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As Filed With the Securities and Exchange Commission on August 3, 1999
Registration No. 000-26267
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
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 Identification
Incorporation or Organization) 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
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None None
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 12(g) OF THE
SECURITIES EXCHANGE OF 1934 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 12(g),
MAY DETERMINE.
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TABLE OF CONTENTS
Page No.
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Item 1. Business 2
Item 2. Financial Information 20
Item 3. Properties 27
Item 4. Security Ownership of Certain Beneficial Owners and Management 28
Item 5. Directors and Executive Officers 29
Item 6. Executive Compensation 32
Item 7. Certain Relationships and Related Transactions 32
Item 8. Legal Proceedings 36
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters 37
Item 10. Recent Sales of Unregistered Securities 39
Item 11. Description of Registrant's Securities to be Registered 40
Item 12. Indemnification of Directors and Officers 43
Item 13. Financial Statements and Supplementary Data 45
Item 14. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 46
Item 15. Financial Statements and Exhibits 46
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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 the
management of seventeen motel properties and one apartment complex in eight
different states (Florida, Georgia, Illinois, Kansas, Missouri, Oregon, Texas
and Washington), the operation of a motel in Iowa under a lease agreement with
option to purchase, and the Company is negotiating to operate ten Select Inns.
See "Item 2. Financial Information-Management's Discussion and Analysis." The
Company plans to continue to obtain more motel operating leases with purchase
options from motel owners throughout the United States and potentially Canada.
The Company began a plan to lease economy scale motels from motel owners for an
annual lease payment of 7.2% of the annual gross revenue of the motel with an
option to purchase for the current value estimated at approximately two and
one-half to three times the annual gross revenue ("Current Estimated Value" or
"CEV") of the individual motel property. The consideration to be paid for the
option would be twenty percent (20%) of the motel's current value payable in the
form of convertible preferred stock of the Company. The Company's management
believes these motel properties can be operated to generate a net profit over a
period of twelve months, after all expenses of the property are paid, of
approximately thirty-three percent (33%) of the annual gross room revenue. The
diagram below shows the operating structure of the Company. 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.
THE COMPANY'S OPERATING STRUCTURE
[IMAGE]
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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 THE 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. 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 from American Citadel, Inc. 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 was a "pullet farm" (where chicks are raised from birth
until they begin producing eggs) and the other was a "layer farm" (where
egg-laying chickens are placed for the life of their egg production cycle).
Dakota Best, Inc. ("Dakota Best") was the original seller of the two farms
operated by Country Maid Farms, Inc. In 1997, after Country Maid Farms had
ceased its operation of the pullet farm, Country Maid Farms leased this farm to
Dakota Best, who made certain improvements to the property. Dakota Best claims
that the improvements made to the property were worth approximately $40,000 and
demanded that Country Maid pay this amount to Dakota Best. The fair market value
of the farm at that time was $5,000 to $10,000, which is calculated based on the
value of the land minus the cost of removal of the barns and chicken houses to
make the land ready to be used for other means. To the best of the officers'
knowledge, there was no market at the time for chicken farms in that area. The
Company had received a letter from an attorney representing Dakota Best
regarding the intent the file a claim. It was determined to be in the Company's
best interest to deed the farm to Dakota Best, Inc. and avoid any potential
litigation fees and expenses, which likely would exceed the fair market value of
the farm.
During the 1996 fiscal year, Country Maid Farms began marketing its
eggs to a breaker plant (where eggs are broken to extract the contents for
processing) operated by another wholly-owned subsidiary of the Company, Country
Maid Egg Products, Inc., a Nevada corporation. At the breaker plant, 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
the main source of revenue for Country Maid Farms at that time. The District
Court ruled in favor of another purchaser and the Company, which had few
alternatives at the time, ceased the egg processing business.
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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, a plan 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 of all of
the outstanding and issued shares of Territorial Inns Management, Inc., a Nevada
corporation, from its shareholders. 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 income producing assets and a lead
to the growing lodging industry, which had been generally successful in
increasing its revenue per available room ("RevPAR") since 1992, generating
increases in profit growth over the previous ten years. See "Item 1.
Business--Industry Information, Lodging Industry, `Total U.S. Lodging Industry
Estimated Revenue & Profitability'" 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 was 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 per
available room ("RevPAR"), which represents motel operating revenues divided by
the total number of rooms available (number of rooms available for rent
multiplied by the number of days in the reported period), has been steadily
increasing:
TOTAL U.S. LODGING INDUSTRY - ESTIMATED REVENUE & PROFITABILITY
AMOUNT PER AVAILABLE ROOM - 1992-1999(1)
1992 1993 1994 1995 1996 1997 1998 1999
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Revenue (2) $19.0 $19.5 $20.3 $21.1 $22.7 $24.3 $23.0-$25.0 $24.0-$26.0
Gop (3) 29.5% 30.5% 36.2% 37.0% 38.2% 40.2% 42.9% 43.0%
Pre-Tax Income (4) $ 0.0 $ 0.7 $ 1.7 $ 2.6 $ 3.7 $ 4.8 $ 5.6 $ 6.2
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(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.
(2) "Revenue" refers to Room Sales
(3) "GOP" refers to Gross Operating Profit
(4) Pre-tax income refers to earnings before federal and state taxes.
The United States lodging industry is generally comprised of two
sectors: full-service facilities and limited-service facilities. Full-service
lodging facilities generally have more extensive common areas (including
restaurants, lounges and extensive meeting room facilities), offer more services
such as bell service and room service, and tend to be larger in terms of number
of rooms than limited-service facilities. The properties operated by the Company
are principally limited-service type lodging facilities. The lodging industry is
also categorized into five general price segments (based on relative pricing in
local markets): luxury, upscale, mid-price, economy, and budget. The Company's
properties fall into the economy and budget segments. Industry estimates
indicate that there are over 23,000 lodging facilities within the mid-price,
economy and budget segments.
The lodging industry has seen a significant increase in the
construction of new lodging facilities over the course of the past few years.
Management believes this increase is a result of the relative strength of the
United States' economy, which in turn has resulted in greater travel and
stronger operating performance of lodging facilities in general. The extent of
new supply that has occurred is expected to continue and may negatively impact
the Company's operating performance especially during the off-peak seasons.
OPERATING STRATEGY
MARKET FOCUS
Although the Company plans to retain in its portfolio the management
agreements based on a straight five-percent-of-gross-revenue basis, it will not
actively seek to increase this segment. According to management's calculation,
the net profit to the company is higher if the Company leases the motels and
retains the net revenue, after deductions of lease payments and expenses. The
Company also does not want the burden of substantial debt in the form of a
mortgage by acquiring the fee ownership interest of the motel properties. Based
on management's experience, the Company expects to generate, on the average, a
net profit of thirty-three percent (33%) of the total gross revenue of the motel
properties in its portfolio.
CAPITALIZATION OF EFFICIENT OPERATIONS
The Company seeks to maximize revenues by increasing the number of
properties managed and operated and through the delivery of quality
accommodations and motel services that result in satisfied, loyal guests. The
experience of the officers of the Company in the management of lodging
facilities may provide the Company with an advantage in controlling the elements
of operation, including increasing revenue per room over cost of service,
purchasing, hiring, and marketing to corporate and individual guests, all of
which are believed 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
experienced management skills with the ability to incorporate ownership issues
in its decision making, the Company aims to provide a full range of services to
motel owners and to operate facilities in its portfolio in a cost-effective
manner.
The Company believes the ownership and management of its properties
gives it certain competitive advantages over third party managed properties with
which it competes by being able to
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control all aspects of a lodging facility's operations and expenditures to
maintain such facilities. The Company also believes it has certain competitive
advantages over chain owned and operated properties because, as long as the
Company meets a franchisor's minimum requirements, it can tailor the services
and product offering of individual facilities without concerning itself with
national consistency.
Management of the Company's lodging facilities is coordinated from the
Company's corporate offices in Lebanon, Oregon. Day-to-day management, facility
renovation, human resources and training, purchasing of operating supplies and
sales and marketing are principally directed from the regional offices. The
executive level functions as well as accounting and payroll are also centralized
in the corporate office.
The Company utilizes advertising and marketing programs sponsored by
the various franchisers on both a national and regional basis. In addition, the
Company engages in a wide variety of sales and marketing activities at the local
market level including extensive individual sales calls, marketing blitzes and
involvement in local community activities.
SERVICE EMPHASIS
The Company strives to hire 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 SENIOR EXECUTIVE MANAGEMENT AND ON-SITE PERSONNEL
The Company's senior management team is experienced and has worked
together for an extended period of time to develop, operate and manage motel
properties. The executive management team of the Company consist of its Chief
Executive Officer, C. Richard Kearns; President, Ellis Stutzman, and Secretary
Mark Owen. Mr. Kearns has worked with Mr. Stutzman in the management of motel
properties since 1984, and with Mr. Owen since 1986. These officers have jointly
managed over 40 motel properties with as many as 30 properties at one time.
The Company provides hands-on training for site managers during which
the motel owner or the departing manager will initially 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 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
Twelve of the nineteen properties in the Company's portfolio are
franchises of national motel chains, one Best Western, two Select Inns and nine
Best Inns franchises. The Company has a Letter of Intent to lease ten more
Select Inns. 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
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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
The Company plans to increase the number of properties in the segment
of its portfolio that focuses on lease agreements 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 its strategy of obtaining
motel operating leases with purchase options will enable the Company to increase
the number of properties in its portfolio and, through efficient and effective
management, increase market penetration of the motel operating industry, which
in turn could increase 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 may enable the Company to provide a
competitive advantage over other management companies that do not offer such
purchase option terms to motel owners. The Company targets motel properties that
can be leased for an annual lease payment of 7.2% of the current estimated value
("CEV") based on approximately two and one-half to three times the annual gross
revenue of the property, with an option to purchase for a price equivalent to
the CEV. The consideration paid to the motel owner for the option would be
approximately twenty percent (20%) of the motel's CEV, payable at the
commencement of the lease, in the form of convertible preferred stock of the
Company. The Company's management believes these motel properties can be
operated to generate a net profit over a period of twelve months of
approximately thirty-three percent (33%) of the annual gross room revenue. See
"Item 1. Business--Risk Factors, Competition, and --Uncertain Tax Effects of
Lease" and "Item 11. Description of Registrant's Securities to Be Registered."
ABILITY TO MEET FINANCIAL OBLIGATIONS
The Company expects to generate sufficient income from the revenues of
the motel properties, on an average basis, to meet the operating expenses of the
properties. Other than the two shareholder loans currently outstanding, the
Company does not have plans to seek debt financing. The Company plans to conduct
a public offering of its common stock to raise approximately $3,000,000 for
working capital within the next twelve months.
LONG-TERM LEASE AGREEMENTS WITH PURCHASE OPTIONS
The Company's standard lease with option to purchase (the "Leases") is
generally on a long-term basis with rights of renewal in five-year increments up
to twenty years exercisable at the Company's election and the landlord's
consent, which should not be withheld unreasonably. Lease payments generally
will either consist of a fixed amount, payable monthly, with no additional rent
based on the gross revenue or of a straight percentage lease payment consisting
of twenty percent (20%) of the gross revenue of the property, calculated
monthly, without a fixed minimum payment. The Lease is a triple net lease that
requires the Company to pay all costs and expenditures of the motel property
including real estate taxes and salaries of employees, and to maintain the
leased motels in good condition and repair in conformity with all applicable
legal requirements. The motel owner is solely obligated to pay any outstanding
mortgages or liens on the property.
The Leases generally also provide that the Company is responsible for
obtaining adequate and standard insurance for the property 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.
The motel owner may terminate the Lease upon an event of default, which
includes the failure to remit lease payments and any other uncured default of
the terms of the lease, including: a) failure to
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maintain the casualty insurance requirements of the lease; b) failure to perform
the terms of the agreements and continuance of non-performance for a period of
30 days; c) the default of Landlord or Tenant beyond the specified cure period
of any other related Leases; d) any revocation or limitation of a material
license or permit for the lawful operation of the lodging facility; e) any
material representation or warranty made by the parties under the lease
agreement; and f) in the event that a party to the Lease files bankruptcy or a
proceeding is filed against the party seeking liquidation, reorganization,
arrangement, adjustment or composition of debts of the party. Upon a termination
due to an event of default, the Company will be liable for the payments that
would have been payable for the remainder of the unexpired term of the lease
along with other costs incurred by the landlord, 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.
An option to purchase contained in the lease allows the Company to
exercise the option to purchase the property for a fixed price determined on the
commencement date of the lease. The Company generally may elect to exercise this
option during the term of the Lease upon payment of the full price to motel
owners. As consideration for the purchase option, the motel owner receives
securities of the Company, generally a designated number of shares of preferred
stock, convertible into the common stock of the Company twelve months after the
date of issuance. The value of the preferred stock ("Subscription Price") as
agreed upon by the Company and the motel owner, 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 CEV at the
commencement of the lease. The preferred stock 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")
based on 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. Some motel
owners may be given preferred stock 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. Generally, the nature and
amount of dividends, if any, is determined by agreement between the Company and
the landlord determined on a case- by-case basis. The Company's decision to
grant dividends to the motel owners generally is based on whether there is some
added value received by the Company in the form of expected increase of revenues
not reflected in the past revenues of the motel property. For example, if a
freeway or convention center will be constructed near the motel property in the
near future, the past revenue of the motel will not accurately reflect the
potential added income. In such a circumstance, the Company may agree to give to
the landlords the additional consideration in the form of dividends on the
preferred stock until conversion. See "Item 11. Description of Registrant's
Securities to Be Registered."
EXERCISE OF PURCHASE OPTION
In general, the Company does not intend to exercise any option obtained
in the lease purchase agreements unless the landlord attempts to sell the
property to a third party that will not permit the Company to continue the
lease. In the event the Company does have to resort to exercising its option to
retain the operation of a certain motel, it will seek another buyer that will
continue to lease the motel to the Company. The purpose of the option is to
protect the Company's ability to retain the operation and earnings of a
profitable motel property without the burden of substantial indebtedness of a
significant mortgage. The price paid for the option is not credited toward the
actual purchase. The Company plans to pay one hundred percent (100%) of the
current estimated market value, calculated at 275% of the annual gross revenue
of the property.
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The limitation on when the option to purchase may be exercised depends
on the agreement made by the parties. In the lease that the Company entered into
effective July 1, 1999, the option is exercisable only during the last sixty
(60) days of the fourth five-year term of the lease.
MOTEL OWNERS
The Company believes that its long-term lease agreements 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. The
motel owners generally receive from the Company a consideration for the grant of
the option in an amount equal to about twenty percent (20%) of the current
estimated value ("CEV") of the property in the form of preferred stock of the
Company. To the extent the transaction qualifies under the Internal Revenue
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. 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. Although free exchanges may be available to motel
owners under IRC Section 1031, the motel owners targeted by the Company
generally do not want to remain in operation of a motel property or any other
income property. In a tax-free 1031 exchange, the motel owner will be required
to purchase another property of equal or greater value than the motel, which
likely will be another income property. The Company concedes that certain motel
owners who wish to change location or motel property may choose a 1031 exchange
over the long-term lease agreement with option to purchase, however, the Company
is generally targeting the group of owners that want to retire or eliminate the
responsibilities of operating an income property. See "Item 1. Business--Risk
Factors, Uncertain Tax Effects of Leases and Dependence on Management Agreements
and On Certain Motel Owners" and "Item 11. Description of Registrant's
Securities to Be Registered."
THE COMPANY'S PORTFOLIO
LONG-TERM LEASED PROPERTIES
Southfork Motel: Effective July 1, 1999, the Company entered into a
Lease Agreement with Option to Purchase the Southfork Motel located in
Bloomfield, Iowa. The lease provides for monthly lease payments calculated at
twenty-percent (20%) of the gross revenue of the motel. The lease grants the
Company an option to purchase the property at the price of $650,000 exercisable
only during the last sixty (60) days of the fourth five-year term of the lease.
The Company agreed to grant 650 shares of Class C Preferred Stock, without
dividend, valued at a Subscription Price of $130,000, convertible to the same
value of common stock twelve months from the date of issuance.
The Southfork motel currently subleases the on-site restaurant to a
third-party and the Company has assumed all rights and obligations of the
sublease. The Company receives $1,200 in monthly rental payments which is
included as part of the gross revenue of property used to calculate the monthly
lease payments payable to the motel owner.
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 to purchase
nine Best Inns motel properties. 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.
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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 on a straight management basis of
five percent (5%) of the gross revenue to the Company. The lenders for Best Inns
Kansas and the Company are currently negotiating the remaining terms of the
agreement. Due to unsatisfactory management by the previous management Company
of the nine Best Inns, the underlying lender, whose approval is required,
imposed an additional condition that Territorial Inns Management, Inc.
satisfactorily manage the nine properties for a period of at least six (6)
months prior to approval. The reason for the lender's concern is that the
revenue of the properties is directly related to their fair market value. The
lender believes that the aggregate fair market value of the properties based on
their total revenue during the previous management company's operation was less
than the remaining principal loan amount. In the first four months since the
Company began the management of these motels, the properties have consistently
increased their aggregate revenues by approximately ten percent (10%) or $70,000
per month, which, according to the Company, should be sufficient to secure the
underlying loan amount.
PROPERTIES UNDER 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'
behalf up to a limit amount of $5,000.
SUMMARY OF PORTFOLIO
The following table sets forth, as of July 31, 1999, certain
information with respect the properties in the Company's portfolio:
Under Lease Agreement with Option to Purchase
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Southfork Motel 22 Rooms
Junction 2 & 63 South
P.O. Box 195
Bloomfield, IA 52537
Under Management Agreement / No Lease (5% fee)
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Select Inn 91 Rooms Willow Springs 44 Rooms
100 Bulldog Blvd. 5 "B" Street
Borger, TX 79007 Cheney, WA 99004
Village Inn 27 Rooms Nendels Inn & Suits 60 Rooms
1110 W. Fm 468 2523 E. Wyatt Earp Blvd.
Cotulla, TX 78014 Dodge City, KS 67801
Nendels Inn 106 Rooms Select Inns 37 Rooms
2811 West 2nd Ave. Rt. 1 Box 60
Kennewick, WA 99336 Tulia, TX 79088
Colonial Motor Inn 53 Rooms Summer Hill Apartments 28 Units
1405 North 1st St. 1110 W. Fm 468
Yakima, WA 98901 Cotulla, TX 78014
(Apartment Complex)
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Under Management Agreement Terms (5% fee) / Lease Agreement with Option to Purchase in Negotiation
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Best Western I-35 Inn 78 Rooms Best Inns 91 Rooms
4014 Miller St. 1529 West Walnut Ave.
Bethany, MO 64424 Dalton, GA 30720
Best Inns 83 Rooms Best Inns 110 Rooms
1209 North Keller Dr. 8220 Dix Ellis Trail
Effingham, IL 62401 Jacksonville, FL 32256
Best Inns 116 Rooms Best Inns 104 Rooms
1255 Franklin Rd. 2700 W. DeYoung
Marietta, GA 30067 Marion, IL 62959
Best Inns 153 Rooms Best Inns 75 Rooms
222 S. 44th St. 2738 Graves Rd.
Mt. Vernon, IL 62864 Tallahassee, FL 32303
Best Inns 89 Rooms Best Inns 107 Rooms
31 N. Green Bay Rd. 1905 W. Market St.
Waukegan, IL 60085 Bloomington, IL 61701
COMPETITION IN THE LODGING INDUSTRY
The lodging industry is highly competitive. The Company's operation of
motel properties competes with other national limited and full-service
management and acquisition companies for agreements with motel owners.
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 competes with other
lodging facilities for a wide range of business and leisure travelers who seek
quality accommodations and demand reasonable prices. Due to the nature and
location of the Company's lodging facilities, the Company does not experience
any significant degree of advance bookings typical with many resort or
destination locations nor does any one customer represent a significant portion
of the Company's revenues.
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
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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.
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 steadily grow as it acquires more motel properties in its portfolio.
See "Item 1. Business" 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.
GOVERNMENT REGULATIONS
The Company is subject to environmental regulations under various
federal, state and local laws. Certain of these laws may require a current or
previous owner or operator of real estate to clean up designated hazardous or
toxic substances or petroleum product releases, such as gasoline, that may
contaminate the properties from an adjacent business. In addition, the owner or
operator may be held liable to a governmental entity or to third parties for
damages or costs incurred by such parties in connection with the contamination.
Certain of the Company's lodging facilities are located on, adjacent to
or in the vicinity of, properties, including gasoline stations, that contain or
have contained storage tanks or that have engaged or may in the future engage in
activities that may release petroleum products or other hazardous substances
into the soil or groundwater.
While there can be no assurance that in the future the foregoing
environmental conditions may not have a material effect on the Company,
management is not aware of any such materially adverse impacts to the Company
due to the existence of contaminants under or near its properties. Except as
described above, management is not aware of any environmental condition with
respect to its lodging facilities that could have a material adverse impact on
the Company's financial condition or results of operations.
The Company's lodging facilities are subject to various other laws,
ordinances and regulations. The Company believes that each facility has the
necessary permits and approvals required to enable the Company to operate its
lodging facilities.
The Company's lodging facilities must comply with Title III of the
Americans with Disabilities Act (the "ADA"). Under the provisions of the ADA,
the Company, as owner of the lodging facilities, is obligated to reasonably
accommodate the patrons of its facilities who have physical, mental or other
disabilities. In addition, the Company is obligated to ensure that alterations
to its lodging facilities conform to the specific requirements of the ADA
implementing regulations. The Company believes that
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it is in substantial compliance with all current applicable regulations with
respect to accommodations for the disabled.
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 July 31, 1999, the Company had approximately nineteen (19)
full-time employees and forty (40) 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.
HISTORY OF SUBSTANTIAL LOSSES; NO ASSURANCE OF PROFITABILITY
In the past three fiscal years, the Company has suffered substantial
losses and had not reached profitability as of the first quarter of 1999. The
Company incurred a net loss of $48,464 for the fiscal year ending December 1998.
For the fiscal year ended March 31, 1998, the net loss from the discontinued
operations of Country Maid Farms was $1,960,324. See "Item 2. Financial
Information." In the first three months of 1999, the Company's gross revenue was
$68,890 and the operating expenses were $138,623. The Company's auditor has
indicated that the Company will continue as a going concern. There can be no
assurance that the Company will be successful in addressing these risks or that
the Company can be
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operated profitably, which depends on many factors, including the ability to
obtain long-term lease agreements with options to purchase, the success of the
Company's business plan and the ability to control operating expense levels of
the motel properties.
POSSIBLE UNDERCAPITALIZATION AND NEED FOR FUTURE FINANCING
In order to continue its operating and growth strategies, the Company
plans to seek equity financing in the form of a public offering of its common
stock up to $3,000,000 within the next twelve months. If the Company is unable
to obtain financing, there can be no assurance that the Company will be able to
successfully 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. Management has indicated that it will act in
accordance with the best interests of future shareholders. 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, but are not limited to: (i) changes
in general and local economic conditions; (ii) varying levels of demand for
accommodations and related services; and (iii) changes in travel patterns and
seasonality.
Changes in Economic Conditions: Changes in general and economic
conditions may be affected by many factors such as sudden increase of labor
supply, local weather disasters, regional crisis, and population growth. Any
significant change in any of these factors may negatively affect the revenue of
an individual property.
Varying Demands: Consumers of the lodging facilities managed by the
Company may for any number of reasons change their demand for the style and
level of service provided by the Company's motel properties. The Company does
not have a research department or a set structure to detect trends of travelers
or other consumers of motel services. The inability to prepare for sudden
changes may delay the response needed to upgrade or otherwise change the
services to meet consumer demands.
Seasonality: The lodging industry is seasonal in nature depending on
the travel patterns of consumers. Quarterly earnings vary drastically from high
to low seasons. The Company expects the peak season for its motel properties to
be July and August which is generally generating revenues at 2 1/2 times the low
season of December and January, while the revenues of remaining months are
average amounts between the high and low.
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 a
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motel property may be subjected to high capital gains tax (and/or income tax
from the recapture of depreciation) 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 independent
auditor conducting an annual audit of the Company; such a determination is 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 in the
Financial Statements of the Company and not as 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 AND ENTRY INTO NEW MARKET SEGMENT
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 related to lodging services, such as restaurants, gift
shops, and long distance communications. The Company intends to continue to
pursue an aggressive growth
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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.
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 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.
The Company's prospects also must be considered in light of the risks,
expenses and difficulties frequently encountered by companies attempting to
penetrate a new segment of an industry. 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. Adding 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 entered into, terminated, and renegotiated in
the ordinary course of the Company's business. The loss of one or several
management agreements or leases and the timing of achieving incremental revenues
from additional motels 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.
The Company's Chief Executive Officer and Director, C. Richard Kearns,
who currently owns approximately thirty-two percent (32%) 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."
Additionally, the Company's Chief Executive Officer, C. Richard Kearns
has ownership interests in nine of the nineteen properties currently in the
Company's portfolio and John C. Moneymaker, a director, is a licensed real
estate agent. Officers and directors of the Company may engage in other
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business activities similar or indirectly related to those engaged in by the
Company. To the extent that such officers and directors engage in such other
activities, they will have possible conflicts of interest in diverting
opportunities to other companies, entities or persons with which they are or may
be associated or have an interest, rather than direct such opportunities to the
Company. Such potential conflicts of interest include, among other things, the
time, effort and corporate opportunity involved in their participation in other
business transactions. The Company may be adversely affected should these
individuals choose to place their other business interests before those of the
Company.
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. The foregoing could give rise to conflicts of interest
where the terms of the Stock Redemption Agreement may increase the number of
shares available for sale under Rule 1444 of the Act at an earlier time than if
the same shares are held by Mr. Kearns. See "Item 7. Certain Relationships and
Related Transactions."
RISKS ASSOCIATED WITH LEASING REAL ESTATE
The Company is planning to lease motels on a long-term lease basis with
purchase options. Accordingly, the Company will be subject to varying degrees of
risk generally related to leasing real estate. These risks include, among
others, changes in national or local economic conditions, local real estate
market conditions affecting the viability of the motel based on the
reasonableness of the fixed lease payment versus the cost of operation and
income from the region and liability for long-term lease obligations as follows:
Maintenance and Refurbishment Expenses: For the Southfork Motel, the
Company is obligated to remodel, redecorate, refurnish or recondition the motel
rooms, lobby and hallways to the extent of ten percent (10%) of the value
thereof, meaning that at the end of ten (10) years, all of said motel rooms
shall have been refurnished, reconditioned, remodeled (or repaired) to the
extent of one hundred percent (100%) of the value of the same at the beginning
of said ten year period. Other leases that have not yet been finalized will
likely contain similar terms of maintenance and refurbishment requirements. The
Company will be required use a material portion of operating income for to meet
these maintenance and refurbishment requirements which will vary from month to
month.
Event of Default: The events that constitute default under the
Southfork Motel lease effective as of July 1, 1999 include: failure to maintain
the casualty insurance requirements of the lease; failure to perform the terms
of the agreements and continuance of non-performance for a period of 30 days;
the default of the motel owner or the Company beyond the specified cure period
of any other related leases; any revocation or limitation of a material license
or permit for the lawful operation of the lodging facility; any material
representation or warranty made by the parties under the lease agreement; and in
the event that a party to the lease files bankruptcy or a proceeding is filed
against the party seeking liquidation, reorganization, arrangement, adjustment
or composition of debts of the party.
The Company expects all other leases to be negotiated and entered into
to contain similar provisions of default. In the event that a default occurs,
the lease agreement may be terminated and the Company will lose its ability to
continue to generate income, and may be obligated to pay damages to the motel
owner.
Additional risks include inclement regional weather conditions, the
potential for uninsured casualty and other losses, the impact of present or
future tax and environmental legislation and
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compliance with environmental laws, and adverse changes in zoning laws and other
regulations, many of which are beyond the control of the Company.
SIGNIFICANT LEASE EXPENSES AND 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 lease payment obligations and
other operating expenses 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 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 July 30, 1999, the Company's Chief Executive Officer and
Director, C. Richard Kearns, beneficially owned approximately thirty-two percent
(32%) of the outstanding shares of the Company's common stock and the Company's
officers and directors collectively owned an aggregate of approximately fifty
percent (50%) 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 competitive. There are no substantial barriers to initial
entry, and the Company expects competition to persist, intensify and increase in
the future. 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, including, but not limited to, the dependence on the lodging
industry and the inability to offset losses from one industry to another. The
Company currently does not have the resources to diversify its operations to
benefit from the possible spreading of risks. In the event that the lodging
industry is at a downturn, the Company may not be able to sustain sufficient
operating income to meet its obligations and expenses which directly affect the
marketability and value of the shareholders' interest.
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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.
Without an environmental investigation, the Company is unable to
ascertain whether or not it will be held jointly or severally liable for either
current or prior owned contaminated properties. 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.
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 July 31, 1999, 6,713,843 of the 6,950,771 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, 245,551 were issued on or before July 30, 1998,
and may be currently eligible for resale in the open
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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.
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 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 and balance sheet
data of the Company for the fiscal years ended March 31, 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.
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YEAR ENDED YEAR ENDED
December 31, March 31,
1998(1) 1998
---------- ----------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Management revenues 37,515 --
Other revenues 0 0
Total revenues 37,515 0
Operating expenses:
General and administrative expenses
85,979 --
Total operating expenses 85,979 --
Operating loss (48,464) --
Other income(loss) 0 0
Net loss (48,464) (1,960,324)
CONSOLIDATED BALANCE SHEET DATA:
Current assets 68,180 0
Net fixed assets 0 0
Stock holdings 0 0
Other assets 60,000 0
Total assets 128,180 0
Current liabilities 116,644 0
Long-term debt 0 0
Other liabilities 1,173,695 1,742,652
Total liabilities 1,290,339 1,742,652
Shareholders' equity (1,162,159) (1,742,652)
Total liabilities and shareholders' equity 128,180 0
Primary Earnings (loss) per share (.02) (.76)
(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 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.
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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 depreciation) 0
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 (0.03)
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 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.
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As of July 1, 1999, the Company began operating a motel property in
Iowa under a lease agreement with option to purchase. The Company receives all
the income of the property and pays to the landlord twenty percent (20%) of the
total monthly income as lease payments.
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 July
31, 1999, there were agreements to operate nineteen properties in TIM's
portfolio. See "Item 1. Business--The Company'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 has entered into one long-term lease agreement with option
to purchase effective July 1, 1999 and plans to continue to enter into such
agreements with 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
steadily as more lease agreements are obtained.
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 expansion of the
Company's operating strategy. The Company had assumed 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 add 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."
LIQUIDITY AND CAPITAL RESOURCES
Since October 1998, the Company has partially financed its operations
and capital expenditure requirements through income from the management of
properties and partially through private offerings of common stock. During the
last quarter of 1998, the Company received $37,515 as management fees
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and had raised $60,000 from an individual accredited investor, Richard L.
Johnson, who is not an affiliate of the Company. 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. The Company has entered into Letters of Intent
to lease nine (9) Best Inns and ten (10) Select Inns. The Company expects to
close the lease transaction with Select I.A., Inc. in the third quarter of 1999
and Best Inns by December 1999. The aggregate income of those properties exceeds
the amount of estimated operating expenses anticipated by the Company at this
time. The Company expects the positive cash flow to steadily increase as the
total number of properties managed and leased by the Company increases. 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 lease
ten motel properties located in Minnesota, North Dakota, South Dakota and
Wisconsin from Select I.A., Inc., to close in the third quarter of 1999. 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 no dividends, 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 Select
I.A., Inc. 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.
The Company has been managing nine Best Inns for a management fee of
five percent (5%) of gross revenue of the property until the lease with option
to purchase is approved by the underlying lender for the nine properties.
Closing is expected by the end of 1999. In the event that the Company and the
motel owners 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 $1,053,695 at March 31, 1999. See
"Item 7. Certain Relationships and Related Transactions--Shareholder Loans."
The Company anticipates future operations and capital expenditures to
be funded by private and public offerings of the Company's stock and the revenue
received from the operations of the motel properties. The auditor indicated that
the Company will continue as a going concern. The going concern was based on the
discontinued egg business operated by Country Maid Farms, a subsidiary which
since has been sold to two principal shareholders of the Company. Management
does not believe that the concern is applicable to its current business and
expected financial results. The Company expects to generate sufficient
management fees and operating income from properties to sustain the expenses. As
the Company increases the number of properties under its operation and profit,
doubt as to whether the Company will continue is expected to decrease.
EARNINGS (LOSS) PER SHARE
The Company's net loss per share at fiscal year end December 31, 1998
was ($.02), while the net loss per share for the fiscal years ended March 31,
1997 and March 31, 1996 were ($.00) and ($.01),
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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 (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
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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 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.
5. The Company expects to have all computers Y2K Compliant by
November 1999. The cost of updating the computers is estimated
to be $65,000. Additionally, the Company is implementing
policies throughout the motel properties requiring that all
records be backed-up in paper format. Since the Company's
business is not computer related and only a number of the
currently managed properties are utilizing computers for
reservation and accounting, the Company believes that a
back-up system for these records will be adequate. However,
the Company did not conduct independent reviews of third-party
systems, such as those used by utility companies or emergency
government agencies that may affect the failure of the
services.
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
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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 nineteen 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."
Under Lease Agreement with Option to Purchase (with management provision)
- -------------------------------------------------------------------------
Southfork Motel 22 Rooms
Junction 2 & 63 South
P.O. Box 195
Bloomfield, IA 52537
Under Management Agreement / No Lease (5% fee)
- ----------------------------------------------
Select Inn 91 Rooms Willow Springs 44 Rooms
100 Bulldog Blvd. 5 "B" Street
Borger, TX 79007 Cheney, WA 99004
Village Inn 27 Rooms Nendels Inn & Suits 60 Rooms
1110 W. Fm 468 2523 E. Wyatt Earp Blvd.
Cotulla, TX 78014 Dodge City, KS 67801
Nendels Inn 106 Rooms Select Inns 37 Rooms
2811 West 2nd Ave. Rt. 1 Box 60
Kennewick, WA 99336 Tulia, TX 79088
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Colonial Motor Inn 53 Rooms Summer Hill Apartments 28 Units
1405 North 1st St. 1110 W. Fm 468
Yakima, WA 98901 Cotulla, TX 78014
(Apartment Complex)
Under Management Agreement Terms (5% fee) / Lease Agreement with Option to Purchase in Negotiation
- --------------------------------------------------------------------------------------------------
Best Western I-35 Inn 78 Rooms Best Inns 91 Rooms
4014 Miller St. 1529 West Walnut Ave.
Bethany, MO 64424 Dalton, GA 30720
Best Inns 83 Rooms Best Inns 110 Rooms
1209 North Keller Dr. 8220 Dix Ellis Trail
Effingham, IL 62401 Jacksonville, FL 32256
Best Inns 116 Rooms Best Inns 104 Rooms
1255 Franklin Rd. 2700 W. DeYoung
Marietta, GA 30067 Marion, IL 62959
Best Inns 153 Rooms Best Inns 75 Rooms
222 S. 44th St. 2738 Graves Rd.
Mt. Vernon, IL 62864 Tallahassee, FL 32303
Best Inns 89 Rooms Best Inns 107 Rooms
31 N. Green Bay Rd. 1905 W. Market St.
Waukegan, IL 60085 Bloomington, IL 61701
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.
(1) (2) (3) (4)
Title Name and Address Shares Percentage
of Class of Beneficial Owner Beneficially Owned(1) of Class(2)
-------- ------------------- --------------------- -----------
Common Stock C. Richard Kearns(3) 2,192,751 31.55
2500 South Main Street
Lebanon, OR 97355
Common Stock John C. Moneymaker 323,595 4.66
1930 E. Meadowmere
Springfield, MO 65807
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(1) (2) (3) (4)
Title Name and Address Shares Percentage
of Class of Beneficial Owner Beneficially Owned(1) of Class(2)
-------- ------------------- --------------------- -----------
Common Stock Terrence J. Trapp 550,000 7.91
274 Snyder Mtn. Rd.
Evergreen, CO 80439
Common Stock Ellis Stutzman 220,000 3.17
2500 South Main Street
Lebanon, OR 97355
Common Stock Mark D. Owen 220,000 3.17
2500 South Main Street
Lebanon, OR 97355
Common Stock Thomas J. Krueger 990,000(5) 14.24
522 Diving Hawk Trail
Madison, WI 53713
Common Stock All Officers and Directors 3,506,346 50.45
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 July 30, 1999.
(2) Percentage of beneficial ownership is based upon 6,950,771 shares of common
stock outstanding as of July 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 July 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. 986,157 shares of
the Company's common stock were redeemed by the Company and will be issued
pursuant to the Stock Redemption Agreement effective May 1, 1999. See "Item
7. Certain Relationships and Related Transactions--Stock Redemption
Agreement."
(3) The Company entered into a Stock Redemption Agreement, effective May 1,
1999, with Mr. Kearns to redeem up to 2,500,000 shares of the common stock
of the Company from Mr. Kearns, of which, 2,000,000 had been redeemed as of
July 30, 1999. 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
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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:
NAME AGE POSITIONS AND OFFICES HELD WITH THE COMPANY
----------------- -- --------------------------------------------------------
C. Richard Kearns 52 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, during which time he directed the operation of the egg business of Country
Maid Farms. Mr. Moneymaker 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 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.
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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 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.
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.
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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, 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 options
with contingencies which were never met to the individual shareholders of
Country Maid Farms.
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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 was a "pullet farm" (where chicks are raised from birth
until they begin producing eggs) and the other was a "layer farm" (where
egg-laying chickens are placed for the life of their egg production cycle).
Dakota Best, Inc. ("Dakota Best") was the original seller of the two farms
operated by Country Maid Farms, Inc. In 1997, after Country Maid Farms had
ceased its operation of the pullet farm, Country Maid Farms leased this farm to
Dakota Best, who made certain improvements to the property. Dakota Best claims
that the improvements made to the property were worth approximately $40,000 and
demanded that Country Maid pay this amount to Dakota Best. The fair market value
of the farm at that time was $5,000 to $10,000, which is calculated based on the
value of the land minus the cost of removal of the barns and chicken houses to
make the land ready to be used for other means. To the best of the officers'
knowledge, there was no market at the time for chicken farms in that area. The
Company had received a letter from an attorney representing Dakota Best
regarding the intent the file a claim. It was determined to be in the Company's
best interest to deed the farm to Dakota Best, Inc. and avoid any potential
litigation fees and expenses, which likely would exceed the fair market value of
the farm.
During the 1996 fiscal year, Country Maid Farms began marketing its
eggs to a breaker plant (where eggs are broken to extract the contents for
processing) operated by another wholly-owned subsidiary of the Company, Country
Maid Egg Products, Inc., a Nevada corporation. At the breaker plant, 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
the main source of revenue for Country Maid Farms at that time. 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.
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.
The Board of Directors did not obtain a fairness opinion for the sale
of Country Maid Farms to the Company's two principal shareholders. The assets of
Country Maid Farms consisted of a real estate property that may increase in
value in time. Other than the assumption of the outstanding liabilities of the
Country Maid Farms in the estimated amount of $271,648.80, no other cash
consideration was received by the Company.
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 an operating plan to improve its results of operations by
entering 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
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the acquisition of Territorial Inns Management, Inc., a Nevada corporation
("TIM") with the shareholders of TIM.
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 the sole 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 existing and potential 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. The transaction substantially diluted the
interests of the shareholders of record prior to the acquisition. There was no
independent review as to whether the value of the assets of TIM was reasonably
worth 6,250,000 shares of common stock of the Company. These assets generated
$37,515 as management revenue during the last quarter of 1998 and $68,890 in the
first quarter of 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, at $2.00 per share, to certain creditors of Mr. Kearns who are
public and private lenders who are not in any way affiliated with the Company.
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
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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.
Although the number of outstanding shares will not change and therefore
the current shareholders will not suffer a dilution, the creditors who are
receiving shares from this offering may be able to sell their stock under Rule
144, subject to its requirements, one year after the date of issuance. If the
shares were held by Mr. Kearns as an affiliate, the holding period for the
purposes of Rule 144 is two years from the date of issuance. Mr. Kearns'
interest in releasing his obligations to the creditors may conflict with the
interest of the Company and the shareholders in having less unrestricted stock
outstanding as long as possible as the price of the stock increases.
PRINCIPALS' OWNERSHIP INTEREST IN CERTAIN MOTELS
The Chief Executive Officer and Chairman of the Board, C. Richard
Kearns, is a partner in the ownership of six 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.
The ownership interests of the officers and directors of the Company
may affect the decisions of the Company to pursue management fees from them.
Furthermore, the officers and directors may be in a position where their
ownership interests of the motels will conflict with the interests of the
Company in the event that they receive an offer to sell their properties. The
owners' interest in making a profit from the sale will directly affect the
Company's portfolio and profitability.
REAL ESTATE BROKER COMMISSION
The Company retained Southeast International Hotel Brokers Company
("Southeast"), a motel brokerage company, to assist the Company in the search
and negotiation of potential motel properties to be leased by the Company.
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. Mr. Moneymaker will
receive a commission for the consummation of the lease agreement with option to
purchase the Southfork Motel equal to four percent (4%) of the option purchase
price of $650,000, payable monthly for a period of thirty-six months.
A conflict of interest will arise between Mr. Moneymaker's interest in
closing certain lease transactions to receive a commission and his duty as the
Company's director in determining whether the transaction will be in the best
interest of the Company. Furthermore, since Mr. Moneymaker's fee is
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determined by the amount of the purchase option price of the motel, an agreement
for a higher option price will directly benefit Mr. Moneymaker personally.
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 former operating subsidiary Country Maid Farms. As of
March 31, 1999, the total amount due to Mr. Kearns and Mr. Moneymaker was
$1,032,695. One payment of $120,000 was made toward the balance of the loan in
March 1999 to Mr. Kearns.
The Board of Directors has approved a repayment of the shareholder
loans out of the net operating income of the Company to begin after all
operating expenses are paid. Interest is to accrue at 8% per annum, beginning
July 1, 1999. Furthermore, in the event that the Company does not make the
payments to the shareholders, the shareholders would have a cause of action
against the Company.
PRINCIPAL OFFICE LEASE
Effective October 1, 1998, the Company entered into a lease agreement
with its Chief Executive Officer, C. Richard Kearns, and his spouse 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 did not
seek independent evaluation of the location of the principal office and a
determination whether the $4,000 monthly lease payment is fair market value. Mr.
Kearns also operates his personal business out of the same office. In the event
that the Company has not made the rental payments to Mr. Kearns, he may be
entitled to take eviction or other legal actions against the Company.
LIMITED COMPANY POLICY ON CONFLICTS OF INTEREST
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 Company desires the directors to minimize
and resolve conflicts by putting their fiduciary responsibility to the
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 majority of directors not involved in 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 could be obtained from unaffiliated 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.
ITEM 8
LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no material legal
actions pending against the Company.
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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 high bid was 7.00 and the low bid was 1.50. 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 ten shares of common stock owned to all of
its shareholders of record as of April 7, 1999.
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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 July 31, 1999, 6,713,843 of the 6,950,771 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 245,551 were issued on or before July 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 July 31, 1999, there were no outstanding stock options or
warrants for the Company's securities.
NO ASSURANCE OF ESTABLISHED PUBLIC TRADING MARKET
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 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.
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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 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:
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(a) (b) (c) (d)
Date, Amount, Title Purchasers/Target Class Consideration Exemption
------------------- ----------------------- ------------- ---------
June 15, 1996 One non-affiliate person Shareholder relation Section 4(2) of
500,000 Common services Securities Act of 1933
September 3, 1996 Two non-affiliate corporation $3,000,000 Section 4(2) of
1,500,000 Common(1) 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 Territorial Stock-for-stock Section 4(2) of
6,250,000 Common Inns Management, Inc.(2) exchange (Acquisition Securities Act of 1933
of TIM) and
Rule 506
February 19, 1999 One accredited non-affiliate $60,000 Rule 506
40,000 Common person ($1.50 per share)
February 4, 1999 One non-affiliate corporation Shareholder relations Section 4(2) of
75,000 Common services Securities Act of 1933
March 22, 1999 One accredited non-affiliate $50,000 Rule 506
40,000 Common person ($1.25 per share)
April 5, 1999 One non-affiliate person Retainer for Section 4(2) of
150,000 Common shareholder relations Securities Act of 1933
services
March 22, 1999 One accredited non-affiliate $50,000 Rule 506
40,000 Common person ($1.25 per share)
March 23, 1999 One accredited non-affiliate $120,000 Rule 506
60,000 Common person ($2.00 per share)
(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.
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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 July 31, 1999 there were 6,950,771 shares of common stock
outstanding which were held of record by 242 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 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 July 30,
1999, there were 650 shares of Class C Preferred Stock agreed to be issued
pursuant to the Lease Agreement with Southfork, Inc. 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
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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.
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
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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 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.
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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 July 31, 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.
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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
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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
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LIST OF EXHIBITS AS REQUIRED BY
ITEM 601 OF REGULATION S-K
Exhibit No. Description
- ----------- -----------
3.1(1) Restated Articles of Incorporation
3.2(1) Bylaws
4.1(1) Specimen Common Stock Certificate
4.2(1) Certificate of Designation of Preferred Stock dated May 10,
1999
10.1(1) Form of Management Agreement of Territorial Inns Management,
Inc. (Schedule of Properties)
10.2(1) Form of Property Management Agreement of Territorial Inns
Management, Inc.(Schedule of Terms of Agreements)
10.3(1) Property Management Agreement between Territorial Inns
Management, Inc. and JKLM and for Summer Hill Apartments,
Cotulla, TX
10.4(1) Stock Purchase Agreement dated September 30, 1998 between
Country Maid Financial, Inc. and Shareholders of Territorial
Inns Management, Inc.
10.5(1) Office Lease Agreement dated October 1, 1998, between Country
Maid Financial, Inc. and C. Richard Kearns and Dixie Kearns,
10.6(1) Stock Purchase Agreement dated October 6, 1998 between Country
Maid Farms, Inc. and C. Richard Kearns and John C. Moneymaker
10.7(1) Stock Redemption Agreement dated May 1, 1999 between Country
Maid Financial, Inc. and C. Richard Kearns
10.8 Lease with Option to Purchase dated June 28, 1999 between
Southfork, Inc. and Territorial Inns Management, Inc.
10.9 Letter of Intent for Lease with Option to Purchase dated
October 20, 1998 from Territorial Inns Management, Inc. to
Best Inns, Inc.
10.10 Letter of Intent for Lease with Option to Purchase dated March
3, 1999 from Territorial Inns Management, inc. to Select I.A.,
Inc.
10.11 Letter of Intent for Stock Purchase dated March 9, 1999 from
Company to Select I.A., Inc.
21.1(1) List of Company Subsidiaries
27.1(1) Financial Data Schedule
(1) Previously filed as an Exhibit to the Form 10 filed with the SEC on
June 4, 1999.
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COUNTRY MAID FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND DECEMBER 31, 1998
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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
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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
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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
Gain on Disposition of Discontinued Operations 568,957 0
Loss From Discontinued Operations $ 0 $(1,960,324)
NET INCOME (LOSS) $ 520,493 $(1,960,324)
Primary earnings(loss) per share from operations $ (0.02) $ 0.00
Primary earnings(loss) per share gain on disposition of discontinued operations $ 0.22 $ 0.00
Primary earnings(loss) per share from discontinued operations $ 0.00 $ (0.76)
Primary earnings(loss) per share $ 0.20 $ (0.76)
The accompanying notes are an Integral part of these financial statements
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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) $ 520,493 $(1,960,324)
Less Gain from Disposition of Discontinued Operations (568,957)
Increase (Decrease)
Decrease in Marketable Securities 1,039,703
Decrease in Accounts Receivable 94,397
Decrease in Inventories 489,132
Decrease in Prepaid Expenses 74,950
Decrease in Notes Receivable 4,300
Decrease in Accounts Payable (110,388)
Decrease in Short Term Loans (36,729)
Increase in Accrued Expenses 9,709
Decrease in fixed assets 0 62,387
Due From Properties (68,180)
Accounts Payable 15,521
Accrued Payroll & Payroll Taxes 19,091
----------- -----------
Net cash Flow From Operations $ (82,032) $ (332,863)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Long-term Debt 125,188
Increase in Due to Stockholders 273,298
Issuance of Common Stock 60,000
----------- -----------
Net Cash Flows from Financing Activities 60,000 398,486
=========== ===========
Net Cash Flows $ (22,032) $ 65,623
Cash Balance Beginning 0 $ (67,492)
-----------
Cash Balance Ending $ (22,032) $ (1,869)
=========== ===========
The accompanying notes are an Integral part of these financial statements
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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 income (loss) 520,493 520,493
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
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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. As described in Note 8 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
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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. This revenue is recognized on the accrual basis as the revenue is
recorded by the properties. With the additional income from Best Inns and Select
Inns (See Note 11) management expects that the cash flow from this revenue will
support operations for the next twelve months and on into the future.
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
Farms had a $1.4 million line of credit agreement with Continental Grain
Company. Interest at an annual rate of 4.9% was due monthly. Monthly principal
repayments were based on the age and number of flocks maintained. Draws were
limited based on
55
57
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 04/25/01 9.75% $2,000.00/mo. $ 61,481
Of Southern, MO
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
----------- -----------
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.
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58
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 (computed
as of the measurement date August 14, 1998):
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, the assets and liabilities of TIM
were as follows:
Accounts Payable $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. TIM was organized
shortly before the acquisition and had no operations as of the merger date.
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.
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59
All of the revenues received by the company as of December 31, 1998 were from
properties that were partly owned by the Company's majority shareholder. The
Company's major shareholder has a minority interest in all of the managed
properties.
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.
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60
COUNTRY MAID FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 1999 AND 1998
TABLE OF CONTENTS
Page
----
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
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61
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
========== ==========
These financial statements, in the opinion of management, include all
adjustments necessary for a fair presentation.
The accompanying notes are an Integral part of these financial statements
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62
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 $ (0.03) $ 0.00
Primary earnings(loss) per share gain on disposition of discontinued operations $ (0.03) $ 0.00
Primary earnings(loss) per share from discontinued operations $ 0.00 $ (0.71)
----------- -----------
Primary earnings(loss) per share $ (0.03) $ (0.71)
=========== ===========
These financial statements, in the opinion of management, include all
adjustments necessary for a fair presentation.
The accompanying notes are an Integral part of these financial statements
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63
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
========= =========
These financial statements, in the opinion of management, include all
adjustments necessary for a fair presentation.
The accompanying notes are an Integral part of these financial statements
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64
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 issuance of common stock (150,000) (150,000)
Net loss (69,733) (69,733)
---------- ---------- ---------- ----------
Balance, March 31, 1999 6,950,285 2,909,639 (3,971,531) (1,061,892)
========== ========== ========== ==========
*=After 1 for 100 reverse split
These financial statements, in the opinion of management, include all
adjustments necessary for a fair presentation.
The accompanying notes are an Integral part of these financial statements
63
65
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 12, 1998 when TIM became a wholly owned subsidiary of the
Company. As described in Note 6 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
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66
(33%) of the annual gross room revenue as net operating income of the Company.
This revenue is recognized on the accrual basis as the revenue is recorded by
the properties. With the additional income from Best Inns and Select Inns (See
Note 6) management expects that the cash flow from this revenue will support
operations for the next twelve months and on into the future.
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.
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.
65
67
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.
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, the assets and liabilities of TIM
were as follows:
Accounts Payable $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. TIM was organized
shortly before the acquisition and had no operations as of the merger date.
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.
Prior to March 1, 1999 all of the revenues received by the company were from
properties that were partly owned by the Company's majority shareholder. The
Company's major shareholder has a minority interest in all of the managed
properties. As of March 1, 1999 the Company began accruing management fees from
the Best Inns
66
68
properties. A total of $37,947 was accrued from Best Inns and $30,943 was
accrued from related properties for the period 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.
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69
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
68