N. Green Bay Rd.
Yakima, WA 98901 Waukegan, IL 60085
Best Inns 107 Units Summer Hill Apartments 28 Units
1905 W. Market St. 1110 W. Fm 468
Bloomington, IL 61701 Cotulla, TX 78014
(Apartment Complex)
23
26
ITEM 4
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 30, 1999
regarding the beneficial ownership as of April 30, 1999 of the Company's common
stock by (a) each person known by the Company to be a beneficial owner of more
than five percent (5%) of the outstanding common stock of the Company, (b) each
director of the Company, (c) each executive officer of the Company, and (d) all
directors and executive officers of the Company as a group.
(3)
(1) (2) Shares (4)
Title Name and Address Beneficially Percentage
of Class of Beneficial Owner Owned(1) of Class(2)
------------ ------------------- ------------ -----------
Common Stock C. Richard Kearns(3) 4,192,751(4) 52.83
2500 South Main Street
Lebanon, OR 97355
Common Stock John C. Moneymaker 375,595 4.73
1930 E. Meadowmere
Springfield, MO 65807
Common Stock Terrence J. Trapp 550,000 6.93
274 Snyder Mtn. Rd.
Evergreen, CO 80439
Common Stock Ellis Stutzman 220,000 2.77
2500 South Main Street
Lebanon, OR 97355
Common Stock Mark D. Owen 220,000 2.77
2500 South Main Street
Lebanon, OR 97355
Common Stock Thomas J. Krueger 990,000(5) 12.47
522 Diving Hawk Trail
Madison, WI 53713
Common Stock All Officers and 5,558,346 70.03
Directors
as a Group (5 persons)
(1) Pursuant to applicable rules of the Securities and Exchange Commission,
"beneficial ownership" as used in this table means the sole or shared
power to vote shares (voting power) or the sole or shared power to
dispose of shares (investment power). Unless otherwise indicated the
named individual has sole voting and investment power with respect to
the shares shown as beneficially owned. In addition, a person is deemed
the beneficial owner of those securities not outstanding which are
subject to options, warrants, rights or conversion privileges if that
person has the right to acquire beneficial ownership within sixty days
after April 30, 1999.
(2) Percentage of beneficial ownership is based upon 7,936,928 shares of
common stock outstanding as of April 30, 1999. For each individual, this
percentage includes common stock of which the individual has the right
to acquire beneficial ownership either currently or within sixty days of
April 30, 1999, including, but not limited to, upon the exercise of an
option; however, the common stock is not deemed outstanding for the
purpose of computing the percentage owned by any other individual.
24
27
(3) The Company has entered into a Stock Redemption Agreement with Mr.
Kearns to redeem up to 2,500,000 shares of the common stock of the
Company from Mr. Kearns. See "Item 7. Certain Relationships and Related
Transactions--Stock Redemption Agreement."
(4) Shares beneficially owned by Mr. Kearns include 110,000 shares held by
Northwestern Capital, LLC, a Washington limited liability company, of
which Mr. Kearns is the sole shareholder.
(5) Shares beneficially owned by Mr. Krueger include 935,000 shares held by
Cascade Pacific Equity Corp., of which Mr. Krueger is the sole
shareholder.
ITEM 5
DIRECTORS AND EXECUTIVE OFFICERS
Management of the Company is vested in its Board of Directors and
executive officers. The directors are elected by the shareholders. The officers
of the Company hold office at the discretion of the Board of Directors. There
are currently three directors who were elected for a three-year term at the
Company's annual meeting of shareholders held on April 30, 1999.
The directors and executive officers of the Company and their respective
ages as of April 30, 1999 are as follows:
POSITIONS AND OFFICES HELD WITH THE
NAME AGE COMPANY
------------------------ -------- -------------------------------------
C. Richard Kearns 51 Chief Executive Officer, Director,
Chairman of the Board
John C. Moneymaker 51 Director
Terrence J. Trapp 50 Director
Ellis J. Stutzman 44 President
Mark D. Owen 35 Secretary/Treasurer, Director of
Operations
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
Following is a discussion of the business background of each director
and executive officer. C. Richard Kearns, Ellis J. Stutzman and Mark D. Owen are
full-time employees of the Company. Directors Terrence J. Trapp and John C.
Moneymaker devote only such time as may be necessary for the Company's business
and affairs:
C. Richard Kearns. Mr. Kearns has served as a director of the Company
since 1992 and as Chief Executive Officer and Chairman of the Board since
October 1, 1998. He has also served as a director and as Chief Executive Officer
of Territorial Inns Management, Inc., a Nevada corporation ("TIM") since August
12, 1998. Mr. Kearns has over twenty years of experience as a motel owner and
operator, and has participated in the management of over 35 motel properties.
Between May 1988 and August 1997, Mr. Kearns was Chairman of the Board and Chief
Executive Officer of Nendels Corporation, a motel franchise company, which in
1994, became Skylink Telecommunications Corporation, a telecommunications
company.
John C. Moneymaker. Mr. Moneymaker has been a director of the Company
since 1992 and served as President of the Company from March 1994 to September
1998. He has also served as a director and as Chief Executive Officer of TIM
since August 12, 1998. He has over ten years of experience in the motel business
as an owner. In addition, Mr. Moneymaker also has been in the egg business since
1973. Between 1976 and 1989, Mr. Moneymaker owned and operated Moneymaker Feed
25
28
in Missouri which was in the business of egg production and animal feed
production. Mr. Moneymaker is the co-owner of a motel in Texas. He is currently
also a licensed real estate agent and specializes in motel sales and
acquisitions.
Terrence J. Trapp. Mr. Trapp has served as a director of the Company
since October 1, 1998. He has also served as a director of TIM since August 12,
1998. He has over seventeen years of experience in the hospitality industry and
twenty-five years of experience in the telecommunications industry. He began his
career at AT&T as a manager for approximately eight years. Thereafter, he worked
as an executive with numerous telecommunications and hospitality communications
companies, including serving as Vice President of Marketing with International
Telephone & Telegraph Corp. for four years, where he was instrumental in
developing and marketing programs designed for specific needs within the
hospitality industry. From 1994 to 1996, Mr. Trapp was President of Northwest
Hospitality Management in Portland, Oregon, a hospitality telecommunications
company, where he focused on direct sales and company strategy. Between May 1994
and the present, he has served as President of U.S. Communications Unlimited,
Inc., a telecommunications company. Since 1992, Mr. Trapp has owned and operated
Synergy Network Communications, Inc., a telecommunications company. From
February 1996 to November 1997, Mr. Trapp served as Vice-Chairman for Skylink
Telecommunications Corporation, where his responsibilities included overseeing
the sales and operations of its wholly-owned subsidiaries, "Comtel" and "Skylink
America, Inc." Mr. Trapp has also worked with the communications divisions of
McDonnell Douglas and Computer Sciences Corporation.
Ellis J. Stutzman. Mr. Stutzman has served as President of the Company
and TIM since October 1, 1998. He provides daily management and analysis for all
properties and supervises management and accounting staff in the corporate
office. Mr. Stutzman has over fifteen years of experience in hospitality
management and is a licensed real estate agent in the State of Oregon. Between
1973 and 1983, Mr. Stutzman was a real estate agent for Dan Stutzman Real Estate
where he gained experience in real estate development, appraisal, office
management, and income generation for both commercial and residential
properties. He also served on the Executive Board of the Linn-Benton Title
Company. Between 1983 and and the present, Mr. Stutzman was a partner of
Territorial Inns, an Oregon partnership, which has owned, operated, and managed
numerous motels. His duties have included on-site selection, construction,
financing, valuation, accounting, property rehabilitation, personnel, and the
acquisition and sale of motels. Since 1994, Mr. Stutzman has focused in the area
of motel purchasing and financing. He currently has ownership interests in
several motel properties and is a co-owner of the Best Western I-35 Inn in
Bethany, Missouri.
Mark D. Owen. Mr. Owen has served as Secretary/Treasurer of the Company
and TIM since October 1, 1998. He has approximately fourteen years of experience
in the management of motel properties. In 1985 and 1986, Mr. Owen was the
assistant general manager for Best Western Kings Way Inn in Portland, Oregon. At
Best Western, Mr. Owen participated in all facets of the motel and restaurant
operation including front desk, night audits, housekeeping, maintenance, and
banquet functions, and group tours. From 1986 to the present, Mr. Owen has been
employed by various management entities and responsible for the supervision of
up to thirty independent and franchised motel operations, offering full and
limited service accommodations, where his duties have included recruiting staff;
hiring and training managers; developing and implementing motel policies and
procedures; sales and marketing; purchasing; property renovations and
reconditioning; cost control; quality assurance; purchasing property; liability
and worker's compensation insurance coverage; development of operational
budgets; monitoring and analyzing property financial statements; compliance
assurance with governmental regulations including Occupational Safety and Health
Act ("OSHA") and Americans with Disabilities ("ADA"); and assisting with the
sales, acquisitions, and financing of properties. Since 1995, Mr. Owen is also
the owner of two motels in Texas and Kansas, and since 1990 has also owned and
managed a storage unit complex.
26
29
SIGNIFICANT EMPLOYEES AND CONSULTANTS
Other than the directors and executive officers listed above, the
Company does not have significant employees or consultants as defined in Item
401(c) of Regulation S-K.
DIRECTOR COMPENSATION
Except for reimbursement of expenses, payment of health insurance and
applicable taxes for the insurance payments, directors of the Company generally
do not receive material compensation for services rendered as a director. The
Company does not compensate its directors for committee participation or for
performing special assignments for the Board of Directors.
ITEM 6
EXECUTIVE COMPENSATION
The following table sets forth information with regard to all
compensation paid to C. Richard Kearns, the Company's Chief Executive Officer,
for services rendered the Company during the fiscal year ended December 31,
1998. No compensation was made to the executive officers by the Company during
the fiscal years ending March 31, 1998 and March 31, 1997, nor did any of the
executive officers receive total annual salary, bonus and other compensation in
excess of $100,000 during any of the last three fiscal years.
- ------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------ ----------------------------
SECURITIES
UNDERLYING
NAME AND FISCAL YEAR STOCK OPTIONS/
PRINCIPAL POSITION ENDING SALARY OTHER AWARDS WARRANTS
- -------------------------- --------------- ------------ ----------- ------------- --------------
C. Richard Kearns(1) Dec. 31, 1998 $0.00 $1814.17 -(2)
Chief Executive Officer
- ------------------------------------------------------------------------------------------------
(1) Mr. Kearns became the Company's Chief Executive Officer as of October 1,
1998. The amount paid to Mr. Kearns is for the payment of health
insurance and applicable payroll taxes.
(2) There were no shares or options awarded as compensation to the Named
Officers during the last three fiscal years.
OPTION GRANTS
No stock options were granted to any officer of the Company during the
last three fiscal years.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
There are no outstanding options, warrants, or stock appreciation rights
as of the end of the last three fiscal years.
ITEM 7
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has previously entered into certain transactions with
various parties, which had, at the time of the transaction, material direct or
indirect relationships with the Company, its officers,
27
30
directors, or principal shareholders, their respective affiliates, or other
persons associated with the foregoing, as set forth below.
SALE OF COUNTRY MAID FARMS, INC.
Between 1994 and 1997, the Company, through its wholly-owned subsidiary
Country Maid Farms, was engaged in the production of poultry eggs for the
domestic wholesale egg market, and for the manufacture of mayonnaise and other
egg products. The Company had acquired Country Maid Farms effective July 1, 1992
from John C. Moneymaker, C. Richard Kearns and a third party in a Stock Purchase
Agreement. Pursuant to the agreement, the Company issued 280,360 (giving effect
to the 100:1 reverse stock split effective October 9, 1998) shares and
contingent options which were never triggered to the individual shareholders of
Country Maid Farms.
Country Maid Farms suffered losses for fiscal years 1996, 1997 and 1998.
Although Country Maid Farms suffered losses prior to 1996, the Company's
wholesale egg business began to fail mainly due to the damage to one farm in
Puxico, Missouri from an ice storm and a subsequent snow storm which forced the
farm to cease operation. Country Maid Farms had two other operating farms in
Redfield, South Dakota, of which, one was a "layer farm" and the other was a
"pullet farm." In 1997, Country Maid Farms was the target of a claim by Dakota
Best, Inc., a South Dakota corporation, which claimed that it suffered damages
on the "pullet farm." Although the officers of Country Maid Farms did not agree
with the claim, they determined that the costs and potential risks of the
lawsuit would far exceed the value of the farm. The officers granted the deeded
the "pullet farm" to Dakota Best, Inc. to avoid the unnecessary fees and costs
of a lawsuit.
During the 1996 fiscal year, Country Maid Farms began marketing its eggs
to a breaker plant operated by another wholly-owned subsidiary of the Company,
Country Maid Egg Products, Inc., a Nevada corporation. The eggs were broken and
processed into basic ingredients to be sold to food production companies to
produce mayonnaise and other products that used eggs. This business generated a
substantial amount for revenue for the Company. However, on December 27, 1996,
the owner of the plant operated by Country Maid Egg Products, Inc. was forced
into a bankruptcy sale. The Company attempted to purchase the plant to continue
its egg processing business, which was, at that time, the main source of revenue
for Country Maid Farms. The Bankruptcy Court ruled in favor of another purchaser
and thereafter Country Maid Egg Products, Inc. was forced to cease its egg
processing business which resulted in Country Maid Farms losing its last source
of revenue.
As of July 31, 1998, Country Maid Farms had outstanding liabilities in
the estimated amount of $257,720. The assets of Country Maid Farms on October 6,
1998 consisted of the "layer farm" in Redfield, South Dakota, valued in
September 1998 at approximately $10,000, with a mortgage of approximately
$13,928.87, and the damaged farm and real estate in Puxico, Missouri which was
estimated to be worth approximately $60,000.
On October 6, 1998, the Company entered into a Stock Purchase Agreement
with its Chief Executive Officer and Director, C. Richard Kearns, and Director,
John C. Moneymaker, wherein Mr. Kearns and Mr. Moneymaker purchased all of the
issued and outstanding stock of Country Maid Farms. The consideration for the
sale was an agreement by Mr. Kearns and Mr. Moneymaker to assume the liabilities
of Country Maid Farms and to indemnify the Company from any debts of Country
Maid Farms that were guaranteed by the Company, other than any liability for
violations of environmental law.
ACQUISITION OF TERRITORIAL INNS MANAGEMENT, INC.
In September 1998, after its decision to cease the egg business and sell
Country Maid Farms, the Board of Directors and the officers of the corporation
developed a strategic plan for improving its results of operations by a change
in the Company's focus to the hospitality industry. During the second quarter of
1998, the Company entered into a Stock Purchase Agreement effective October 12,
1998 ("Stock Purchase Agreement") for the acquisition of Territorial Inns
Management, Inc., a Nevada corporation ("TIM") with the shareholders of TIM.
28
31
The Directors of the Company determined that the acquisition of TIM
provided the means for the Company to obtain significant assets. The assets of
TIM consisted of eleven motel management agreements. These management agreements
were purchased by TIM in a transaction effective September 28, 1998 from an
Oregon corporation of which the Company's Chief Executive Officer, C. Richard
Kearns, was a principal shareholder.
In exchange for the shares of TIM, the Company issued a total of
6,250,000 shares of its common stock to the shareholders of TIM, some of whom
are directors and executive officers of the Company, and other related parties,
including C. Richard Kearns (3,600,000 shares), John C. Moneymaker (200,000
shares), Terrence J. Trapp (500,000 shares), Ellis J. Stutzman (200,000 shares),
Mark D. Owen (200,000 shares), Northwestern Capital, LLC, a limited liability
company solely owned by Mr. Kearns (100,000 shares), Thomas J. Krueger (50,000
shares), and Cascade Pacific Equity Corp., of which Mr. Krueger is the sole
shareholder (850,000 shares).
The Company's Chief Executive Officer and Chairman of the Board, Mr.
Kearns, was a principal shareholder of TIM. Mr. Kearns owned approximately 57.6%
of TIM. As of September 30, 1998, before the acquisition of TIM, Mr. Kearns
beneficially owned a total of 104,600 shares of the 485,217 shares of the total
issued and outstanding common stock of the Company, which constituted
approximately 21.56%. These figures have been adjusted to give effect to the
100:1 reverse stock split effective October 9, 1998. See "Item 11. Description
of Registrant's Securities to Be Registered--Common Stock, Reverse Stock Split."
After the acquisition, Mr. Kearns beneficially owned 3,811,460 shares of the
6,850,825 shares of the issued and outstanding common stock of the Company,
which constituted approximately 55.64%, as of January 1, 1999. The transaction
substantially increased Mr. Kearns' percentage of ownership and control of the
Company. Based on the gross revenue of the management agreements of TIM, the
substantial losses and debts of the Company, and the benefits of the acquisition
including providing a means to enter into the lodging industry, the Board of
Directors determined that the transaction was fair and unanimously adopted and
ratified the Stock Purchase Agreement on September 28, 1998. The Board of
Directors did not obtain a fairness opinion. The shareholders of the Company
ratified the transaction at a duly noticed meeting of shareholders on April 30,
1999.
STOCK REDEMPTION AGREEMENT
As of April 30, 1999, Mr. Kearns, Chief Executive Officer and Chairman
of the Board of the Company, beneficially owned approximately 4,192,751 shares
of common stock of the Company which constituted 52.83% of the Company.
With the approval of the Board of Directors and the shareholders, the
Company entered into a Stock Redemption Agreement with Mr. Kearns, effective May
1, 1999. The Company agreed to conduct an offering of up to 2,500,000 shares of
its common stock to certain creditors of Mr. Kearns. The consideration to the
Company for the shares sold under this offering will be a redemption of common
stock owned by Mr. Kearns equal to the number of shares sold. The Company will
not receive any cash consideration. The Stock Redemption Agreement provides
additional consideration to the Company, in exchange for the Company's agreement
to pay the costs of the offering, in the form of the redemption of an additional
10,000 shares of common stock from Mr. Kearns. The Company is expecting to sell
approximately 2,500,000 shares which will reduce the number of shares
beneficially held by Mr. Kearns to 1,692,751 constituting approximately 21.33%
of the issued and outstanding shares of the Company's common stock.
29
32
CERTAIN MANAGEMENT AGREEMENTS
Officers and directors of the Company have ownership interest in certain
properties managed by the Company. The Chief Executive Officer and Chairman of
the Board, C. Richard Kearns, is a partner in the ownership of certain motels
managed by the Company, including Best Western I-35 Inn, Bethany Missouri, and
Willow Springs, Cheney, Washington. Mr. Kearns is also a partner in Lodging
Hospitality Associates, an Oregon partnership, ("LHA") which claims title
ownership of Colonial Motor Inn, Yakima, Washington and Nendels Inn, Kennewick,
Washington. LHA is the tenant of Select Inn, Tulia, Texas, also managed by the
Company.
Mr. Kearns is also a partner of Territorial Inns, an Oregon partnership,
which is the managing member of Lodging Hospitality Associates LLC ("LHA LLC").
LHA LLC is a tenant of the Select Inn, Borger, Texas which is co-owned by John
C. Moneymaker, a director of the Company.
The President of the Company, Ellis J. Stutzman, is a partner in the
ownership of Best Western I-35 Inn.
CERTAIN MOTEL PROPERTY ACQUISITIONS
The Company may retain Southeast International Hotel Brokers Company
("Southeast"), a motel brokerage company, to assist the Company in the search
and negotiation of potential motel properties for acquisition purposes. Director
John C. Moneymaker is an agent of Southeast and may receive a portion of the
commission paid to Southeast as compensation for his services as a real estate
agent. There is no written agreement between Southeast and the Company. The
amount of the commission earned by Southeast may range from two to ten percent
(2% - 10%) of the amount of the purchase option price of the motel to be paid at
the closing of the transaction. Mr. Moneymaker may receive an amount which
equals twenty to fifty percent (20% - 50%) of the total commission paid to
Southeast. Mr. Moneymaker is neither an owner nor a director of Southeast. Mr.
Moneymaker has agreed to inform any motel owner who may enter into negotiation
with the Company of his directorship with the Company. As of April 30, 1999, Mr.
Moneymaker has not yet earned any commission from the Company's motel
acquisition activities.
SHAREHOLDER LOANS
C. Richard Kearns and John C. Moneymaker have been personally advancing
money to the Company, since prior to 1995, to continue its operation despite the
losses suffered by its operating subsidiary Country Maid Farms. As of March 31,
1999, the total amount due to Mr. Kearns and Mr. Moneymaker was $1,032,695. The
Company currently has no set arrangement with these principal shareholders as to
a repayment date and will make payments toward the loans as authorized by the
Board of Directors. One payment of One Hundred and Twenty Thousand Dollars
($120,000) was made toward the balance of the loan in March 1999 to Mr. Kearns.
PRINCIPAL OFFICE LEASE
The Company entered into a lease agreement with its Chief Executive
Officer, C. Richard Kearns, and his spouse, effective October 1, 1998, for the
lease of approximately 5,020 square feet for its executive offices in Lebanon,
Oregon. The lease provides that the monthly rent payment is $4,000 per month for
a term of five years, renewable for three additional terms.
The Company may be subject to various conflicts of interest arising out
of the relationship of the Company, its Board of Directors, affiliates and the
common shareholders. If conflicts do arise, they will not be resolved through
arms length negotiations but through the exercise of management's judgment
consistent with its fiduciary responsibility to the shareholders and the
Company's objectives and policies. The directors will minimize and resolve
conflicts by putting their fiduciary responsibility to the
30
33
shareholders ahead of personal interests. Certain directors of the Company will
only devote so much of their time to the business of the Company as in their
judgment is reasonably required and must decide how to allocate their time and
services among the Company and other entities with which they are involved.
The Company intends that all future transactions, including loans,
between the Company and its officers, directors, principal shareholders and
their affiliates will be approved by a disinterested majority of the Board of
Directors, agreed on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and, to the extent advisable by the
Board of Directors, recommended to shareholders for ratification.
ITEM 8
LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no material legal
actions pending against the Company.
ITEM 9
MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the OTC Bulletin Board under the
symbol "CMFI." The following table sets forth the range of high and low bid
prices for the Company's common stock on a quarterly basis for the two most
recent fiscal years and the three months ended March 31, 1999, as reported by
the OTC Bulletin Board Research Service (which reflect inter-dealer prices,
without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions), unless otherwise stated. The foregoing and
following information should not be taken as an indication of the existence of
an established public trading market for the Company's common stock.
QUARTERLY COMMON STOCK PRICE RANGES(1)
High Low
Period: Fiscal Year ending March 31, 1998
- -----------------------------------------
First Quarter ending June 30, 1997 10.00 6.00
Second Quarter ending September 30, 1997 7.50 3.00
Third Quarter ending December 31, 1997 4.25 1.50
Fourth Quarter ending March 31, 1998 6.75 2.25
Period: Fiscal Year ending December 31, 1998
- --------------------------------------------
Second Quarter ending June 30, 1998 3.00 2.50
Third Quarter ending September 30, 1998 7.00 2.25
Fourth Quarter ending December 31, 1998 4.3125/7.00(2) 2.00/1.50(2)
Period: Fiscal Year ending December 31, 1999
First Quarter ending March 31, 1999 4.625 1.625
(1) On October 9, 1998, the Company effectuated a reverse stock split in the
ratio of 100:1 for all of the outstanding and issued common stock. The
information provided in this table gives effect to the reverse stock
split.
(2) The Company disagrees with the bids provided by the OTC Bulletin Board
Research Service for the fourth quarter of 1998. As recorded by the
Company, the bid was 7.00 and the low bid was 1.50.
31
34
The approximate number of record holders of the Company's common stock as
of April 30, 1999 was 205 shareholders inclusive of those brokerage firms
and/or clearing houses holding the Company's common shares for their clientele
(with each such brokerage house and/or clearing house being considered as one
holder). The aggregate number of shares of common stock outstanding as of
April 30, 1999 was 7,936,928 shares.
DIVIDENDS POLICY
The Board of Directors does not contemplate or anticipate paying any
cash dividends upon its common stock in the foreseeable future based on the
Company's present financial status and its contemplated financial requirements.
The Company declared a stock dividend effective April 7, 1999 awarding
one share of common stock for every one hundred shares of common stock to all of
its shareholders of record as of April 7, 1999.
SHARES ELIGIBLE FOR FUTURE SALE
In general, Rule 144 under the Securities Act of 1933, as amended ("Rule
144") provides that securities may be sold without registration if there is
current public information available regarding the Company and the securities
have been held at least one year. Rule 144 also includes restrictions on the
amount of securities sold and the manner of sale, and requires notice to be
filed with the SEC. Under Rule 144, a minimum of one year must elapse between
the later of the date of the acquisition of the securities from the issuer or
from an affiliate of the issuer, and any resale under the Rule. If a one-year
period has elapsed since the date the securities were acquired, the amount of
restricted securities that may be sold for the account of any person within any
three-month period, including a person who is an affiliate of the issuer, may
not exceed the greater of one percent (1%) of the then outstanding shares of
common stock of the issuer or the average weekly trading volume in the
over-the-counter ("OTC") market during the four calendar weeks preceding the
date on which notice of sale is filed with the SEC. If a two-year period has
elapsed since the date the securities were acquired from the issuer or from an
affiliate of the issuer, a seller who is not an affiliate of the issuer at any
time during the three months preceding a sale is entitled to sell the shares
without regard to volume limitations, manner of sale provisions or notice
requirements.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET
As of April 30, 1999, a substantial majority of the 7,936,928
outstanding shares of common stock held by existing shareholders were issued and
sold by the Company in private transactions in reliance on exemptions from the
registration provisions of the Securities Act of 1933, as amended, and are
restricted securities within the meaning of Rule 144. Of the outstanding shares,
including shares held by affiliates, 48,521,682 were issued on or before April
30, 1998, and may be currently eligible for resale in the open market, if any,
in compliance with Rule 144. The sale in the public market of these shares of
restricted common stock under Rule 144 may depress prevailing market prices of
the common stock.
OUTSTANDING OPTIONS AND WARRANTS
As of April 30, 1999, there were no outstanding stock options or
warrants for the Company's securities.
NO ASSURANCE OF ESTABLISHED PUBLIC TRADING MARKET
Although the common stock of the Company trades on the OTC Bulletin
Board, there can be no assurance that a regular trading market for the
securities will be sustained. The OTC Bulletin Board is an unorganized,
inter-dealer, over-the-counter market which provides significantly less
liquidity than The Nasdaq Stock Market. Quotes for stocks included on the OTC
Bulletin Board are not listed in the financial sections of newspapers as are
those for The Nasdaq Stock Market. Therefore, prices for
32
35
securities traded solely on the OTC Bulletin Board may be difficult to obtain
and holders of common stock may be unable to resell their securities at or near
their original offering price or at any price. Furthermore, the NASD has
proposed certain regulation changes that affect the OTC Bulletin Board, which,
if and when implemented, will affect both issuers and market makers. The effect
on the OTC Bulletin Board cannot be determined at this time. In the event the
Company's securities are not included on the OTC Bulletin Board and do not
qualify for Nasdaq, quotes for the securities may be included in the "pink
sheets" for the over-the-counter market.
NEW OTC BULLETIN BOARD ELIGIBILITY STANDARDS
In 1998, the NASD amended Rule 6530, relating to the eligibility
standards of OTC Bulletin Board companies, to require that a member's
eligibility for quotation in its service include the registration of its
securities pursuant to Section 12 of the Securities Exchange Act of 1934
("Exchange Act") and thereafter compliance with the reporting requirements of
the Exchange Act.
The NASD has provided the currently eligible companies who are not yet
registered pursuant to Section 12 of the Exchange Act a phase-in period to file
the necessary information with the SEC. The phase-in schedule is determined in
alphabetical order by the name of the company. Unless otherwise permitted by the
NASD, the Company is required to be properly registered under the Exchange Act
and the information declared effective by the SEC by October 1999. There is no
assurance that the Company will be declared effectively registered under the
Exchange Act within the time frame allowed. The Company thereafter will be
required to be current in the filing of periodic reports pursuant to Section
15(d) of the Exchange Act. There is also no assurance that the Company will not
be delisted by the NASD from the OTC Bulletin Board for failure to timely file
the proper periodic report. The Company's failure to be effectively registered
or timely file the proper periodic report may negatively affect the ability of
the Company's shareholders to trade stock on the OTC Bulletin Board and the
value of the Company's stock.
PRICE VOLATILITY
The market price of the common stock could be subject to significant
fluctuations in response to variations in quarterly operating results and other
factors. In addition, the securities markets have experienced significant price
and volume fluctuations from time to time in recent years that often have been
unrelated or disproportionate to the operating performance of particular
companies. These broad fluctuations may adversely affect the market price of the
common stock of the Company.
"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON
MARKETABILITY OF SECURITIES.
The Securities and Exchange Commission (the "SEC") has adopted
regulations which generally define "penny stock" to be any equity security that
is not traded on a national securities exchange or Nasdaq and that has a market
price of less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. If the Company's securities are trading at
less than $5.00 per share on the OTC Bulletin Board, the Company's securities
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. Accredited investors generally have assets
in excess of $1,000,000 or an individual annual income exceeding $200,000 or,
together with the investor's spouse, a joint income of $300,000. For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require, among other things, the delivery, prior to the transaction, of a
risk disclosure document mandated by the SEC relating to the penny stock market
and the risks associated therewith. The broker-dealer must also disclose the
commission payable to both the broker-dealer and
33
36
the registered representative and current quotations for the securities. If the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the penny stock rules may restrict the ability of broker-dealers
to sell the Company's securities and may affect the ability of shareholders of
the Company to sell their securities in the secondary market.
ITEM 10
RECENT SALES OF UNREGISTERED SECURITIES
The following unregistered securities of the Company have been issued in
the period from May 30, 1996 through May 30, 1999:
(a) (b) (c) (d)
Date, Amount, Title Purchasers/Target Class Consideration Exemption
------------------- ----------------------- ----------------- -----------------
June 15, 1996 One non-affiliate Shareholder Section 4(2) of
500,000 Common person relation services Securities Act of
1933
September 3, 1996 Two non-affiliate $3,000,000 Section 4(2) of
1,500,000 Common(1) corporation Securities Act of
1933
October 25, 1996 One non-affiliate Legal services Section 4(2) of
40,000 Common Securities Act of
1933
December 18, 1998 Shareholders of Stock-for-stock Section 4(2) of
6,250,000 Common Territorial Inns exchange Securities Act of
Management, Inc.(2) (Acquisition of 1933
TIM) and
Rule 506
February 19, 1999 One accredited $60,000 Rule 506
40,000 Common non-affiliate person ($1.50 per share)
February 4, 1999 One non-affiliate Shareholder Section 4(2) of
75,000 Common corporation relations services Securities Act of
1933
March 22, 1999 One accredited $50,000 Rule 506
40,000 Common non-affiliate person ($1.25 per share)
April 5, 1999 One non-affiliate Retainer for Section 4(2) of
150,000 Common person shareholder Securities Act of
relations services 1933
March 22, 1999 One accredited $50,000 Rule 506
40,000 Common non-affiliate person ($1.25 per share)
March 23, 1999 One accredited $120,000 Rule 506
60,000 Common non-affiliate person ($2.00 per share)
34
37
(1) The Company issued 1,500,000 shares of common stock in the name of two
third-party corporations in advance pending the closing of a corporate
acquisition which later terminated without performance. The Company
requested the transfer agent to cancel the certificates. The third party
had notified the transfer agent by telephone to dispute the
cancellation. The Company has not received any complaint or otherwise
been contacted by these parties.
(2) Pursuant to the Stock Purchase Agreement whereby the Company acquired
all of the outstanding and issued common stock of Territorial Inns
Management, Inc., a Nevada corporation ("TIM"), effective October 12,
1998, the Company issued an aggregate of 6,250,000 shares of common
stock to the shareholders of TIM. See "Item 7. Certain Relationships and
Related Transactions--Acquisition of Territorial Inns Management, Inc."
There were seventeen shareholders of TIM, including C. Richard Kearns,
John C. Moneymaker, Terrence J. Trapp, Ellis Stutzman, Mark D. Owen,
Candy Johnson, all of whom are directors and/or employees of the
Company. The remaining shareholders of TIM were not affiliated with the
Company.
ITEM 11
DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of up to
four hundred and ninety million (490,000,000) shares of common stock, no par
value. Each share has the same rights, privileges and preferences. Holders of
the shares of common stock have no preemptive rights to acquire additional
shares or other subscription rights. The shares of common stock are not subject
to redemption provisions or future calls by the Company. All outstanding shares
of common stock are fully paid and nonassessable.
The holders of shares of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of shareholders. They
are not entitled to cumulate their votes for the purpose of electing directors
of the Company. Holders of common stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of legally available
funds.
In the event of liquidation, dissolution, or winding-up of the Company,
either voluntarily or involuntarily, the holders of the outstanding shares of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and satisfaction of preferential rights and have no rights to
convert their common stock into any other securities.
As of April 30, 1999 there were 7,936,928 shares of common stock
outstanding which were held of record by 205 shareholders. There were no
outstanding stock options or warrants of common stock.
REVERSE STOCK SPLIT
On October 9, 1998, the Company effectuated a reverse stock split in the
ratio of 100:1 for all of the outstanding and issued common stock. Prior to the
reverse stock split, there were 48,521,682 total shares outstanding. Immediately
subsequent to the reverse stock split, there were 485,285 total shares
outstanding. The total number of shares authorized by the Company was not
changed.
STOCK DIVIDEND
The Company declared a stock dividend March 16, 1999, effectuated April
7, 1999, to all shareholders of record as of 5:00 p.m. Pacific Standard Time on
the same day, wherein each holder of at least ten shares of common stock of the
Company was awarded one share of common stock for every ten owned. Prior to the
issuance of shares based on the stock dividend, there were 7,215,285 shares of
common stock outstanding and issued. Subsequent to the distribution of the stock
dividend, there were
35
38
7,936,928 shares outstanding. The total number of shares authorized by the
Company was not changed.
PREFERRED STOCK
Pursuant to the Articles of Incorporation, as amended, the Company has
authorized 10,000,000 shares of preferred stock, no par value. As of April 30,
1999, there was no preferred stock issued and outstanding. The Company's Board
of Directors has the authority to determine the price, rights, preferences,
privileges and restrictions thereof, including voting rights, without any
further vote or action by the Company's shareholders. The voting and other
rights of the holders of common stock could be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of the Company.
The Board of Directors has designated three classes of preferred stock:
Class A, Series I; Class B, Series I; and Class C, Series I. The Company plans
to authorize and issue preferred stock to motel owners from whom the Company
will acquire leases with options to purchase as consideration for the purchase
options. The number of preferred shares issued will be dependent upon the value
of the motel property. The Company anticipates granting preferred stock, which
would be convertible into common stock of the Company, in a value equal to
twenty percent (20%) of the total value of the motel on the commencement date of
the subject lease. Certain motel owners may receive cash or stock dividends
depending on the class of preferred stock issued by the Company.
To the extent permitted by law, the Company will pay a cash dividend to
the holders of Class A, Series I preferred stock, which will be payable monthly
beginning thirty (30) days after the date of issuance at a rate of eight percent
(8%) per annum, based on the previously determined Subscription Price. The
holders of Class B, Series I preferred stock will receive a stock dividend,
issued quarterly, in an amount equal to eight percent (8%) per annum of the
Subscription Price based on the price of the common stock. Holders of Class C,
Series I preferred stock do not have rights to any dividends. The terms, rights
and preferences common to the three different classes of preferred stock are
summarized as follows:
CONVERSION
The preferred stock is convertible at the option of the holder, but not
earlier than twelve (12) months after the Subscription Date unless previously
redeemed by the Company, into the nearest whole number of common stock
("Conversion Shares") the Subscription Price would be able to purchase at the
Company's average common stock price ("Average Stock Price") for the sixty (60)
trading days last preceding the date of conversion. The Average Stock Price is
equivalent to the mean between the closing bid and asked quotations for the
Company's common stock in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation system ("Nasdaq"), or any
other reliable quotation system if the common stock is not listed on Nasdaq.
Unless the Company, at its election, acts to obtain effectiveness of a
registration statement under the Securities Act covering the Conversion Shares,
the preferred stock shall be converted into restricted common stock as the term
"restricted" is defined in Rule 144 under the Securities Act. The Company has no
obligation to register the Conversion Shares.
REDEMPTION
The preferred stock is redeemable at any time at the option of the
Company, in whole or in part, upon payment by the Company, in its sole
discretion, of the redemption price consisting of the Average Stock Price of the
Conversion Shares plus an amount equal to all declared and accrued dividends.
36
39
LIQUIDATION
If there is a liquidation of the Company, a holder of the preferred
stock is entitled to a pro rata liquidation preference in an amount equal to the
Subscription Price plus any accrued dividends to the date of distribution,
before any distribution or payment to the holders of common stock or any other
security ranking junior to the class.
VOTING
The preferred stock is entitled to one vote per share together as one
class with common shareholders on all matters upon which common shareholders are
entitled to vote.
REGISTRATION RIGHTS
The Company has a Letter of Intent to acquire the operations of ten
motel properties located in Minnesota, North Dakota, South Dakota and Wisconsin
from an unrelated third party. The lease will be a triple net lease where the
Company will pay for all expenses and costs of operations and pay a fixed annual
lease payment of $1,750,000, payable in equal monthly installments. The Company
may also elect to exercise its option to purchase the property upon the payment
of $18,000,000 to the motel owner. The consideration for the option will be the
issuance of $3,500,000 of preferred stock with a cash dividend rate of eight
percent (8%) paid monthly and registration rights to sell $500,000 of the
convertible preferred stock at the Company's initial public offering.
TRANSFER AGENT
American Securities Transfer and Trust. Inc. is transfer agent and
registrar for the Company's common and preferred stock.
WASHINGTON TAKEOVER ACT
The Company is subject to the Washington Takeover Act ("WTA")
promulgated under 23B.19.010, et seq. of the Revised Code of Washington ("RCW")
which provides that any "significant business transactions," which includes a
merger, a share exchange consolidation, the sale or encumbrance of assets, and
other enumerated transactions, are forbidden for a five-year-period, unless
approved by a majority of the board of directors prior to the share acquisition
if certain "acquiring persons(1)" obtain ten percent (10%) or more of the stock
of a "target corporation(2)."
The WTA requires that an acquiring person negotiate with the target
corporation's board of directors prior to acquisition to avoid the statutory
prohibitions. The board of directors, in making its decision, must exercise its
responsibilities and duties of loyalty and of care and cannot use the WTA as a
blanket veto over the acquiring person's proposal. If the acquiring person does
not obtain the approval of the board of directors prior to its acquisition of
the shares, a significant business transaction may proceed, following the
five-year moratorium, if the significant business transaction complies with the
"fair price" provisions of RCW 23B.19.040(2) or if it is approved at a
shareholders' meeting held at least five years after the acquiring person
purchased its shares. Any transaction that violates the WTA is void.
(1) "Acquiring person" means a person or group of persons who beneficially
owns ten percent or more of the outstanding voting shares of the target
corporation. The term "acquiring person" does not include a person who
acquires its shares by gift, inheritance, or in a transaction in which
no consideration is exchanged; exceeds the ten percent threshold as a
result of action taken solely by the target corporation, such as
redemption of shares, unless that person, by its own action, acquires
additional shares of the target corporation; beneficially was the owner
of ten percent or more of the outstanding voting shares prior to the
37
40
time the target corporation had a class of voting shares registered with
the securities and exchange commission pursuant to section 12 or 15 of
the exchange act; or beneficially was the owner of ten percent or more
of the outstanding voting shares prior to the time the target
corporation amended its articles of incorporation to provide that the
corporation shall be subject to the WTA.
(2) "Target corporation" means: Every domestic corporation, if the
corporation has a class of voting shares registered with the securities
and exchange commission pursuant to section 12 or 15 of the exchange
act; or the corporation's articles of incorporation have been amended to
provide that such a corporation shall be subject to the provisions of
this chapter, if the corporation did not have a class of voting shares
registered with the securities and exchange commission pursuant to
section 12 or 15 of the exchange act on the effective date of that
amendment.
ITEM 12
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation currently provide for the
limitation of liability of directors to the Company and its shareholders to the
fullest extent permitted by the Washington Business Corporation Act ("WBCA").
The Company may also indemnify its officers and directors to the fullest extent
permitted by law from any action or proceeding whether criminal, civil,
administrative or investigative by reason of the service of such officer or
director to the Company.
Section 23B.08.300(4) of the WBCA provides that a director is not liable
for any action taken as a director, or any failure to take any action, if the
director performed the duties of the director's office in the following manner:
in good faith; with the care an ordinarily prudent person in a like position
would exercise under similar circumstances; and in a manner the director
reasonably believes to be in the best interests of the corporation. The
directors are entitled to rely on information, opinions, reports, or statements,
including financial statements and other financial data, if the same is prepared
by any of the following: an officer of the Company whom the director reasonably
believes to be reliable and competent in the matters presented; legal counsel,
public accountants, or other persons as to matters the director reasonably
believes are within the person's professional or expert competence; or a
committee of the board of directors of which the director is not a member if the
director reasonably believes the committee merits confidence. An exception is
provided by the WBCA that the director is not acting in good faith if the
director has knowledge concerning the matter in question that makes reliance
otherwise permitted unwarranted.
Directors and officers are protected under the "business judgment rule,"
which generally shields business decisions made by directors and officers from
hindsight judgment by the courts as long as the decisions were made in good
faith and without a corrupt motive.
The WBCA applies to any negligent conduct of the directors. A
corporation is not permitted to limit the liability of a director for acts or
omissions that involve intentional misconduct, a knowing violation of law,
conduct regarding liability for unlawful distributions, or for any transaction
from which the director will personally receive a benefit in money, property or
services to which the director is not legally entitled.
As of April 30, 1999, there was no pending litigation or proceeding
involving a director, officer, employee or agent of the Company where
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for
indemnification.
38
41
ITEM 13
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS INDEX
Page No.
--------
FISCAL YEARS ENDING DECEMBER 31, 1998 AND MARCH 31, 1998
Report of Independent Certified Public Accountants 42
Financial Statements (Audited) 43
Consolidated Balance Sheets 43
Consolidated Statements of Income 44
Consolidated Statements of Cash Flows 45
Consolidated Statement of Stockholders' Equity 46
Notes to Consolidated Financial Statements 47
FIRST QUARTER ENDING MARCH 31, 1999
Report of Independent Certified Public Accountants 54
Financial Statements (Unaudited) 55
Consolidated Balance Sheets 55
Consolidated Statements of Income 56
Consolidated Statements of Cash Flows 57
Consolidated Statement of Stockholders' Equity 58
Notes to Consolidated Financial Statements 59
39
42
COUNTRY MAID FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND DECEMBER 31, 1998
40
43
COUNTRY MAID FINANCIAL, INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
MARCH 31, 1998 AND DECEMBER 31, 1998
TABLE OF CONTENTS
Page
----
Accountant's Report............................................1
Balance Sheet..................................................2
Statement of Net Income(Loss)..................................3
Statement of Retained Earnings(Deficit)........................4
Statement of Cash Flows........................................5
Notes to Financial Statements..................................6
41
44
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
Board of Directors
COUNTRY MAID FINANCIAL, INC.
Lebanon, Oregon
We have audited the balance sheet of COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
as of March 31, 1998 and December 31,1998, and the related statements of net
income, retained earnings, and cash flows for the year ended March 31, 1998 and
the nine months ended December 31, 1998. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of COUNTRY MAID FINANCIAL, INC.
and SUBSIDIARY as of March 31, 1998 and December 31, 1998, and the results of
its operations and its cash flows for the periods then ended, are 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 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency. These factors raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
THOMAS J. HARRIS CPA
April 29, 1999
Seattle, Washington
42
45
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 AND DECEMBER 31, 1998
ASSETS
December 31, March 31,
1998 1998
------------ ----------
ASSETS
Current Assets
Cash in Bank 0 0
Receivables From and Advances to Properties 68,180 0
Prepaid Expenses 0 0
---------- ----------
Total Current Assets 68,180 0
---------- ----------
Fixed Assets: Net 0 0
---------- ----------
Other Assets
Goodwill 60,000
---------- ----------
Total Other Assets 60,000 0
---------- ----------
TOTAL ASSETS 128,180 0
========== ==========
LIABILITIES
Current Liabilities
Bank overdraft 22,032 0
Accounts Payable 15,521 0
Accrued Payroll & Payroll Taxes 79,091 0
---------- ----------
Total Current Liabilities 116,644 0
---------- ----------
Long Term Debt
Total Long Term Debt 0 0
---------- ----------
Other Liabilities
Due to Stockholders 1,173,695 1,173,695
Excess Liabilities From Discontinued Operations 0 568,957
---------- ----------
Total Other Liabilities 1,173,695 1,742,652
---------- ----------
TOTAL LIABILITIES 1,290,339 1,742,652
---------- ----------
STOCKHOLDER'S EQUITY
Common Stock 490,000,000 shares authorized, no par value,
6,775,285 and 485,217 issued and outstanding December
and March 1998 respectively 2,739,639 2,679,639
Retained Earnings (deficit) (3,901,798) (4,422,291)
TOTAL STOCKHOLDERS' EQUITY (1,162,159) (1,742,652)
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 128,180 0
========== ==========
The accompanying notes are an Integral part of these financial statements
43
46
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF NET INCOME(LOSS)
FOR THE PERIODS ENDED MARCH 31, 1998 AND DECEMBER 31, 1998
December 31, March 31,
1998 1998
------------ -----------
REVENUES
Management Fees $ 37,515 $ 0
-------- -----------
EXPENSES:
Payroll & Payroll Taxes $ 47,909
Insurance $ 5,593
Interest $ 2,015
Miscellaneous $ 285
Professional Fees $ 3,626
Rent $ 12,000
Repairs $ 66
Supplies $ 5,068
Telephone $ 4,665
Travel $ 3,524
Utilities $ 1,228
-------- -----------
Total Expenses $ 85,979 $ 0
-------- -----------
NET INCOME (LOSS) FROM OPERATIONS $(48,464) $ 0
Loss From Discontinued Operations $ 0 $(1,960,324)
-------- -----------
NET INCOME (LOSS) $(48,464) $(1,960,324)
======== ===========
Primary earnings(loss) per share from
operations $(0.0188) $ 0.0000
======== ===========
Primary earnings(loss) per share $(0.0188) $ (0.7606)
======== ===========
The accompanying notes are an Integral part of these financial statements
44
47
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31, 1998 AND DECEMBER 31, 1998
December 31, March 31,
1998 1998
------------ --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) From Operations $(48,464) $ 0
Increase (Decrease)
Due From Properties (68,180)
Accounts Payable 15,521
Accrued Payroll & Payroll Taxes 19,091
--------
Net cash Flow From Operations $(82,032)
CASH FLOWS FROM INVESTING ACTIVITIES
0
--------
CASH FLOWS FROM FINANCING ACTIVITIES 0
--------
Issuance of Common Stock 60,000
--------
Net ash Flows $(22,032)
Cash Balance Beginning 0
--------
Cash Balance Ending $(22,032)
========
All transactions of the discontinued operations have been excluded from this
statement.
The accompanying notes are an Integral part of these financial statements
45
48
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIODS ENDED MARCH 31, 1998 AND DECEMBER 31,1998
Total
Number Common Retained Stockholder
of Shares* Stock Earnings Equity
---------- ---------- ---------- ------------
Balance, March 31, 1997 485,285 2,679,639 (2,461,967) 217,672
Net loss (1,960,324) (1,960,324)
---------- ---------- ---------- ----------
Balance, March 31, 1998 485,285 2,679,639 (4,422,291) (1,742,652)
Shares issued in acquisition of TIM 6,250,000 0 0
Shares issued for cash 40,000 60,000 60,000
Net loss (48,464) (48,464)
Excess Liabilities of
Discontinued Operations 568,957 568,957
---------- ---------- ---------- ----------
Balance, December 31, 1998 6,775,285 2,739,639 (3,901,798) (1,162,159)
========== ========== ========== ==========
*=After 1 for 100 reverse split
The accompanying notes are an Integral part of these financial statements
46
49
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF THE COMPANY
Country Maid Financial, Inc. ("Company") was incorporated in April 1984 in the
State of Washington under the name Raywheel, Inc. The Company commenced
operations in Toledo, Ohio and moved its offices to Portland, Oregon in 1989.
The Company's name was changed to American Citadel, Inc. in December 1989. In a
transaction effective July 1, 1992 the Company acquired Country Maid Farms, Inc.
("Farms") issuing 28,036,000 shares of its common stock to the shareholders of
Country Maid Farms, Inc. to acquire total ownership. The merger was accounted of
as a recapitalization of Country Maid Farms, Inc. and a reverse acquisition of
American Citadel, Inc. with Country Maid Farms, Inc. as the surviving
corporation. Stockholders' equity during 1993 was adjusted to reflect this
recapitalization.
In March 1994, American Citadel, Inc. name was changed to Country Maid Foods,
Inc. to signify its primary business of food production. Through its wholly
owned subsidiary, Country Maid Farms, Inc., the Company was engaged in the
production of poultry eggs for the domestic egg market and for the manufacture
of mayonnaise and other egg products. Country Maid Farms, Inc. contracts with
farms in Nebraska and Missouri.
Prior to the acquisition of Country Maid Farms, the Company had another
wholly-owned subsidiary, Security Bar, Inc., a Washington corporation ("Security
Bar") through which it conducted its business. Security Bar was sold to an
unrelated third party in December 1993.
The Company started a new corporation Country Maid Egg Products, Inc. ("Egg
Products"), a Nevada corporation, October 11, 1996. Egg Products is a wholly
owned subsidiary used to broker the Farm's eggs and operate a breaker plant
under a lease agreement with a third party. Egg Products primarily purchases
Farm's eggs.
In September 1998, the Company determined that the chicken egg business it was
conducting through its wholly-owned subsidiary Country Maid Farms, Inc., a
Nevada corporation was not profitable and did not generate sufficient income for
the Company. The Company had been unprofitable for the last several years and
had experienced significant losses during its operating history. The Company's
cash flows from operations have not been sufficient to fund its operating
activities. The Company determined that conventional financing was unavailable
to the Company at that time. In addition, management did not believe that an
equity or debt offering of its securities would succeed without a positive
change of the Company's business or an infusion of value into the Company
through a recapitalization. Therefore, management opted to sell the subsidiary
to two shareholders for their assumption of the underlying debt.
In September 1998, the name was changed to Country Maid Financial, Inc. upon the
Board's decision to enter management and financing in the lodging industry. The
Company's principal executive offices are in Lebanon, Oregon.
During the third quarter of 1998, the Company negotiated the terms of the Stock
Purchase Agreement dated September 30, 1998 ("Stock Purchase Agreement") for the
acquisition of Territorial Inns Management Inc. ("TIM"), a Nevada corporation.
The Directors of the Company determined that the acquisition of TIM provided the
potential for the Company to obtain significant assets and shareholder equity.
The Company acquired all of the issued and outstanding common stock of TIM
effective October 12, 1998 when TIM became a wholly owned subsidiary of the
Company.
The Company, through its operating subsidiary TIM, is engaged in providing
management of motel properties for a fee and by acquiring operating leases with
options to purchase. TIM currently is in the process of acquiring several within
the next six months. The Company plans to continue to acquire motel operating
leases, with
47
50
management agreements, and purchase options from motel owners throughout the
United States and potentially Canada. The Company has identified certain motel
properties that can be acquired at a value equivalent to 2.5 to 3.0 times the
annual room gross revenue. The owners of these motels have expressed a
willingness to accept a purchase option payment of up to twenty percent (20%) of
the motel portfolio's current value and annual lease payments in an amount equal
to seven and one-fifth percent (7.2%) of the portfolio value. The Company's
management believes that these motel properties can be managed in such a manner
as to yield thirty-three percent (33%) of the annual gross room revenue as net
operating income of the Company.
The Board of Directors has changed the Company's fiscal year to the calendar
year January thru December.
DEFERRED INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement
No. 109 requires a change from the deferred method of accounting for income
taxes of APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method of Statement No. 109,
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. Under Statement No. 109, 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 date.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Earnings per share have been calculated as if the 1 for 100 reverse split had
been made as of the beginning of the fiscal year ended March 31, 1998. The
weighted average method for shares outstanding has been used to compute earnings
per share.
2. INVENTORY:
All inventories were sold at March 31, 1998.
3. TRADE ACCOUNTS RECEIVABLE
As of March 31, 1998 all accounts receivable had been received.
4. NOTES RECEIVABLE
The Company had notes receivable at March 31, 1998 as follows:
Cletus Miller 248,500.00
----------
TOTAL $ 248,500.00
On January 3, 1996, the Company sold the Puxico, Missouri farm with attached
buildings and some equipment to Cletus Miller for a note receivable of
$250,000.00. After the first four years, during which time interest would not
accrue, the unpaid balance would accrue interest at 10% per annum. Repayment of
the note was to be made by the buyer paying $1.00 per hog sold from the premises
during the first year and $5.00 per hog sold during the next six years. During
fiscal 1998 this note was discounted and sold, the proceeds were used to pay
some of the creditors.
5. SHORT-TERM BORROWING
48
51
Farms had a $1.4 million line of credit agreement with Continental Grain
Company. Interest of 4.9% was due monthly. Monthly principal repayments were
based on the age and number of flocks maintained. Draws were limited based on
current flock levels. The agreement required that the Company purchase pre-mix
feed solely from Wayne Feeds, a subsidiary of Continental Grain Company. The
line of credit was collateralized by real property accounts receivable,
inventory, and stockholder guarantees. The outstanding balance on the line was
$211,181 at March 31, 1998. Payments on the line were $3,000 per month during
1998. As described in Note 1 the Management decided to dispose of the Company's
subsidiary, Country Maid Farms, Inc. The disposition was completed by agreement
with two of the Company's shareholders who assumed all of the debt of the
subsidiary in return for its assets.
6. LONG-TERM DEBT
Long-term debt at March 31, 1998 consisted of the following:
DUE DATE INTEREST RATE PAYMENT BALANCES
Boatmen's Bank Of Southern, MO 04/25/01 9.75% $2,000.00/mo. $ 61,481
Wayne Feeds 02/15/98 variable 3,000.00/mo. 211,181
Yale Financial 03/99 6.8% 189.33/mo. 2,014
Pallet Jack
Percy & Lelham Gerig 02/00 15% 997.50/mo. 19,082
--------
Total Long-Term Debt $293,758
Current Portion $ 66,607
--------
Long-Term Debt net of current portion $227,151
--------
All of the above debt was assumed in the disposition of the subsidiary
as explained in Note 12.
7. INCOME TAXES
As discussed in Note 1, the Company adopted Statement No. 109 in 1993 and has
applied the provisions of Statement No. 109 retroactively to July 1, 1989. The
cumulative effect of this change in accounting for income taxes had been applied
to July 1, 1990 retained earnings.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 1998 are
presented below:
MARCH 31, 1998 DECEMBER 31, 1998
-------------- -----------------
Deferred Tax Assets:
Taxable (income) loss 1,960,324 (532,493)
Loss carryforward 2,866,147 4,826,147
----------- -----------
TOTAL 4,826,471 4,293,978
Tax rate 34% 34%
Deferred Tax Assets 1,641,001 1,459,953
Deferred Tax Assets Valuation Allowance (1,641,001) (1,459,953)
----------- -----------
NET DEFERRED TAX ASSET $ 0 $ 0
49
52
Due to cumulative losses in recent years and the uncertainty of future earnings
the probability of deriving any benefits from the deferred tax asset is
unlikely. In addition the Tax Reform Act of 1986 severely reduces the
deductibility of these losses due to the changes in ownership discussed in Notes
1 and 9.
50
53
8. DISPOSAL OF COUNTRY MAID FARMS, INC.
As described in Note 1 the Management decided to dispose of the Company's
subsidiary, Country Maid Farms, Inc. The disposition was completed by agreement
with two of the Company's shareholders who assumed all of the debt of the
subsidiary in return for its assets. The sale is summarized as follows:
LIABILITIES:
Bank overdraft $ 1,870
Accounts payable 180,146
Accrued expenses 121,608
Long term debt 334,296
Other liabilities 461,000
----------
Liabilities assumed (including loans from shareholders) $1,098,920
----------
ASSETS:
Prepaid expenses 9,170
Fixed assets, net 272,243
Other assets 248,550
----------
Assets taken (book value) 529,963
----------
Excess liabilities from discontinued operations $ 568,957
----------
The market value of the assets of the subsidiary is not known but it is unlikely
that the value is anywhere near the total liabilities assumed by the
shareholders.
The measurement date for the disposition of the Farm is August 14, 1998, and the
disposal date is October 6, 1998.
9. ACQUISITION OF TERRITORIAL INNS MANAGEMENT, INC.
As described in Note 1 the Company acquired all of the outstanding stock of TIM.
The transaction is being accounted for as a pooling of interests as required by
APB Opinion No. 16, Business Combinations, as such goodwill was recorded from
this transaction as follows:
Liabilities assumed $60,000
-------
Goodwill $60,000
-------
The Company issued 6,250,000 shares of common stock in the acquisition of TIM.
The major assets of TIM consisted of management contracts for eleven hotel
properties with gross annual receipts of approximately $10,600,000, of which a
five percent (5%) is paid to the Company as a management fee.
10. RELATED PARTY TRANSACTIONS
Effective October 1, 1998, the Company began a five year lease for office space
from one of the Company's shareholders. The amount of the lease is $4,000.00 per
month.
At March 31, 1999, the Company had interest free advances from stockholders of
$1,032,695. Proceeds from the sale of common stock were used to pay some of the
loans to shareholders during the quarter ended March 31, 1999.
51
54
11. CONTRACTS
On or about November 9, 1998, the Company and Best Inns, Inc., a Kansas
corporation (Best Inns Kansas), executed a Letter of Intent which set forth the
terms for the Company to lease with an option to purchase nine Best Inns motel
properties to be effective, as amended by the parties, March 1, 1999. The terms
of the Letter of Intent provide that the Company receives the gross revenue
generated by the properties and pays to Best Inns a fixed annual lease payment
of $1,980,000 payable monthly, and the Company has an option to purchase the
properties for the total amount of $24,000,000. As consideration to Best Inns
for the option to purchase, the Company agreed to issue securities of the
Company with an aggregate value of $3,000,000.
On March 1, 1999, the outgoing management company of the nine Best Inns
properties voluntarily resigned and the Company assumed the operation of the
nine properties of Best Inns pursuant to the terms of the Letter of Intent. The
lenders for Best Inns Kansas and the Company are currently negotiating the
remaining terms of the final lease with option to purchase agreement.
52
55
COUNTRY MAID FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENT
UNAUDITED
MARCH 31, 1999 AND 1998
53
56
COUNTRY MAID FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 1999 AND 1998
TABLE OF CONTENTS
Page
----
Accountant's Report............................................1
Balance Sheet(Unaudited).......................................2
Statement of Income(Loss) .....................................3
Statement of Cash Flows........................................4
Statement of Shareholders' Equity..............................5
Notes to Financial Statements..................................6-9
54
57
INDEPENDENT ACCOUNTANT'S REPORT
- --------------------------------------------------------------------------------
Board of Directors
COUNTRY MAID FINANCIAL, INC.
LEBANON, OREGON
We have compiled the balance sheet of COUNTRY MAID FINANCIAL, INC. and
SUBSIDIARY as of March 31, 1999, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of financial statements that
which is the representation of management. We have not audited or reviewed the
accompanying financial statements and, accordingly, do not express an opinion or
any form of assurance on them.
Thomas J Harris, CPA
April 29, 1999
Seattle, Washington
55
58
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 1999 and 1998
ASSETS
March 31, March 31,
1999 1998
---------- ----------
ASSETS
Current Assets
Cash in Bank 4,549 0
Receivables from and advances to properties 61,444 0
Prepaid Expenses 0 0
---------- ----------
Total Current Assets 65,993 0
---------- ----------
Fixed Assets: Net 0 0
---------- ----------
Other Assets
Goodwill 60,000 0
---------- ----------
Total Other Assets 60,000 0
---------- ----------
TOTAL ASSETS 125,993 0
========== ==========
LIABILITIES
Current Liabilities
Accounts Payable 103,095 0
Accrued Payroll & Payroll Taxes 52,095 0
---------- ----------
Total Current Liabilities 155,190 0
---------- ----------
Long Term Debt
---------- ----------
Total Long Term Debt 0 0
---------- ----------
Other Liabilities
Excess liabilities from discontinued operations 0 568,957
Due to Stockholders 1,032,695 1,173,695
---------- ----------
Total Other Liabilities 1,032,695 1,742,652
---------- ----------
TOTAL LIABILITIES 1,187,885 1,742,652
---------- ----------
STOCKHOLDER'S EQUITY
Common Stock 490,000,000 shares authorized, no par value,
6,950,285 issued and outstanding 3,059,639 2,679,639
Retained Earnings (deficit) (4,121,531) (4,422,291)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (1,061,892) (1,742,652)
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 125,993 0
========== ==========
The accompanying notes are an Integral part of these financial statements
56
59
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF NET INCOME(LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
March 31, March 31,
1999 1998
----------- -----------
REVENUES
Management fees $ 68,890 $ 0
----------- -----------
EXPENSES:
Payroll & payroll taxes $ 54,457
Insurance $ 7,522
Interest $ 0
Miscellaneous $ 2,279
Professional fees $ 39,961
Promotional $ 1,336
Rent $ 12,000
Repairs $ 1,270
Supplies $ 5,223
Telephone $ 3,257
Travel $ 9,284
Utilities $ 2,034
----------- -----------
Total Expenses $ 138,623 $ 0
----------- -----------
NET INCOME (LOSS) FROM OPERATIONS $ (69,733) $ 0
Loss from discontinued operations $ 0 $(1,840,324)
----------- -----------
NET INCOME (LOSS) $ (69,733) $(1,840,324)
=========== ===========
Primary earnings(loss) per share from operations $ (0.0271) $ 0.0000
=========== ===========
Primary earnings(loss) per share $ (0.0271) $ (0.7140)
=========== ===========
The accompanying notes are an Integral part of these financial statements
57
60
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
March 31, March 31,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) From Operations $ (69,733) $ 0
Increase (Decrease)
Due From Properties 6,736
Accounts Payable 87,574
Accrued Payroll & payroll taxes (26,996)
--------- ---------
Net cash Flow from operations $ (2,419) $ 0
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments on shareholder loans (141,000) 0
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common stock 170,000
--------- ---------
Net Cash Flows $ 26,581 $ 0
Cash Balance Beginning (22,032) 0
--------- ---------
Cash Balance Ending $ 4,549 $ 0
========= =========
All transactions of the discontinued operations have been excluded from this
statement.
The accompanying notes are an Integral part of these financial statements
58
61
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIODS ENDED MARCH 31, 1999 AND 1998
Total
Number Common Retained Stockholder
of Shares* Stock Earnings Equity
---------- ---------- ---------- ----------
Balance, March 31, 1997 485,285 2,679,639 (2,461,967) 217,672
Net loss (1,960,324) (1,960,324)
---------- ---------- ---------- ----------
Balance, March 31, 1998 485,285 2,679,639 (4,422,291) (1,742,652)
Shares issued in acquisition of TIM 6,250,000 0 0
Shares issued for cash 40,000 60,000 60,000
Net loss (48,464) (48,464)
Excess Liabilities of
Discontinued Operations 568,957 568,957
---------- ---------- ---------- ----------
Balance, December 31, 1998 6,775,285 2,739,639 (3,901,798) (1,162,159)
Shares issued for cash 100,000 170,000 170,000
Shares issued for services 75,000 150,000 150,000
Costs advanced for sale of common stock (150,000) (150,000)
Net loss (69,733) (69,733)
---------- ---------- ---------- ----------
Balance, March 31, 1999 6,950,285 3,059,639 (4,121,531) (1,061,892)
========== ========== ========== ==========
*=After 1 for 100 reverse split
The accompanying notes are an Integral part of these financial statements
59
62
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF THE COMPANY
Country Maid Financial, Inc. ("Company") was incorporated in April 1984 in the
State of Washington under the name Raywheel, Inc. The Company commenced
operations in Toledo, Ohio and moved its offices to Portland, Oregon in 1989.
The Company's name was changed to American Citadel, Inc. in December 1989. In a
transaction effective July 1, 1992 the Company merged with Country Maid Farms,
Inc. ("Farm") issuing 28,036,000 shares of its common stock to the shareholders
of Country Maid Farms, Inc. to acquire total ownership. The merger was accounted
of as a recapitalization of Country Maid Farms, Inc. and a reverse acquisition
of American Citadel, Inc. with Country Maid Farms, Inc. as the surviving
corporation. Stockholders' equity during 1993 was adjusted to reflect this
recapitalization.
In March 1994, American Citadel, Inc. name was changed to Country Maid Foods,
Inc. to signify its primary business of food production. Through its wholly
owned subsidiary, Country Maid Farms, Inc., the Company was engaged in the
production of poultry eggs for the domestic egg market and for the manufacture
of mayonnaise and other egg products. Country Maid Farms, Inc. contracts with
farms in Nebraska and Missouri.
Prior to the acquisition of Country Maid Farms, the Company had another
wholly-owned subsidiary, Security Bar, Inc., a Washington corporation ("Security
Bar") through which it conducted its business. Security Bar was sold to an
unrelated third party in December 1993.
The Company started a new corporation Country Maid Egg Products, Inc. ("Egg
Products"), a Nevada corporation, October 11, 1996. Egg Products is a wholly
owned subsidiary used to broker the Farm's eggs and operate a breaker plant
under a lease agreement with a third party. Egg Products primarily purchases
Farm's eggs.
In September 1998, the Company determined that the chicken egg business it was
conducting through its wholly-owned subsidiary Country Maid Farms, Inc., a
Nevada corporation was not profitable and did not generate sufficient income for
the Company. The Company had been unprofitable for the last several years and
had experienced significant losses during its operating history. The Company's
cash flows from operations have not been sufficient to fund its operating
activities. The Company determined that conventional financing was unavailable
to the Company at that time. In addition, management did not believe that an
equity or debt offering of its securities would succeed without a positive
change of the Company's business or an infusion of value into the Company
through a recapitalization. Therefore, management opted to dispose of the
subsidiary by distributing the assets for assumption of the underlying debt.
In September 1998, the name was changed to Country Maid Financial, Inc. upon the
Board's decision to enter management and financing in the lodging industry. The
Company's principal executive offices are in Lebanon, Oregon.
During the third quarter of 1998, the Company negotiated the terms of the Stock
Purchase Agreement dated September 30, 1998 ("Stock Purchase Agreement") for the
acquisition of Territorial Inns Management Inc. ("TIM"), a Nevada corporation.
The Directors of the Company determined that the acquisition of TIM provided the
potential for the Company to obtain significant assets and shareholder equity.
The Company acquired all of the issued and outstanding common stock of TIM
effective October
60
63
12, 1998 when TIM became a wholly owned subsidiary of the Company. As described
in Note 1 the Management decided to dispose of the Company's subsidiary, Country
Maid Farms, Inc. The disposition was completed by agreement with two of the
Company's shareholders who assumed all of the debt of the subsidiary in return
for its assets.
The Company, through its operating subsidiary TIM, is engaged in providing
management of motel properties for a fee and by acquiring operating leases with
options to purchase. TIM currently is in the process of acquiring several within
the next six months. The Company plans to continue to acquire motel operating
leases, with management agreements, and purchase options from motel owners
throughout the United States and potentially Canada. The Company has identified
certain motel properties that can be acquired at a value equivalent to 2.5 to
3.0 times the annual room gross revenue. The owners of these motels have
expressed a willingness to accept a purchase option payment of up to twenty
percent (20%) of the motel portfolio's current value and annual lease payments
in an amount equal to seven and one-fifth percent (7.2%) of the portfolio value.
The Company's management believes that these motel properties can be managed in
such a manner as to yield thirty-three percent (33%) of the annual gross room
revenue as net operating income of the Company.
The Board of Directors has changed the Company's fiscal year to the calendar
year January thru December.
DEFERRED INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement
No. 109 requires a change from the deferred method of accounting for income
taxes of APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method of Statement No. 109,
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. Under Statement No. 109, 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 date.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Earnings per share have been calculated as if the 1 for 100 reverse split had
been made as of the beginning of the fiscal year ended March 31, 1998. The
weighted average method for shares outstanding has been used to compute earnings
per share.
2. INCOME TAXES
As discussed in Note 1, the Company adopted Statement No. 109 in 1993 and has
applied the provisions of Statement No. 109 retroactively to July 1, 1989. The
cumulative effect of this change in accounting for income taxes had been applied
to July 1, 1990 retained earnings.
61
64
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 1999 are
presented below:
1999
-----------
Deferred Tax Assets:
Taxable (income)loss 57,733
Loss carryforward 3,889,798
-----------
TOTAL 3,947,531
-----------
Tax rate 34%
-----------
Deferred Tax Assets 1,342,161
Deferred Tax Assets Valuation Allowance (1,342,161)
-----------
NET DEFERRED TAX ASSET $ 0
-----------
Due to cumulative losses in recent years and the uncertainty of future earnings
the probability of deriving any benefits from the deferred tax asset is
unlikely. In addition the Tax Reform Act of 1986 severely reduces the
deductibility of these losses due to the changes in ownership discussed in Notes
1 and 12.
3. DISPOSAL OF COUNTRY MAID FARMS, INC.
As described in Note 1 the Management decided to dispose of the Company's
subsidiary, Country Maid Farms, Inc. The disposition was completed by agreement
with two of the Company's shareholders who assumed all of the debt of the
subsidiary in return for its assets. The sale is summarized as follows:
LIABILITIES:
Bank overdraft $ 1,870
Accounts payable 180,146
Accrued expenses 121,608
Long term debt 334,296
Other liabilities 461,000
----------
Liabilities assumed (including loans from shareholders) $1,098,920
----------
ASSETS:
Prepaid expenses 9,170
Fixed assets, net 272,243
Other assets 248,550
----------
Assets taken (book value) 529,963
Excess liabilities from discontinued operations $ 568,957
----------
The market value of the assets of Farms is not known but it is unlikely that the
value is anywhere near the total liabilities assumed by the shareholders.
The measurement date for the disposition of Farms is August 14, 1998 and the
disposal date is October 6, 1998.
62
65
4. ACQUISITION OF TERRITORIAL INNS MANAGEMENT, INC.
As described in Note 1 the Company acquired all of the outstanding stock of TIM.
The transaction is being accounted for as a pooling of interests as required by
APB Opinion No. 16, Business Combinations, as goodwill was recorded from this
transaction as follows:
Liabilities assumed $60,000
-------
Goodwill $60,000
-------
The Company issued 6,250,000 shares of common stock in the acquisition of TIM.
The major assets of TIM consisted of management contracts for eleven hotel
properties with gross annual receipts of approximately $10,600,000, of which
five percent (5%) is paid to the Company as management fees
5. RELATED PARTY TRANSACTIONS
Effective October 1, 1998 the Company began a five year lease for office space
from one of the Company's shareholders. The amount of the lease is $4,000.00 per
month.
At March 31, 1999, the Company had interest free advances from stockholders of
$1,032,695. Proceeds from the sale of common stock were used to pay some of the
loans to shareholders during the quarter ended March 31, 1999.
6. CONTRACTS
On or about November 9, 1998, the Company and Best Inns, Inc., a Kansas
corporation(Best Inns Kansas), executed a Letter of Intent which set forth the
terms for the Company to lease with an option to purchase nine Best Inns motel
properties to be effective, as amended by the parties, March 1, 1999. The terms
of the Letter of Intent provide that the Company receives the gross revenue
generated by the properties and pays to Best Inns a fixed annual lease payment
of $1,980,000 payable monthly, and the Company has an option to purchase the
properties for the total amount of $24,000,000. As consideration to Best Inns
for the option to purchase, the Company agreed to issue securities of the
Company with an aggregate value of $3,000,000.
On March 1, 1999, the outgoing management company of the nine Best Inns
properties voluntarily resigned and the Company assumed the operation of the
nine properties of Best Inns pursuant to the terms of the Letter of Intent. The
lenders for Best Inns Kansas and the Company are currently negotiating the
remaining terms of the final lease with option to purchase agreement.
63
66
ITEM 14
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no changes in or disagreements with accountants on
accounting or financial disclosure which fall within the scope of Item 304 of
Regulation S-K.
ITEM 15
FINANCIAL STATEMENTS AND EXHIBITS
LIST OF FINANCIAL STATEMENTS FILED AS PART OF
REGISTRATION STATEMENT
FISCAL YEARS ENDING DECEMBER 31, 1998 AND MARCH 31, 1998
Report of Independent Certified Public Accountants
Financial Statements (Audited)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
FIRST QUARTER ENDING MARCH 31, 1999
Report of Independent Certified Public Accountants
Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
64
67
LIST OF EXHIBITS AS REQUIRED BY
ITEM 601 OF REGULATION S-K
Exhibit
No. Description
------- -----------
3.1 Restated Articles of Incorporation
3.2 Bylaws
4.1 Specimen Common Stock Certificate
4.2 Certificate of Designation of Preferred Stock dated May 10, 1999
10.1 Form of Management Agreement of Territorial Inns Management,
Inc. (Schedule of Properties)
10.2 Form of Property Management Agreement of Territorial Inns
(Schedule of Terms of Agreements)
10.3 Property Management Agreement between Territorial Inns
Management, Inc. and JKLM and for Summer Hill Apartments,
Cotulla, TX
10.4 Stock Purchase Agreement dated September 30, 1998 between
Country Maid Financial, Inc. and Shareholders of Territorial
Inns Management, Inc.
10.5 Office Lease Agreement dated October 1, 1998, between Country
Maid Financial, Inc. and C. Richard Kearns and Dixie Kearns,
10.6 Stock Purchase Agreement dated October 6, 1998 between Country
Maid Farms, Inc. and C. Richard Kearns and John C. Moneymaker
10.7 Stock Redemption Agreement dated May 1, 1999 between Country
Maid Financial, Inc. and C. Richard Kearns
21.1 List of Company Subsidiaries
27.1 Financial Data Schedule
65
68
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
COUNTRY MAID FINANCIAL, INC.
(Registrant)
Date: By: /s/ C. Richard Kearns
-------------------------------------
C. Richard Kearns
-------------------------------------
Chief Executive Officer
66
69
EXHIBIT INDEX
Exhibit
No. Description Page
------- ----------- ----
3.1 Restated Articles of Incorporation 67
3.2 Bylaws 73
4.1 Specimen Common Stock Certificate 87
4.2 Certificate of Designation of Preferred Stock dated May 10, 1999 89
10.1 Form of Management Agreement of Territorial Inns Management,
Inc. (Schedule of Properties) 96
10.2 Form of Property Management Agreement of Territorial Inns
Management, Inc. (Schedule of Terms of Agreements) 104
10.3 Property Management Agreement between Territorial Inns
Management, Inc. and JKLM and for Summer Hill Apartments,
Cotulla, TX 111
10.4 Stock Purchase Agreement dated September 30, 1998 between
Country Maid Financial, Inc. and Shareholders of Territorial
Inns Management, Inc. 121
10.5 Office Lease Agreement dated October 1, 1998, between Country
Maid Financial, Inc. and C. Richard Kearns and Dixie Kearns, 136
10.6 Stock Purchase Agreement dated October 6, 1998 between Country
Maid Farms, Inc. and C. Richard Kearns and John C. Moneymaker 138
10.7 Stock Redemption Agreement dated May 1, 1999 between Country
Maid Financial, Inc. and C. Richard Kearns 147
21.1 List of Company Subsidiaries 154
27.1 Financial Data Schedule 155
67