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As Filed With the Securities and Exchange Commission on June 26, 2000
Registration No. 0-30730
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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
------------------- ------------------------------
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
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Page No.
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Item 1. Business 2
Item 2. Financial Information 23
Item 3. Properties 28
Item 4. Security Ownership of Certain Beneficial Owners and Management 30
Item 5. Directors and Executive Officers 31
Item 6. Executive Compensation 34
Item 7. Certain Relationships and Related Transactions 34
Item 8. Legal Proceedings 38
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters 38
Item 10. Recent Sales of Unregistered Securities 41
Item 11. Description of Registrant's Securities to be Registered 43
Item 12. Indemnification of Directors and Officers 46
Item 13. Financial Statements and Supplementary Data 47
Item 14. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 71
Item 15. Financial Statements and Exhibits 72
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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.
TIM purchased the assets of Territorial Inns Management, Inc., an
Oregon corporation ("TIM Oregon") effective October 12, 1998. TIM Oregon
suffered losses for the past three fiscal years in the amounts of $103,446 for
the nine-month period ending September 30, 1998, $39,780 for the fiscal year
ending December 31, 1997 and $175,337 for the fiscal year ending December 31,
1996. The Company suffered operating losses for the fiscal years ended December
31, 1998 and December 31, 1999 in the amounts of $48,464 and $121,454
respectively, and had a net loss of $66,582 for the three month period ended
March 31, 2000. During the fiscal years ended March 31, 1997, March 31, 1998,
and through September 30, 1998, the Company was in the business of the
production of poultry eggs for the domestic wholesale egg market, and for the
manufacture of mayonnaise and other egg products. The Company entered into the
lodging industry in the third quarter of 1998. SEE "Item 1. Business -
Development and Background.
The Company's portfolio currently consists of the management of
seventeen motel properties and one apartment complex in eight different states
(Florida, Georgia, Illinois, Iowa, Kansas, 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. Additionally, the
Company is currently managing a motel in Lawrence, Kansas with 60 economy scale
rooms with estimated gross revenues of $720,000 per year since March 1, 2000
under an oral management agreement until the long-term lease agreement can be
finalized between the parties. 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, whose per room price ranges from $27 to $59 (except in extraordinary
circumstances such as contract negotiated room rates or during unusually busy
events or seasons), 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.
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THE COMPANY'S OPERATING STRUCTURE
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COUNTRY MAID FINANCIAL, INC.
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|
---------------------------------
TERRITORIAL INNS MANAGEMENT, INC.
---------------------------------
|
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Management Agreements Lease Agreements with Option
to Purchase
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| |
- 5-year term renewable for
- 5-year term three additional terms
- 5% of Gross Revenue to TIM - Motel's current estimated
value is 275% of Annual
- All Expenses paid by Motel Gross Revenue
Owners
- Annual lease payments of 7.2%
of motel current estimated
value
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
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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 snowstorm that
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 to file a claim. The
Company's management determined that it was in the Company's best interest to
deed the farm to Dakota Best, Inc. and avoid any potential litigation fees and
expenses, which may have exceeded 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 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.
After a last attempt to restart the egg business by planning to market
gourmet eggs in 1998, a plan that 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 TIM effective October 12, 1998, for
the acquisition of all of the outstanding and issued shares of TIM 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, consisting of eleven motel management agreements, of TIM Oregon, which
was owned by the Company's Chief Executive Officer, C. Richard Kearns. See "Item
7. Certain Relationships and Related Transactions." TIM Oregon was formed in
April 1992 as a motel management company mainly in the northwest region,
operating up to thirty properties at one time. TIM Oregon suffered losses for
the past three fiscal years in the amounts of $103,446, $39,780, and $175,337.
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. Recent research showed that the lodging industry has
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."
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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)
(Thousands of Dollars)
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1992 1993 1994 1995 1996 1997 1998 1999
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Revenue $19.0 $19.5 $20.3 $21.1 $22.7 $24.3 $23.0-$25.0 $24.0-$26.0
GOP 29.5% 30.5% 36.2% 37.0% 38.2% 40.2% 42.9% 43.0%
Pre-Tax Inc $ 0.0 $ 0.7 $ 1.7 $ 2.6 $ 3.7 $ 4.8 $ 5.6 $ 6.2
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GOP - Percent of Revenue
(1) "Lodging Outlook," Smith Travel Research, endorsed by the American Hotel
and Motel Association, December 1998. It should be noted that Smith Travel
Research has not provided any form of consultation, advice or counsel
regarding any aspects of, and is in no way associated, with this
Registration Statement.
(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
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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 leasehold ownership and management of its
properties gives it certain competitive advantages over third party managed
properties with which it competes by being able to control all aspects of a
lodging facility's operations and expenditures to maintain such facilities.
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.
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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 consists 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 forty motel properties with as many as thirty 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
Eleven of the sixteen motel properties in the Company's portfolio are
franchises of national motel chains, two Select Inns and nine Best Inns
franchises. The Company has a Letter of Intent to lease ten more Select Inns.
See "Item 2. Financial Information - Management's Discussion and Analysis." The
franchisers of Select Inns and Best Inns provide marketing and a toll-free
reservation system for the motels. Customers have standard expectations and
familiarity with national franchises in certain regions. The motel franchisers
may also have agreements with suppliers and vendors for maintenance and
furnishings in which the individual motel franchise is invited to participate.
The motels are required to conform to the standards of the franchises. The fee
paid to the franchisers usually entails an enrollment fee and a fixed percentage
of the gross revenue of the motel thereafter payable on a monthly basis.
GROWTH STRATEGY
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."
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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 "Lease") 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 Lease generally also provides 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 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 Lease.
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. With certain exceptions where the exercise is
limited to a specified time period, the Company may elect to exercise this
option anytime 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"),
typically is 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
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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. 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 OPTIONS
The Company currently 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.
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. Some motel owners may choose to exchange their
properties 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.
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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 that are
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 sets 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.
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. Best Inns Kansas
proceeded with litigation in the Southern District of Illinois Federal Court
against the former management company for unsatisfactory management of the
properties. The case was settled and dismissed on April 11, 2000. The principal
of Best Inns, who is not an affiliate of the Company, is currently in
litigation with its franchiser on an issue not related to the Company. The
Company intends to continue the management of the nine (9) Best Inns based on
the oral agreement effective March 1, 1999. The Company does not plan to close
the lease transaction until the litigation matter is resolved.
PROPERTIES UNDER MANAGEMENT AGREEMENTS
The Company operates six 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 an amount of $5,000 per month.
SUMMARY OF PORTFOLIO
The following table sets forth, as of April 30, 2000, certain
information with respect the properties in the Company's portfolio:
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<PAGE> 12
<TABLE>
<CAPTION>
PROPERTY NUMBER OF ROOMS DATE CONSTRUCTED TERMINATION DATE
-------- --------------- ---------------- ----------------
<S> <C> <C> <C>
Under Lease Agreement with Option to Purchase
Southfork Motel 22 1982 June 30, 2004
Junction 2 & 63 South
P.O. Box 195
Bloomfield, IA 52537
Under Management Agreement / No Lease (5% fee)
Select Inn 91 1980 June 19, 2001
100 Bulldog Blvd.
Borger, TX 79007
Nendels Inn 106 1979 May 26, 2004
2811 West 2nd Ave.
Kennewick, WA 99336
Colonial Motor Inn 53 1972 May 26, 2004
1405 North 1st St.
Yakima, WA 98901
Willow Springs 44 1982 May 26, 2004
5 "B" Street
Cheney, WA 99004
Nendels Inn & Suites 60 1972 April 28, 2001
2523 E. Wyatt Earp Blvd.
Dodge City, KS 67801
Select Inns 37 1995 May 2002
Rt. 1 Box 60
Tulia, TX 79088
Summer Hill Apartments 28 (Units) 1977 May 26, 2004
1110 W. Fm 468
Cotulla, TX 78014
(Apartment Complex)
Under Management Agreement Terms (5% fee) / Lease Agreement with Option to Purchase in Negotiation
Best Inns 83 1984 (1)
1209 North Keller Dr.
Effingham, IL 62401
Best Inns 116 1988 (1)
1255 Franklin Rd.
Marietta, GA 30067
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
PROPERTY NUMBER OF ROOMS DATE CONSTRUCTED TERMINATION DATE
-------- --------------- ---------------- ----------------
<S> <C> <C> <C>
153 1982 (1)
Best Inns
222 S. 44th St.
Mt. Vernon, IL 62864
Best Inns 89 1986 (1)
31 N. Green Bay Rd.
Waukegan, IL 60085
Best Inns 91 1986 (1)
1529 West Walnut Ave.
Dalton, GA 30720
Best Inns 110 1984 (1)
8220 Dix Ellis Trail
Jacksonville, FL 32256
Best Inns 104 1981 (1)
2700 W. DeYoung
Marion, IL 62959
Best Inns 75 1985 (1)
2738 Graves Rd.
Tallahassee, FL 32303
Best Inns 107 1979 (1)
1905 W. Market St.
Bloomington, IL 61701
</TABLE>
(1) See "Item 2. Financial Information--Management's Discussion and Analysis,
Liquidity and Capital Resources."
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.
There are numerous other management companies who may compete 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.
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<PAGE> 14
The Company anticipates that competition within this industry segment
will increase in the foreseeable future. A number of the Company's competitors
are larger, operate more motels and hotels, and have substantially greater
financial and other resources than the Company. In addition, some of the
Company's competitors operate properties that have locations superior to those
of the Company's properties. Competitive factors in the lodging industry include
room rates, quality of accommodations, name recognition, service levels and
convenience of location. There can be no assurance that demographic, geographic
or other changes in markets in which the Company's properties are located will
not adversely affect the convenience or desirability of certain of the Company's
motels. Furthermore, there can be no assurance that new or existing competitors
will not significantly lower rates or offer greater conveniences, services or
amenities, or significantly expand or improve facilities in a market in which
the Company's motels compete, thereby adversely affecting the Company's results
of operations.
FINANCIAL INFORMATION
The Company's operations were 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 year ending 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 audited financial information provided for the fiscal year
ending December 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 December 31, 1998 and 1999, and the three
month period ended March 31, 2000, 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 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.
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<PAGE> 15
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 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 TIM. 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, TIM, incorporated in the state of Nevada in August 1998 and acquired
in October 1998. TIM markets, operates, maintains and provides the management
services for the Company. TIM employs all employees of the Company.
EMPLOYEES
As of April 30, 1999, the Company had approximately thirteen (13)
full-time employees and seventeen (17) 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.
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<PAGE> 16
HISTORY OF SUBSTANTIAL LOSSES; NO ASSURANCE OF PROFITABILITY
The Company had not reached profitability as of the three month period
ended March 31, 2000 and had suffered substantial losses in the previous three
fiscal years. For the three month period ended March 31, 2000, the Company's
gross revenues totaled $646,228, operating costs totaled $524,415, and expenses
totaled $188,395, which resulted in a net loss of $66,582 during the first
quarter of 2000. For the fiscal year ending December 31, 1999, the Company's
gross revenue was $1,943,345 and the operating costs and expenses were
$2,064,799 resulting in an operating loss of $121,454. For the fiscal year
ending December 31, 1998, the Company's gross revenue was $37,515. The Company
incurred $85,979 in expenses for an operating loss of $48,464, which was offset
by a $568,957 gain on discontinued operations of Country Maid Farms, resulting
in net income of $520,493 for the fiscal year ending December 31, 1998. For the
nine-month period ending September 30, 1998, TIM Oregon's gross revenue from
management fees was $180,539 and the operating expenses were $284,981, resulting
in an operating loss of $104,442. For the fiscal year ended December 31, 1997,
the Company's predecessor TIM Oregon's gross revenues from management fees were
$316,360 and its operating expenses were $347,666, which resulted in operating
losses of $31,306. See "Item 2. Financial Information." There can be no
assurance that the Company will be successful in addressing these risks or that
the Company can be operated profitably, which depends on many factors, including
the 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. The Company requires
additional capital until the Company can increase the number of properties in
its portfolio to a level that will efficiently use its resources and operate
profitably. If the Company cannot increase the number of properties in its
portfolio, it is unlikely that it will reach profitability without decreasing
the number of the Company's properties and employees. 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.
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<PAGE> 17
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 usually generates revenues at 2 1/2 times the low
season of December and January, while the revenues of remaining months range
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 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 determinative 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.
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<PAGE> 18
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 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 terms of the agreements do not restrict the motel owners from
selling the motels, nor do they require the continuance of the management
agreement subsequent to the sale as long as the notice periods are satisfied in
accordance with the terms of the agreement. As a result, the Company is subject
to the risk that a substantial number of the motels can be sold by the motel
owners within a short time frame, which may result in the Company's loss of a
significant amount of revenue. The Company is not subjected to these risks for
those properties that are leased and operated by the Company as a Tenant.
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The Company's Chief Executive Officer and Director, C. Richard Kearns,
who owns approximately twenty-eight percent (28%) of the Company's issued and
outstanding common stock as of April 30, 2000, has interests in five motels
managed by the Company. Nine of the sixteen 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 acquisitions,
renovation, development and other expansion opportunities. There can be no
assurance that the Company's relationships with motel owners and investors 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."
Motel Ownership Interests of CEO. The Company's Chief Executive Officer
and principal shareholder, C. Richard Kearns, has ownership interests in five of
the seventeen properties currently in the Company's portfolio. A conflict exists
between Mr. Kearns' interest in getting the lowest management fee possible for
his motels with adequate protections to him as a motel owner, and the interest
of the Company in obtaining a favorable management fee and terms. The Company
may be adversely affected in the event that Mr. Kearns uses his position and
influence to ensure that the terms are not enforced or to impose terms favorable
to his personal interests at the expense of the Company.
Real Estate Activities of Director. John C. Moneymaker, a director, is
a licensed real estate agent. Officers and directors of the Company may engage
in other 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.
Stock Purchase Agreement. During the second quarter of 1998, the
Company entered into a Stock Purchase Agreement effective October 12, 1998 for
the acquisition of TIM, of which C. Richard Kearns was a principal shareholder.
The assets of TIM consisted of eleven motel management agreements that were
purchased by TIM in a transaction effective September 28, 1998 from an Oregon
corporation, of which, 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, C.
Richard Kearns, was a principal shareholder owning approximately 57.6% of TIM As
of September 30, 1998, before the
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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, or 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 from an
independent third party for the acquisition of TIM. Although the shareholders of
the Company ratified the transaction at a duly noticed meeting of shareholders
on April 30, 1999, there was no independent review of the validity of the
reasons submitted by the Board of Directors to the shareholders. The lack of a
fairness opinion fails to comprehensively review the benefits and costs of the
transaction from an unbiased point of view. Such benefits and costs may include
the comparison between the benefits of adding the management agreements and the
lead into the lodging industry versus the dilution of the shareholders' interest
and the price paid for the assets of TIM.
Stock Redemption Agreement. In April 1999, the shareholders of the
Company approved a Stock Redemption Agreement wherein the Company would 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 investors who are creditors of Mr. Kearns. 2,000,000 shares have been
redeemed from Mr. Kearns and 1,769,968 have been issued as of April 30, 2000.
The remaining 230,032 shares are being held by the transfer agent to be issued
as the offering continues. 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 144 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."
INVESTMENT RISKS
In the event that any of the foregoing or any other transactions
involving a conflict of interest between the Company and its officers or
directors should result in detriments to the Company, the shares of the Company
may be substantially affected and the marketability and price of the securities
of the Company may decrease.
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
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<PAGE> 21
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 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 April 30, 2000, the Company's Chief Executive Officer and
Director, C. Richard Kearns, beneficially owned approximately twenty-eight
percent (28%) of the outstanding shares of the Company's common stock and the
Company's officers and directors collectively owned an aggregate of
approximately forty-five percent (45%) 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."
20
<PAGE> 22
COMPETITION
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 that directly affect the
marketability and value of the shareholders' interest.
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.
Federal and state laws also regulate the operation and removal of
certain underground storage tanks. 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
21
<PAGE> 23
securities from the issuer or from an affiliate of the issuer, and any resale
under the Rule. If a one-year period has elapsed since the date the securities
were acquired, the amount of restricted securities that may be sold for the
account of any person within any three-month period, including a person who is
an affiliate of the issuer, may not exceed the greater of one percent (1%) of
the then outstanding shares of common stock of the issuer or the average weekly
trading volume in the over-the-counter ("OTC") market during the four calendar
weeks preceding the date on which notice of sale is filed with the SEC. If a
two-year period has elapsed since the date the securities were acquired from the
issuer or from an affiliate of the issuer, a seller who is not an affiliate of
the issuer at any time during the three months preceding a sale is entitled to
sell the shares without regard to volume limitations, manner of sale provisions
or notice requirements.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET
As of April 30, 2000, 7,355,068 of the 7,706,896 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, 4,336,928 were issued on or before April 30, 1999,
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. Additionally, 230,032 shares are being held in reserve by the
transfer agent pursuant to the terms of the Stock Redemption Offering. See "Item
7. Certain Relationships and Related Transactions - Stock Redemption Agreement."
All or part of these shares may be reissued to C. Richard Kearns upon the close
of the offering if they are not redeemed by the Company, and may be eligible for
sale under Rule 144.
22
<PAGE> 24
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 December 31, 1999 and December
31, 1998, are derived from the Company's audited Financial Statements, of which,
the fiscal years ended December 31, 1999 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.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Management revenues 536,601 37,515
Other revenues 1,406,744 0
Total revenues 1,943,345 37,515
Operating costs 1,372,132 0
Operating expenses:
General and administrative expenses 692,667 85,979
Total operating costs and/or expenses 2,064,799 85,979
Operating loss (121,454) (48,464)
Gain on disposition from discontinued operations 0 568,957
Net income (loss) (121,454) 520,493
CONSOLIDATED BALANCE SHEET DATA:
Current assets 81,378 68,180
Net fixed assets 0 0
Stock holdings 0 0
Other assets 0 0
Total assets 81,378 68,180
Current liabilities 362,683 116,644
Long-term debt 0 0
Other liabilities 1,032,695 1,173,695
Total liabilities 1,395,378 1,290,339
Shareholders' equity (1,314,000) (1,222,159)
Total liabilities and shareholders' equity 81,378 68,180
Primary Earnings (loss) per share (.05) .08
</TABLE>
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, 2000, are derived
from the Company's unaudited first quarter 2000 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.
<TABLE>
<CAPTION>
INTERIM PERIOD ENDED
March 31, 2000 March 31, 1999
-------------------- --------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Management revenues 136,538 68,890
Other revenues 509,690 0
Total revenues 646,228 68,890
Operating costs and expenses:
Lease Payments 163,420 0
Direct costs 323,650 0
General and administrative costs 37,345 0
Expenses 188,395 138,623
Total operating costs and expenses 712,810 0
Net income (loss) from Operations (66,582) (69,733)
Net income (loss) (66,582) (69,733)
CONSOLIDATED BALANCE SHEET DATA:
Current assets 269,422 65,993
Net fixed assets -- --
Stock holdings -- --
Other assets 0 0
Total assets 269,422 65,993
Current liabilities 517,309 155,190
Long-term debt 0 0
Other liabilities 1,032,695 1,032,695
Total liabilities 1,550,004 1,187,885
Shareholders' equity (1,280,582) (1,121,892)
Total liabilities and shareholders' equity 269,422 65,993
Primary Earnings (loss) per share (0.01) (0.01)
</TABLE>
23
<PAGE> 25
TIM Oregon Financial Data
The following table sets forth certain selected consolidated financial
data for TIM Oregon. The selected statement of operations and balance sheet data
of TIM Oregon for the fiscal years ended December 31, 1994, December 31, 1995,
December 31, 1996, December 31, 1997, and the nine months ended September 30,
1998, are derived from TIM Oregon's audited Financial Statements.
<TABLE>
<CAPTION>
NINE
MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
September 30, December 31, December 31, December 31,
1998 1997 1996 1995
------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues:
Management revenues 181,891 251,189 240,866 229,091
Total revenues 181,891 251,189 240,866 229,091
Operating expenses:
General and administrative expenses
284,981 347,666 389,479 277,470
Total operating expenses 284,981 347,666 389,479 277,470
Operating income/loss (103,446) (31,306) (31,306) (48,379)
Other income (loss) 996 (8,474) (39,780) (15,458)
Net loss (103,446) (39,780) (175,337) (63,837)
CONSOLIDATED BALANCE SHEET DATA:
Current assets 1,254,233 1,154,026 957,493 608,811
Net fixed assets 9,6610 9,311 9,736 4,802
Total assets 1,263,894 1,163,337 967,229 613,613
Current liabilities 1,646,700 1,442,697 1,206,809 677,856
Long-term debt 0 0 0 0
Total liabilities 1,646,700 1,442,697 1,206,809 677,856
Shareholders' equity (382,806) (279,360) (239,580) (64,243)
Total liabilities and
shareholders' equity 1,263,895 1,163,337 967,229 613,613
Primary Earnings (loss) per share
(10.34) (3.98) (17.53) (6.38)
</TABLE>
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.
24
<PAGE> 26
OVERVIEW OF CURRENT OPERATIONS
As of March 31, 2000, the Company's revenues are derived mainly from
management fees paid for the operation of the motel properties and operating
revenues from the leased 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 revenue during the fiscal year ended December 31, 1999 was
$1,943,345, which is comprised of management fees of $536,601 and operating
revenues from the leases totaling $1,406,744. The total outstanding management
fees due and advances for costs and expenses to be reimbursed by the motel
owners as of December 31, 1999 was $81,378. During the three month period
ending March 31, 2000, revenues from management fees were $136,538 and
operating revenues were $509,690 totaling $646,228. During the same period, the
Company expended $524,415 in operating costs and $188,395 in expenses. The
outstanding management fees and advances for costs and expenses to be
reimbursed by the motel owners as of March 31, 2000 totaled $46,411.
The Company's first quarter earnings have been substantially lower
than the remaining quarters because of the seasonal nature of the lodging
industry. The Company experienced first quarter losses of $66,582 in 2000 and
$69,733 in 1999. Seasonal travel patterns of consumers impact the travel
industry. 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 usually generates revenues at 2 1/2 times the low season of December and
January, while the revenues of remaining months range between the high and low.
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
In September 1998, the Company entered an agreement to acquire 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.
TIM Oregon was the business of management of motel properties. TIM
Oregon focused on obtaining general management agreements with 5% of the gross
revenues management fees and earned gross revenues in 1994, 1995, 1996, 1997,
and for the interim period from January 1, 1998 through September 30, 1998, in
the respective amounts of $212,004, $229,091, $240,866, $316,360, and $180,539.
The Company changed the business model used by TIM Oregon to focus on
adding new properties in the Company's portfolio by acquisition of leases with
option to purchase. See "Item 1. Business - Growth Strategy." The Company has
added new properties to its portfolio since the acquisition of the properties
that were originally managed by TIM Oregon. There are currently sixteen motel
properties and one apartment complex in the portfolio. Additionally, the Company
has entered into negotiations to lease (with option to purchase) four motel
properties located in Lawrence, Kansas; Joplin, Missouri; Kellogg, Idaho; and
Plainview, Texas. The motel in Lawrence, Kansas with 60 economy scale rooms with
estimated gross revenues of $720,000 per year is already being operated by the
Company since March 1, 2000 under an oral management agreement while the Company
finalize the financing terms of the lease with the motel owners.
The Company anticipates bringing into its portfolio by the end of the
second quarter three more motel properties located in Joplin, Missouri
(95 rooms) with estimated gross revenues of approximately $800,000, Kellogg,
Idaho (61 rooms) with estimated gross revenues $646,000, and Plainview, Texas
(82 rooms), with estimated gross revenues of $936,000.
As of April 30, 2000, there were agreements to operate seventeen
properties in TIM's portfolio. See "Item 1. Business--The Company's Portfolio."
The management fees collected in the last quarter of 1998 totaled $37,515, and
the outstanding balance of receivables and advances to properties was $68,180.
The management fees and operating revenues collected in fiscal year 1999 totaled
$1,943,345 and the outstanding balance of receivables and advances for certain
operating costs of the properties to be reimbursed by the motel owners was
$81,378. During the three month period ended March 31, 2000, the Company
received management fees in the amount of $136,538 and $46,411 is due from motel
owners for costs and expenses advanced by the Company. The Company has entered
into one long-
25
<PAGE> 27
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, $302,929 for the fiscal year ended December 31, 1999
and $70,084 for the three month period ended March 31, 2000. The amounts for
1999 and 2000 represent a substantial increase from the 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 seventeen properties by
the end of 1999. As of April 30, 2000, the Company had thirteen (13) full-time
and seventeen (17) 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 financial demands of each property, and the revenue
generated from the motels that 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 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.
The Company's directors and principal shareholders loaned money during
the first the quarter of 2000 to support the operations of the Company and
anticipate to do so until the properties in negotiation bring sufficient revenue
for the company to meet the expenses of operation. Directors, C. Richard Kearns
Terrence Trapp loaned $120,000 and $110,000 respectively, to the Company in
January 2000.
During 2000, the Company anticipates the monthly revenue from
operations to steadily increase. The Company expects add four more properties
into its portfolio by the end of the second quarter the remaining located in
Lawrence, Kansas (60 rooms) with estimated gross revenues of $720,000 per year;
Joplin, Missouri (95 rooms) with estimated gross revenues of approximately
$800,000; Kellogg, Idaho (61 rooms) with estimated gross revenues $646,000; and
Plainview, Texas (82 rooms), with estimated gross revenues of $936,000. The
Company has also entered into Letters of Intent to lease nine (9) Best Inns and
ten (10) Select Inns. The company has preliminary approval from the lenders of
select Inns to close the lease transaction. The Company expects to close the
lease transactions with Select I.A., Inc. and Best Inns in the third quarter of
2000. The principal of Best Inns, who is not an affiliate of the Company, is
currently in litigation with its franchiser on an issue not related to the
Company. Since March 1, 1999, the Company has been managing nine Best Inns for a
management fee of five percent (5%) of the gross revenue of the property. The
Company intends to continue the management of the nine Best Inns based on the
oral agreement effective March 1, 1999. The Company does not plan to close the
lease transaction until the litigation matter is resolved. 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 2000. 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,
26
<PAGE> 28
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 underlying lender
for the nine properties approves the lease with option to purchase. Closing was
postponed due to litigation between Best Inns Kansas and the former management
company. 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, $81,378 at December 31, 1999, and $46,411 at March 31, 2000, which is
comprised of receivables of management fees and amounts due for advances to
properties.
During the fiscal year ended December 31, 1999, the Company reduced
related party debt from $1,173,695 at December 31, 1998 to $1,032,695 at
December 31, 1999. The principal amount of $1,032,695 remained unchanged as of
March 31, 2000. Interest has been accruing on this related party debt since July
1, 1999 at the rate of eight percent (8%) per annum. The shareholders have
waived payment until the Company is profitable. See "Item 7. Certain
Relationships and Related Transactions--Shareholder Loans."
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. In the event that
operating income does not meet the expenses of the Company, the Company will
conduct private offerings of the Company's stock to current shareholders or new
investors.
EARNINGS (LOSS) PER SHARE
The Company's net earnings (loss) per share for the period ending March
31, 2000 was ($0.01). The Company's net earnings(loss) per share for the fiscal
years ended December 31, 1999 and December 31, 1998, were ($0.05) and $0.08,
respectively. It should be noted that these figures were impacted by 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, and by the gain in the amount of
$568,957 recorded fiscal year end December 31, 1998, from the discontinued
operations when Country Maid Farms was sold.
The Company's predecessor TIM Oregon's net loss per share for the
nine-month period ended September 30, 1998 was ($10.34) and its net loss per
share for fiscal year ended December 31, 1997 was ($3.98).
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
27
<PAGE> 29
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.
ITEM 3
PROPERTIES
The Company, by and through its subsidiary, TIM, leases approximately
5,020 square feet for its executive offices located at 2500 South Main Street,
Lebanon, Oregon under a ten-year operating lease that commenced December 1999
and expires December 2009. TIM is required to notify the landlord in the event
of a change in the majority ownership of TIM. Written consent for the
continuation of the lease is required if majority ownership of TIM changes. The
Company pays rent in the amount of $3,125 each month.
The Company manages and operates a total of seventeen 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."
<TABLE>
<CAPTION>
NUMBER OF DATE TERMINATION
PROPERTY ROOMS CONSTRUCTED DATE
-------- --------- ----------- ---------------
<S> <C> <C> <C>
Under Lease Agreement with Option to Purchase
Southfork Motel 22 1982 June 30, 2004
Junction 2 & 63 South
P.O. Box 195
Bloomfield, IA 52537
Under Management Agreement / No Lease (5% fee)
Select Inn 91 1980 June 19, 2001
100 Bulldog Blvd.
Borger, TX 79007
Nendels Inn 106 1979 May 26, 2004
2811 West 2nd Ave.
Kennewick, WA 99336
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
NUMBER OF DATE TERMINATION
PROPERTY ROOMS CONSTRUCTED DATE
-------- --------- ----------- ---------------
<S> <C> <C> <C>
Colonial Motor Inn 53 1972 May 26, 2004
1405 North 1st St.
Yakima, WA 98901
Willow Springs 44 1982 May 26, 2004
5 "B" Street
Cheney, WA 99004
Nendels Inn & Suites 60 1972 April 28, 2001
2523 E. Wyatt Earp Blvd.
Dodge City, KS 67801
Select Inns 37 1995 May 2002
Rt. 1 Box 60
Tulia, TX 79088
Summer Hill Apartments 28 (Units) 1977 May 26, 2004
1110 W. Fm 468
Cotulla, TX 78014
(Apartment Complex)
Under Management Agreement Terms (5% fee) / Lease Agreement with Option to Purchase in Negotiation
Best Inns 83 1984 (1)
1209 North Keller Dr.
Effingham, IL 62401
Best Inns 116 1988 (1)
1255 Franklin Rd.
Marietta, GA 30067
Best Inns 153 1982 (1)
222 S. 44th St.
Mt. Vernon, IL 62864
Best Inns 89 1986 (1)
31 N. Green Bay Rd.
Waukegan, IL 60085
Best Inns 91 1986 (1)
1529 West Walnut Ave.
Dalton, GA 30720
Best Inns 110 1984 (1)
8220 Dix Ellis Trail
Jacksonville, FL 32256
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
NUMBER OF DATE TERMINATION
PROPERTY ROOMS CONSTRUCTED DATE
-------- --------- ----------- ---------------
<S> <C> <C> <C>
Best Inns 104 1981 (1)
2700 W. DeYoung
Marion, IL 62959
Best Inns 75 1985 (1)
2738 Graves Rd.
Tallahassee, FL 32303
Best Inns 107 1979 (1)
1905 W. Market St.
Bloomington, IL 61701
</TABLE>
(1) See "Item 2. Financial Information--Management's Discussion and Analysis,
Liquidity and Capital Resources."
The terms of the agreements do not restrict the motel owners from selling the
motels, nor do they require the continuance of the management agreement
subsequent to the sale as long as the notice periods are satisfied in accordance
with the terms of the agreement. As a result, the Company is subject to the risk
that a substantial number of the motels can be sold by the motel owners within a
short time frame which would result in the lose of a significant amount of
revenue. The Company is not subjected to these risks for those properties that
are leased and operated by the Company as a Tenant
ITEM 4
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 30,
2000 regarding the beneficial ownership 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.
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Title Name and Address Shares Percentage
of Class of Beneficial Owner Beneficially Owned(1) of Class(2)
------------ ------------------------ --------------------- -----------
<S> <C> <C> <C>
Common Stock C. Richard Kearns(3) 2,192,751(4) 28.45
2500 South Main Street
Lebanon, OR 97355
Common Stock John C. Moneymaker 323,595 4.20
1930 E. Meadowmere
Springfield, MO 65807
Common Stock Terrence J. Trapp 550,000 7.14
274 Snyder Mtn. Rd.
Evergreen, CO 80439
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Title Name and Address Shares Percentage
of Class of Beneficial Owner Beneficially Owned(1) of Class(2)
------------ ------------------------ --------------------- -----------
<S> <C> <C> <C>
Common Stock Ellis Stutzman 220,000 2.85
2500 South Main Street
Lebanon, OR 97355
Common Stock Mark D. Owen 220,000 2.85
2500 South Main Street
Lebanon, OR 97355
Common Stock Thomas J. Krueger 990,000(5) 12.85
522 Diving Hawk Trail
Madison, WI 53713
Common Stock All Officers and Directors 3,506,346 45.50
as a Group (5 persons)
</TABLE>
(1) Pursuant to applicable rules of the Securities and Exchange Commission,
"beneficial ownership" as used in this table means the sole or shared
power to vote shares (voting power) or the sole or shared power to dispose
of shares (investment power). Unless otherwise indicated the named
individual has sole voting and investment power with respect to the shares
shown as beneficially owned. In addition, a person is deemed the
beneficial owner of those securities not outstanding which are subject to
options, warrants, rights or conversion privileges if that person has the
right to acquire beneficial ownership within sixty days after April 30,
2000.
(2) Percentage of beneficial ownership is based upon 7,706,896 shares of
common stock outstanding as of April 30, 2000. For each individual,
this percentage includes common stock of which the individual has the
right to acquire beneficial ownership either currently or within sixty
days of April 30, 2000, 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.
(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 have been redeemed
from Mr. Kearns as of April 30, 2000 and 1,769,968 have been issued.
The remaining 230,032 shares are being held by the transfer agent to be
issued as the offering continues. 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 shareholders elect the directors. The officers of the
Company hold office at the discretion of the Board of Directors. There are
currently three directors who were elected for a three-year term at the
Company's annual meeting of shareholders held on April 30, 1999.
31
<PAGE> 33
The directors and executive officers of the Company and their
respective ages as of April 30, 2000 are as follows:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AGE HELD WITH THE COMPANY
---- --- ---------------------
<S> <C> <C>
C. Richard Kearns 52 Chief Executive Officer, Director, Chairman of the Board
John C. Moneymaker 52 Director
Terrence J. Trapp 51 Director
Ellis J. Stutzman 45 President
Mark D. Owen 36 Secretary/Treasurer, Director of Operations
</TABLE>
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 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. Since November 1999, Mr. Trapp has served concurrently on
the Board of Directors of IWBC.NET Corporation, an Internet service wholesale
telecommunications and distribution company. Since December 1999, Mr. Trapp has
also served as President of Network Services for Internet Direct International,
Inc. ("IDI"), whose business focuses on sales of international long distance
services. Mr. Trapp's responsibilities involve sales and marketing for IDI. 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
32
<PAGE> 34
1994 and the present, he has served as President of U.S. Communications
Unlimited, Inc., a telecommunications company. Since 1992, Mr. Trapp has owned
and operated Synergy Network Communications, Inc., a telecommunications company.
From February 1996 to November 1997, Mr. Trapp served as Vice-Chairman for
Skylink Telecommunications Corporation, where his responsibilities included
overseeing the sales and operations of its wholly-owned subsidiaries, "Comtel"
and "Skylink America, Inc." Mr. Trapp has also worked with the communications
divisions of McDonnell Douglas and Computer Sciences Corporation.
Ellis J. Stutzman. Mr. Stutzman has served as President of the Company
and TIM since October 1, 1998. He provides daily management and analysis for all
properties and supervises management and accounting staff in the corporate
office. Mr. Stutzman has over fifteen years of experience in hospitality
management and is a licensed real estate agent in the State of Oregon. Between
1973 and 1983, Mr. Stutzman was a real estate agent for Dan Stutzman Real Estate
where he gained experience in real estate development, appraisal, office
management, and income generation for both commercial and residential
properties. He also served on the Executive Board of the Linn-Benton Title
Company. Between 1983 and 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.
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.
33
<PAGE> 35
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 years ended December 31,
1999 and December 31, 1998. The Company made no compensation to the executive
officers during the fiscal years ending March 31, 1998, 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
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
SECURITIES
FISCAL ANNUAL COMPENSATION UNDERLYING
NAME AND YEAR ---------------------- STOCK OPTIONS/
PRINCIPAL POSITION ENDING SALARY OTHER AWARDS WARRANTS
----------------------- ------------ ------ --------- ------ ------------
<S> <C> <C> <C> <C> <C>
C. Richard Kearns(1) Dec. 31, 1998 $0.00 $1,814.17 -(2)
Chief Executive Officer
Dec. 31, 1999 $7,256.65
</TABLE>
----------
(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
34
<PAGE> 36
reverse stock split effective October 9, 1998) shares and options with
contingencies that were never met to the individual shareholders of Country Maid
Farms.
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 snowstorm that 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, the Company received
no other cash consideration.
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 Company
developed an operating plan to improve its results of
35
<PAGE> 37
operations by entering into the hospitality industry. During the second quarter
of 1998, the Company through a Stock Purchase Agreement effective October 12,
1998 ("Stock Purchase Agreement") acquired 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. TIM purchased these
management agreements 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 owning 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.
STOCK REDEMPTION AGREEMENT
As of April 30, 1999, Mr. Kearns, Chief Executive Officer and Chairman
of the Board of the Company, beneficially owned approximately 4,192,751 shares
of common stock of the Company, which constituted 52.83% of the Company.
With the approval of the Board of Directors and the shareholders, the
Company entered into a Stock Redemption Agreement with Mr. Kearns, effective May
1, 1999. The Company agreed to conduct an offering of up to 2,500,000 shares of
its common stock to certain creditors of Mr. Kearns 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 was redemption of common
stock owned by Mr. Kearns equal to the number of shares sold. The Company did
not receive any cash consideration. The Stock Redemption Agreement provided
additional consideration to the Company, in exchange for the Company's agreement
to pay the costs of the offering, in the form of the redemption of an additional
10,000 shares of common stock from Mr. Kearns. The Company issued
1,769,968 shares, which reduced
36
<PAGE> 38
the number of shares beneficially held by Mr. Kearns to 2,192,751 constituting
approximately 28% of the issued and outstanding shares of the Company's
common stock.
As a result of the Stock Redemption Agreement, the number of
outstanding shares did not change and therefore the current shareholders did not
suffer an immediate dilution. The creditors who received 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 Mr. Kearns, as an
affiliate of the company, held the shares, 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 five motels managed by the Company, one
of which is Willow Springs in Cheney, Washington.
Mr. Kearns is a partner of Territorial Inns, an Oregon partnership,
which is the managing member of Lodging Hospitality Associates LLC ("LHA LLC")
and claims title ownership of Colonial Motor Inn, Yakima, Washington and Nendels
Inn, Kennewick, Washington. LHA LLC is the tenant of Select Inn, Tulia, Texas,
also managed by the Company. LHA LLC ia also a tenant of Select Inn, Borger,
Texas that is co-owned by John C. Moneymaker, a director of the Company.
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
and the relationship is non-exclusive. 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 that 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 is receiving a commission for the consummation of
the lease agreement with option to purchase the Southfork Motel equal to three
percent (3%) of the option purchase price of $650,000, payable monthly for a
period of thirty-six months. As of April 30, 2000, Mr. Moneymaker had received a
total of $4,000 in commission payments with regard to the Southfork Motel.
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 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
37
<PAGE> 39
subsidiary Country Maid Farms. As of April 30, 2000, the total
principal 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. Mr. Terrence Trapp, a director of the Company, loaned $110,000 to the
Company in January 2000.
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 began accruing at 8% per annum on July 1,
1999. The Company has not been able to make the payments to
the shareholders. The shareholders have waived payment until the Company
becomes sufficiently profitable to make the payments after all expenses have
been paid.
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.
ITEM 9
MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to being delisted in October 1999, the Company's common stock
traded 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 three most recent fiscal years 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.
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<PAGE> 40
QUARTERLY COMMON STOCK PRICE RANGES(1)
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Period: Fiscal Year ending March 31, 1998
First Quarter ending June 30, 1997 10.00 6.00
Second Quarter ending Third September 30, 1997 7.50 3.00
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 Third June 30, 1998 3.00 2.50
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
Second Quarter ending Third June 30, 1999 4.0 2.375
Quarter ending September 30, 1999 3.125 1.9375
Fourth Quarter ending December 31, 1999(3) 2.25 .25
Period: Fiscal Year ending December 31, 2000
First Quarter Year ending December 31, 2000 .75 .25
</TABLE>
(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.
(3) Fourth quarter 1999 and first quarter 2000 figures were provided by the
Company based on The National Quotation Bureau, LLC "Pink Sheets".
The number of holders of record of the Company's common stock as of
April 30, 2000 was 271 shareholders inclusive of those brokerage firms and/or
clearinghouses 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,
2000 was 7,706,896 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.
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
39
<PAGE> 41
securities from the issuer or from an affiliate of the issuer, and any resale
under the Rule. If a one-year period has elapsed since the date the securities
were acquired, the amount of restricted securities that may be sold for the
account of any person within any three-month period, including a person who is
an affiliate of the issuer, may not exceed the greater of one percent (1%) of
the then outstanding shares of common stock of the issuer or the average weekly
trading volume in the over-the-counter ("OTC") market during the four calendar
weeks preceding the date on which notice of sale is filed with the SEC. If a
two-year period has elapsed since the date the securities were acquired from the
issuer or from an affiliate of the issuer, a seller who is not an affiliate of
the issuer at any time during the three months preceding a sale is entitled to
sell the shares without regard to volume limitations, manner of sale provisions
or notice requirements.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET
As of April 30, 2000, 7,355,068 of the 7,706,896 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, 4,336,928 were issued on or before April 30, 1999
and may be currently eligible for resale in the open market, if any, in
compliance with Rule 144. The sale in the public market of these shares of
restricted common stock under Rule 144 may depress prevailing market prices of
the common stock.
OUTSTANDING OPTIONS AND WARRANTS
As of April 30, 2000, there were no outstanding stock options or
warrants for the Company's securities.
NO ASSURANCE OF ESTABLISHED PUBLIC TRADING MARKET
Upon the effectiveness of this Registration Statement, the Company will
be trading common stock 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 that
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. The NASD has adopted
certain regulatory changes that affect both issuers and market makers. The
effect on the OTC Bulletin Board cannot be determined at this time. The
Company's securities are not included on the OTC Bulletin Board and do not
qualify for NASDAQ until the Company is in compliance with Rule 6530 and other
listing requirements. Quotes for the Company's 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.
Upon the effectiveness of this Registration Statement, the Company 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 be
listed by the NASD or the OTC Bulletin Board or thereafter delisted for failure
to timely file any periodic report. The Company's failure to be effectively
registered or timely file the required periodic reports 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.
40
<PAGE> 42
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
will be 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 April 30, 1997 through April 30, 2000:
<TABLE>
<CAPTION>
(a) (b) (c) (d)
Date, Amount, Title Purchasers/Target Class Consideration Exemption
------------------- ----------------------- ------------- ---------
<S> <C> <C> <C>
December 18, 1998 Shareholders of Stock-for-stock Section 4(2) of
6,250,000 Common Territorial Inns exchange Securities Act of 1933
Management, Inc.(1) (Acquisition and
of TIM) Rule 506
February 19, 1999 One accredited non- $60,000 Rule 506
40,000 Common affiliate person ($1.50 per share)
February 4, 1999 One non-affiliate Shareholder Section 4(2) of
75,000 Common corporation relations services Securities Act of 1933
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
(a) (b) (c) (d)
Date, Amount, Title Purchasers/Target Class Consideration Exemption
------------------- ----------------------- ------------- ---------
<S> <C> <C> <C>
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)
July 29, 1999 Eleven accredited (2) Rule 506
1,013,843 Common non-affiliate persons;
Twelve non-accredited
non-affiliate persons;
One accredited non-affiliate
trust;
One non-accredited
non-affiliate trust
August 11, 1999 One non-accredited (2) Rule 506
144,124 Common non-affiliate person
September 9, 1999 Two non-affiliate entities; (2) Rule 506
512,001 Common one accredited non-affiliate
trust; three non-accredited
non-affiliate persons
November 2, 1999 One non-accredited, (2) Rule 506
100,000 Common non-affiliate person
</TABLE>
(1) Pursuant to the Stock Purchase Agreement whereby the Company acquired all
of the outstanding and issued common stock of 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, and Candy
Johnson, all of who are directors and/or employees of the Company. The
remaining shareholders of TIM were not affiliated with the Company.
(2) In April 1999, the shareholders of the Company approved a Stock Redemption
Agreement wherein the Company would 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 investors
who are creditors of Mr. Kearns. 2,000,000 shares have been redeemed from
Mr. Kearns and 1,769,968 have been issued as of April 30, 2000. The
remaining 230,032 shares are being held by the transfer agent to be issued
as the offering continues. The foregoing could give rise to
42
<PAGE> 44
conflicts of interest where the terms of the Stock Redemption Agreement
may increase the number of shares available for sale under Rule 144 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."
ITEM 11
DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of up to
four hundred and ninety million (490,000,000) shares of common stock, no par
value. Each share has the same rights, privileges and preferences. Holders of
the shares of common stock have no preemptive rights to acquire additional
shares or other subscription rights. The shares of common stock are not subject
to redemption provisions or future calls by the Company. All outstanding shares
of common stock are fully paid and nonassessable.
The holders of shares of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of shareholders. They
are not entitled to cumulate their votes for the purpose of electing directors
of the Company. Holders of common stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of legally available
funds.
In the event of liquidation, dissolution, or winding-up of the Company,
either voluntarily or involuntarily, the holders of the outstanding shares of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and satisfaction of preferential rights and have no rights to
convert their common stock into any other securities.
As of April 30, 2000, there were 7,706,896 shares of common stock
outstanding, which were held of record by 271 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
On March 16, 1999, the Company declared a stock dividend, to be
effective 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 April 30,
2000, 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,
43
<PAGE> 45
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock could have the effect of delaying,
deferring or preventing a change in control of the Company.
The Board of Directors has designated three classes of preferred stock:
Class A, Series I; Class B, Series I; and Class C, Series I. The Company plans
to authorize and issue preferred stock to motel owners from whom the Company
will acquire leases with options to purchase as consideration for the purchase
options. The number of preferred shares issued will be dependent upon the value
of the motel property. The Company anticipates granting preferred stock, which
would be convertible into common stock of the Company, in a value equal to
twenty percent (20%) of the total value of the motel on the commencement date of
the subject lease. Certain motel owners may receive cash or stock dividends
depending on the class of preferred stock issued by the Company.
To the extent permitted by law, the Company will pay a cash dividend to
the holders of Class A, Series I preferred stock, which will be payable monthly
beginning thirty (30) days after the date of issuance at a rate of eight percent
(8%) per annum, based on the previously determined Subscription Price. The
holders of Class B, Series I preferred stock will receive a stock dividend,
issued quarterly, in an amount equal to eight percent (8%) per annum of the
Subscription Price based on the price of the common stock. Holders of Class C,
Series I preferred stock do not have rights to any dividends. The terms, rights
and preferences common to the three different classes of preferred stock are
summarized as follows:
CONVERSION
The preferred stock is convertible at the option of the holder, but not
earlier than twelve (12) months after the Subscription Date unless previously
redeemed by the Company, into the nearest whole number of common stock
("Conversion Shares") the Subscription Price would be able to purchase at the
Company's average common stock price ("Average Stock Price") for the sixty (60)
trading days last preceding the date of conversion. The Average Stock Price is
equivalent to the mean between the closing bid and asked quotations for the
Company's common stock in the over-the-counter market as quoted on the National
Association of Securities Dealers Automated Quotation system ("NASDAQ"), or any
other reliable quotation system if the common stock is not listed on NASDAQ.
Unless the Company, at its election, acts to obtain effectiveness of a
registration statement under the Securities Act covering the Conversion Shares,
the preferred stock shall be converted into restricted common stock as the term
"restricted" is defined in Rule 144 under the Securities Act. The Company has no
obligation to register the Conversion Shares.
REDEMPTION
The preferred stock is redeemable at any time at the option of the
Company, in whole or in part, upon payment by the Company, in its sole
discretion, of the redemption price consisting of the Average Stock Price of the
Conversion Shares plus an amount equal to all declared and accrued dividends.
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.
44
<PAGE> 46
REGISTRATION RIGHTS
The Company has a Letter of Intent to acquire the operations of ten
motel properties located in Minnesota, North Dakota, South Dakota and Wisconsin
from an unrelated third party. The lease will be a triple net lease where the
Company will pay for all expenses and costs of operations and pay a fixed annual
lease payment of $1,750,000, payable in equal monthly installments. The Company
may also elect to exercise its option to purchase the property upon the payment
of $18,000,000 to the motel owner. The consideration for the option will be the
issuance of $3,500,000 of preferred stock with a cash dividend rate of eight
percent (8%) paid monthly and registration rights to sell $500,000 of the
convertible preferred stock at the Company's initial public offering.
TRANSFER AGENT
American Securities Transfer and Trust. Inc. is transfer agent and
registrar for the Company's common and preferred stock.
WASHINGTON TAKEOVER ACT
The Company is subject to the Washington Takeover Act ("WTA")
promulgated under 23B.19.010, et seq. of the Revised Code of Washington ("RCW")
which provides that any "significant business transactions," which includes a
merger, a share exchange consolidation, the sale or encumbrance of assets, and
other enumerated transactions, are forbidden for a five-year-period, unless
approved by a majority of the board of directors prior to the share acquisition
if certain "acquiring persons(1)" obtain ten percent (10%) or more of the stock
of a "target corporation(2)."
The WTA requires that an acquiring person negotiate with the target
corporation's board of directors prior to acquisition to avoid the statutory
prohibitions. The board of directors, in making its decision, must exercise its
responsibilities and duties of loyalty and of care and cannot use the WTA as a
blanket veto over the acquiring person's proposal. If the acquiring person does
not obtain the approval of the board of directors prior to its acquisition of
the shares, a significant business transaction may proceed, following the
five-year moratorium, if the significant business transaction complies with the
"fair price" provisions of RCW 23B.19.040(2) or if it is approved at a
shareholders' meeting held at least five years after the acquiring person
purchased its shares. Any transaction that violates the WTA is void.
(1) "Acquiring person" means a person or group of persons who beneficially
owns ten percent or more of the outstanding voting shares of the target
corporation. The term "acquiring person" does not include a person who
acquires its shares by gift, inheritance, or in a transaction in which no
consideration is exchanged; exceeds the ten percent threshold as a result
of action taken solely by the target corporation, such as redemption of
shares, unless that person, by its own action, acquires additional shares
of the target corporation; beneficially was the owner of ten percent or
more of the outstanding voting shares prior to the 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.
45
<PAGE> 47
ITEM 12
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation currently provide for the
limitation of liability of directors to the Company and its shareholders to the
fullest extent permitted by the Washington Business Corporation Act ("WBCA").
The Company may also indemnify its officers and directors to the fullest extent
permitted by law from any action or proceeding whether criminal, civil,
administrative or investigative by reason of the service of such officer or
director to the Company.
Section 23B.08.300(4) of the WBCA provides that a director is not
liable for any action taken as a director, or any failure to take any action, if
the director performed the duties of the director's office in the following
manner: in good faith; with the care an ordinarily prudent person in a like
position would exercise under similar circumstances; and in a manner the
director reasonably believes to be in the best interests of the corporation. The
directors are entitled to rely on information, opinions, reports, or statements,
including financial statements and other financial data, if the same is prepared
by any of the following: an officer of the Company whom the director reasonably
believes to be reliable and competent in the matters presented; legal counsel,
public accountants, or other persons as to matters the director reasonably
believes are within the person's professional or expert competence; or a
committee of the board of directors of which the director is not a member if the
director reasonably believes the committee merits confidence. An exception is
provided by the WBCA that the director is not acting in good faith if the
director has knowledge concerning the matter in question that makes reliance
otherwise permitted unwarranted.
Directors and officers are protected under the "business judgment
rule," which generally shields business decisions made by directors and officers
from hindsight judgment by the courts as long as the decisions were made in good
faith and without a corrupt motive.
The WBCA applies to any negligent conduct of the directors. A
corporation is not permitted to limit the liability of a director for acts or
omissions that involve intentional misconduct, a knowing violation of law,
conduct regarding liability for unlawful distributions, or for any transaction
from which the director will personally receive a benefit in money, property or
services to which the director is not legally entitled.
As of April 30, 2000, 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 that may result in a claim for
indemnification.
46
<PAGE> 48
ITEM 13
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS INDEX
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
Country Maid Financial, Inc. and Subsidiary
THREE MONTHS ENDING MARCH 31, 2000 AND 1999
Financial Statements (Unaudited)
Consolidated Balance Sheet 51
Consolidated Statement of Net Income/(Loss) 52
Consolidated Statement of Cash Flows 53
Consolidated Statement of Shareholders' Equity 54
FISCAL YEARS ENDING DECEMBER 31, 1999 AND 1998
Report of Independent Certified Public Accountants 56
Financial Statements (Audited)
Consolidated Balance Sheet 57
Consolidated Statement of Net Income/(Loss) 58
Consolidated Statement of Cash Flows 59
Consolidated Statement of Shareholders' Equity 62
Notes to Consolidated Financial Statements 63
Territorial Inns Management, Inc., an Oregon Corporation
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
Report of Independent Certified Public Accountants 69
Financial Statements (Audited)
Consolidated Balance Sheet 70
Consolidated Statement of Net Income/(Loss) 71
Statement of Shareholders' Equity 72-73
Consolidated Statement of Cash Flows 74
Notes to Consolidated Financial Statements 75
</TABLE>
47
<PAGE> 49
COUNTRY MAID FINANCIAL, INC.
CONSOLIDATED FINANCIAL STATEMENT
UNAUDITED
MARCH 31, 2000 and 1999
<PAGE> 50
COUNTRY MAID FINANCIAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ACCOUNTANT'S REPORT .................................................. 50
BALANCE SHEET ........................................................ 51
STATEMENT OF INCOME (LOSS) ........................................... 52
STATEMENT OF CASH FLOWS .............................................. 53
STATEMENT OF SHAREHOLDERS' EQUITY .................................... 54
</TABLE>
49
<PAGE> 51
THOMAS J. HARRIS
CERTIFIED PUBLIC ACCOUNTANT
3901 STONE WAY N., SUITE 202
SEATTLE, WA 98103
206.547.6050
ACCOUNTANT'S REPORT
--------------------------------------------------------------------------------
Board of Directors
Country Maid Financial, Inc.
Lebanon, Oregon
We have reviewed the accompanying Balance Sheets of Country Maid Financial, Inc.
as of March 31, 2000 and 1999 and the related statements of Income,
Shareholders' Equity, and Cash Flows for the years then ended, in accordance
with Statements for Accounting and Review Services issued by the American
Institute of Certified Public Accountants. All information included in these
financial statements is the representation of the management of Country Maid
Financial, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principals.
June 13, 2000
50
<PAGE> 52
COUNTRY MAID FINANCIAL, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Cash in Bank $ 137,839 $ 4,549
Receivables from and advances to properties 46,411 61,444
Prepaid Expenses 85,172 0
----------- -----------
TOTAL ASSETS 269,422 65,993
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable 302,072 103,095
Advanced Management Fees 15,938 0
Accrued Payroll & Payroll Taxes 199,299 52,095
----------- -----------
Total Current Liabilities 517,309 155,190
----------- -----------
Other Liabilities
Due to Stockholders 1,032,695 1,032,695
----------- -----------
Total Other Liabilities 1,032,695 1,032,695
----------- -----------
TOTAL LIABILITIES 1,550,004 1,187,885
STOCKHOLDERS' EQUITY
Common Stock 490,000,000 shares authorized, no par value,
7,745,513 issued and outstanding 2,869,252 3,059,639
Excess of Liabilities at Inception (60,000) (60,000)
Retained (Deficit) (4,089,834) (4,121,531)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (1,280,582) (1,121,892)
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 269,422 $ 65,993
=========== ===========
</TABLE>
Since the notes are essentially the same as at December 31, 1999,
they are not repeated here.
51
<PAGE> 53
COUNTRY MAID FINANCIAL, INC.
CONSOLIDATED STATEMENT OF NET INCOME (LOSS)
MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
REVENUES
Operating Revenues $ 509,690 $ 0
Management Fees 136,538 68,890
--------- ---------
Total Revenues 646,228 68,890
--------- ---------
Operating Costs
Lease Payments 163,420 0
Direct Costs 323,650 0
General and Administrative Costs 37,345 0
--------- ---------
Total Operating Costs 524,415 0
--------- ---------
Gross Profit 121,813 68,890
--------- ---------
EXPENSES
Payroll & Payroll Taxes 70,084 54,457
Insurance 14,850 7,522
Miscellaneous 0 2,279
Professional Fees 70,436 39,961
Promotional 0 1,336
Rent 9,375 12,000
Repairs 0 1,270
Supplies 7,857 5,223
Telephone 4,911 3,257
Travel 9,371 9,284
Utilities 1,511 2,034
--------- ---------
Total Expenses 188,395 138,623
--------- ---------
NET (LOSS) $ (66,582) $ (69,733)
========= =========
Primary Earnings (Loss) per share $ (0.01) $ (0.01)
========= =========
</TABLE>
Since the notes are essentially the same as at December 31, 1999,
they are not repeated here.
52
<PAGE> 54
COUNTRY MAID FINANCIAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) From Operations $ (66,582) $ (69,733)
Increase (Decrease)
Due From Properties 34,967 6,736
Prepaid Expenses (85,172) 0
Accounts Payable 123,248 87,574
Advanced Management Fees 12,384 0
Accrued Payroll & Payroll Taxes 19,120 (26,996)
--------- ---------
Net Cash Flow from Operations 37,965 (2,419)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments on Shareholder Loans 0 (141,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock 100,000 170,000
--------- ---------
Net Cash Flows 137,965 26,581
Cash Balance Beginning (126) (22,032)
--------- ---------
Cash Balance Ending $ 137,839 $ 4,549
========= =========
</TABLE>
Since the notes are essentially the same as at December 31, 1999,
they are not repeated here.
53
<PAGE> 55
COUNTRY MAID FINANCIAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Total
Number Common Retained Stockholders'
of Shares* Stock** Earnings Equity
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 6,775,285 $ 2,679,639 $(3,901,798) $(1,222,159)
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 (290,387) (290,387)
Stock Dividend 695,028
Net Loss (121,454) (121,454)
---------- ----------- ----------- -----------
Balance, December 31, 1999 7,645,313 2,709,252 (4,023,252) (1,314,000)
Shares Issued for Cash 100,000 100,000 100,000
Net Loss (66,582) (66,582)
---------- ----------- ----------- -----------
Balance, March 31, 2000 7,745,313 $ 2,809,252 $(4,089,834) $(1,280,582)
========== =========== =========== ===========
</TABLE>
* = After 1 for 100 reverse split.
** = Common Stock of $2,869,252 less Excess of Liabilities at Inception of
$60,000.
Since the notes are essentially the same as at December 31, 1999,
they are not repeated here.
54
<PAGE> 56
COUNTRY MAID FINANCIAL, INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accountant's Report 56
Balance Sheet 57
Statement of Net Income (Loss) year ended December 31 58
Statement of Cash Flows year ended December 31 59
Statement of Net Income (Loss) three months ended December 31 60
Statement of Cash Flows three months ended December 31 61
Statement of Shareholders' Equity 62
Notes to Financial Statements 63-66
</TABLE>
55
<PAGE> 57
INDEPENDENT AUDITOR'S REPORT
Board of Directors
COUNTRY MAID FINANCIAL, INC.
Lebanon, Oregon
We have audited the balance sheets of COUNTRY MAID FINANCIAL, INC. and
SUBSIDIARY as December 31, 1999 and 1998, and the related statements of net
income, retained earnings, and cash flows for the period from inception October
1, 1998 to December 31, 1998 and the year ended December 31, 1999. 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 December 31, 1998 and 1999, and the results of its
operations and its cash flows for the periods then ended, and are in conformity
with generally accepted accounting principles.
THOMAS J. HARRIS CPA
March 20, 2000
Seattle, Washington
56
<PAGE> 58
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 and 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash in Bank 0
Receivables From and Advances to Properties 81,378 68,180
Prepaid Expenses 0
---------- ----------
Total Current Assets 81,378 68,180
---------- ----------
Fixed Assets: Net 0 0
---------- ----------
Other Assets
---------- ----------
Total Other Assets 0 0
---------- ----------
TOTAL ASSETS 81,378 68,180
========== ==========
LIABILITIES
Current Liabilities
Bank overdraft 126 22,032
Accounts Payable 178,824 15,521
Advanced Management Fees 3,554
Accrued Payroll & Payroll Taxes 180,179 79,091
---------- ----------
Total Current Liabilities 362,683 116,644
---------- ----------
Long Term Debt
Total Long Term Debt 0 0
---------- ----------
Other Liabilities
Due to Stockholders 1,032,695 1,173,695
Excess Liabilities From Discontinued Operations 0 0
---------- ----------
Total Other Liabilities 1,032,695 1,173,695
---------- ----------
TOTAL LIABILITIES 1,395,378 1,290,339
---------- ----------
STOCKHOLDER'S EQUITY
Common Stock 490,000,000 shares authorized,
no par value, 6,775,285 issued and outstanding 2,769,252 2,739,639
Excess of liabilities at inception (60,000) (60,000)
Retained Earnings (deficit) (4,023,252) (3,901,798)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (1,314,000) (1,222,159)
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 81,378 68,180
========== ==========
</TABLE>
The accompanying notes are an Integral part of these financial statements
57
<PAGE> 59
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF NET INCOME(LOSS)
FOR THE PERIOD FROM INCEPTION OCTOBER 1,1998 TO DECEMBER 31,1998
AND THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
REVENUES
Management Fees 536,601 37,515
Operating revenues 1,406,744
---------- --------
Total revenues 1,943,345 37,515
---------- --------
Operating costs
Direct costs 782,357
General and administrative costs 589,775
---------- --------
Total operating costs 1,372,132 0
---------- --------
Gross profit 571,213 37,515
---------- --------
EXPENSES:
Payroll & Payroll Taxes 302,929 47,909
Insurance 40,192 5,593
Interest 192 2,015
Consulting fees 75,600
Miscellaneous 6,408 285
Professional Fees 110,770 3,626
Rent 48,000 12,000
Repairs 2,910 66
Supplies 33,289 5,068
Telephone 21,111 4,665
Travel 43,216 3,524
Utilities 8,050 1,228
---------- --------
Total Expenses 692,667 85,979
---------- --------
NET INCOME (LOSS) FROM OPERATIONS (121,454) (48,464)
Gain on Disposition of Discontinued Operations 0 568,957
---------- --------
NET INCOME (LOSS) (121,454) 520,493
========== ========
Primary earnings(loss) per share from operations $ (0.05) $ (0.01)
Primary earnings(loss) per share
gain on disposition of discontinued operations $ 0.00 $ 0.08
---------- --------
Primary earnings(loss) per share $ (0.05) $ 0.08
========== ========
</TABLE>
The accompanying notes are an Integral part of these financial statements
58
<PAGE> 60
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION OCTOBER 1,1998 TO DECEMBER 31,1998
AND THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $(121,454) $ 520,493
Less Gain from Disposition of Discontinued Operations 0 (568,957)
Increase (Decrease)
Due From Properties (13,198) (68,180)
Accounts Payable 163,303 15,521
Advanced management fees 3,554
Accrued Payroll & Payroll Taxes 101,088 19,091
--------- ---------
Net cash Flow From Operations $ 133,293 $ (82,032)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment on shareholder loans (141,000)
--------- ---------
Net Cash Flows from Investing Activities (141,000) 0
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock 29,613 60,000
--------- ---------
Net Cash Flows from Financing Activities 29,613 60,000
--------- ---------
Net Cash Flows $ 21,906 $ (22,032)
Cash Balance Beginning (22,032) 0
--------- ---------
Cash Balance Ending $ (126) $ (22,032)
========= =========
</TABLE>
The accompanying notes are an Integral part of these financial statements
59
<PAGE> 61
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF NET INCOME(LOSS)
FOR THE PERIOD FROM INCEPTION OCTOBER 1,1998 TO DECEMBER 31,1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
REVENUES
Management Fees 100,920 37,515
Operating revenues 423,214
-------- --------
Total revenues 524,134 37,515
-------- --------
Operating costs
Direct costs 248,501
General and administrative costs 217,284
-------- --------
Total operating costs 465,785 0
-------- --------
Gross profit 58,349 37,515
-------- --------
EXPENSES:
Payroll & Payroll Taxes 102,130 47,909
Insurance 14,282 5,593
Interest 0 2,015
Consulting fees 49,100
Miscellaneous 729 285
Professional Fees 25,660 3,626
Rent 12,000 12,000
Repairs 975 66
Supplies 5,656 5,068
Telephone 6,001 4,665
Travel 3,989 3,524
Utilities 2,827 1,228
-------- --------
Total Expenses 223,349 85,979
-------- --------
NET INCOME (LOSS) FROM OPERATIONS (165,000) (48,464)
Gain on Disposition of Discontinued Operations 0 568,957
-------- --------
NET INCOME (LOSS) (165,000) 520,493
======== ========
Primary earnings(loss) per share from operations $ (0.06) $ (0.01)
Primary earnings(loss) per share
gain on disposition of discontinued operations $ 0.00 $ 0.08
-------- --------
Primary earnings(loss) per share $ (0.06) $ 0.08
======== ========
</TABLE>
The accompanying notes are an Integral part of these financial statements
60
<PAGE> 62
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION OCTOBER 1,1998 TO DECEMBER 31,1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (165,000) $ 520,493
Less Gain from Disposition of Discontinued Operations 0 (568,957)
Increase (Decrease)
Due From Properties 88,240 0
Accounts Payable 31,356 0
Advanced management fees (59,150)
Accrued Payroll & Payroll Taxes 60,676 (60,000)
---------- ----------
Net cash Flow From Operations $ (43,878) $ (108,464)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment on shareholder loans 0
---------- ----------
Net Cash Flows from Investing Activities 0 0
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock 0 60,000
---------- ----------
Net Cash Flows from Financing Activities 0 60,000
---------- ----------
Net Cash Flows $ (43,878) $ (48,464)
Cash Balance Beginning 43,752 0
---------- ----------
Cash Balance Ending $ (126) $ (48,464)
========== ==========
</TABLE>
The accompanying notes are an Integral part of these financial statements
61
<PAGE> 63
COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION OCTOBER 1,1998 TO DECEMBER 31,1998
<TABLE>
<CAPTION>
Total
Number Common Retained Stockholder
of Shares* Stock Earnings Equity
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Shares issued at inception 6,250,000
Shares from reverse acquisition
of Country Maid Financial 485,285 2,679,639 (4,422,291) (1,742,652)
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)
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 (290,387) (290,387)
Common stock dividend 695,028
Net Income (Loss) (121,454) (121,454)
--------- --------- ---------- ----------
Balance, December 31, 1999 7,645,313 2,769,252 (4,023,252) (1,254,000)
========= ========= ========== ==========
</TABLE>
The accompanying notes are an Integral part of these financial statements
62
<PAGE> 64
COUNTRY MAID FINANCIAL INC AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
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, Country Maid Financial, Inc. (CMF) 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. This transaction has been recorded as a reverse
acquisition of CMF by TIM. 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 above, Management decided
to dispose of the Company's subsidiary, Country Maid
63
<PAGE> 65
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 has acquired several leases during the
current year. The income from these properties is shown as operating income on
these financial statements and the expenses are shown as operating costs. The
Company plans to continue to acquire motel operating leases, with management
agreements, and purchase options from motel owners throughout the United States
and potentially Canada. The Company has identified certain motel properties that
can be acquired at a value equivalent to 2.5 to 3.0 times the annual room gross
revenue. The owners of these motels have expressed a willingness to accept a
purchase option payment of up to twenty percent (20%) of the motel portfolio's
current value and annual lease payments in an amount equal to seven and
one-fifth percent (7.2%) of the portfolio value. The Company's management
believes that these motel properties can be managed in such a manner as to yield
thirty-three percent (33%) of the annual gross room revenue as net operating
income of the Company. 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 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 through 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.
FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenue and
expenses during the period. Actual results could differ from those estimates.
EARNINGS PER SHARE
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.
64
<PAGE> 66
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilites at December 31, 1999 are
presented below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Taxable (income) loss (532,493) (121,454)
Loss carry-forward 4,826,147 4,293,978
----------- -----------
Total 4,293,978 4,415,432
Tax rate 34% 34%
----------- -----------
Deferred Tax Assets 1,459,953 1,501,247
Deferred Tax Assets Valuation Allowance (1,459,953) (1,501,247)
----------- -----------
Net Deferred Tax Asset $ 0 $ 0
</TABLE>
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.
3. 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 reverse acquisition of CMF by TIM.
The assets and liabilities of CMF at acquisition were as follows:
<TABLE>
<S> <C>
Assets $ -0-
Liabilities 1,742,652
Common Stock 2,679,639
Retained deficit (4,422,291)
-----------
</TABLE>
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.
4. RELATED PARTY TRANSACTIONS
At December 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.
Some of the revenues received by the company as were from properties that were
partly owned by the Company's majority shareholder. The Company's major
shareholder has a minority interest in four of the eleven managed properties.
The amount of revenue received from these properties was $88,651.
65
<PAGE> 67
5. CONTRACTS
On March 1, 1999 the Company assumed the operation of the nine properties owned
by Best Inns, Inc., a Kansas corporation (Best Inns Kansas). The agreement
provides for management of the properties for a fee of 5% of the gross revenues.
The lenders for Best Inns Kansas had previously believed 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 principal loan amount. Since
the Company began management of the properties aggregate revenues have increased
by approximately 10% per month which should be sufficient to secure the
underlying loan amount.
The Company entered into a lease agreement with a Option to Purchase the
Southfork Motel located in Bloomfield, Iowa. The lease provides for monthly
lease payments calculated at (20%) of the gross revenue of the motel. The lease
grants the Company an option to purchase the property at the end of the twenty
year lease.
66
<PAGE> 68
FINANCIAL STATEMENTS
COUNTRY MAID FINANCIAL, INC.
DECEMBER 31, 1998
TERRITORIAL INNS MANAGEMENT, INC.
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND 1996
67
<PAGE> 69
COUNTRY MAID FINANCIAL, INC.
DECEMBER 31, 1998
TERRITORIAL INNS MANAGEMENT, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ACCOUNTANT'S REPORT ....................................................... 69
BALANCE SHEET ............................................................. 70
STATEMENT OF NET INCOME (LOSS) ............................................ 71
STATEMENT OF SHAREHOLDER'S EQUITY ......................................... 72-73
STATEMENT OF CASH FLOWS ................................................... 74
NOTES TO FINANCIAL STATEMENTS ............................................. 75-77
</TABLE>
68
<PAGE> 70
INDEPENDENT AUDITOR'S REPORT
Board of Directors
COUNTRY MAID FINANCIAL, INC.
TERRITORIAL INNS MANAGEMNET, INC.
Lebanon, Oregon
We have audited the balance sheets of COUNTRY MAID FINANCIAL, INC. as of
December 31, 1998 and TERRITORIAL INNS MANAGEMNET, INC. as of September 30, 1998
and December 31, 1997 and 1996, and the related statements of net income,
retained earnings, and cash flows for the nine months ended September 30, 1998
and the years ended December 31, 1997 and 1996. 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 TERRITORIAL INNS MANAGEMNET, INC. as of the dates stated, and the results of
their operations and 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
September 30, 1999
Seattle, Washington
69
<PAGE> 71
COUNTRY MAID FINANCIAL, INC/TERRITORIAL INNS MANAGEMENT, INC (Oregon)
BALANCE SHEET
<TABLE>
<CAPTION>
CMF TIMO TIMO TIMO
December 31, September 30, December 31, December 31,
1998 1998 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash in Bank $ 6,923 $ 0
Receivables From/Advances to
Properties $ 68,180 $ 1,253,281 1,146,991 957,381
Prepaid Expenses 952 112 112
------------ ------------ ------------ ------------
Total Current Assets 68,180 1,254,233 1,154,026 957,493
------------ ------------ ------------ ------------
Fixed Assets: Net
Furniture & Equipment 14,548 14,198 12,004
Accumulated depreciation (4,887) (4,887) (2,268)
------------ ------------ ------------ ------------
9,661 9,311 9,736
------------ ------------ ------------ ------------
TOTAL ASSETS $ 68,180 $ 1,263,894 $ 1,163,337 $ 967,229
============ ============ ============ ============
LIABILITIES
Current Liabilities
Bank overdraft $ 22,032 $ 122,809 $ 0 $ 48,859
Accounts Payable 15,521 29,551 15,745 49,793
Accrued Payroll & Payroll Taxes 79,091 91,935 107,383 121,226
Due to properties 1,402,405 1,319,569 986,931
------------ ------------ ------------ ------------
Total Current Liabilities 116,644 1,646,700 1,442,697 1,206,809
------------ ------------ ------------ ------------
OTHER LIABILITIES
Due to Stockholders 1,173,695
TOTAL LIABILITIES 1,290,339 1,646,700 1,442,697 1,206,809
------------ ------------ ------------ ------------
STOCKHOLDER'S EQUITY
Common Stock 20,000,000 shares
authorized, no par value, 6,775,285
and 10,000 shares issued and
outstanding 2,739,639 1,000 1,000 1,000
Excess of liabilities at inception (60,000)
Retained Earnings (deficit) (3,901,798) (383,806) (280,360) (240,580)
------------ ------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY (1,222,159) (382,806) (279,360) (239,580)
------------ ------------ ------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 68,180 $ 1,263,894 $ 1,163,337 $ 967,229
============ ============ ============ ============
</TABLE>
The accompanying notes are an Integral part of these financial statements
70
<PAGE> 72
COUNTRY MAID FINANCIAL, INC./TERRITORIAL INNS MANAGEMENT, INC. (Oregon)
STATEMENT OF NET INCOME(LOSS)
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
CMF TIMO TIMO TIMO
December 31, September 30, December 31, December 31,
1998 1998 1997 1996
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Management Fees $ 37,515 $ 180,539 $ 316,360 $ 240,866
---------- ---------- ---------- ----------
EXPENSES:
Payroll & Payroll Taxes 47,909 181,391 251,189 248,777
Depreciation 2,619 1,734
Insurance 5,593 10,419 6,729 25,725
Miscellaneous 285 1,655 4,408 6,810
Professional Fees 3,626 22,655 2,571 31,926
Rent 12,000 28,814 24,279 12,558
Repairs 66 478 1,079 1,180
Supplies 5,068 12,507 22,100 21,008
Taxes & Licenses 89 434
Telephone 4,665 13,478 18,771 5,318
Travel 3,524 10,573 9,649 27,947
Utilities 1,228 2,922 3,838 6,496
---------- ---------- ---------- ----------
Total Expenses 83,964 284,981 347,666 389,479
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (46,449) (104,442) (31,306) (148,613)
---------- ---------- ---------- ----------
Other income (expense)
Interest expense (2,015) (3,220) (9,676) (31,625)
Interest income 3,166 1,202 4,901
Other income 1,050 0 0
---------- ---------- ---------- ----------
Total other income (expense) (2,015) 996 (8,474) (26,724)
---------- ---------- ---------- ----------
NET INCOME (LOSS) FROM OPERATIONS (48,464) (103,446) (39,780) (175,337)
Gain from disposition of discontinued operations 568,957
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 520,493 $ (103,446) $ (39,780) $ (175,337)
========== ========== ========== ==========
Primary earnings(loss) per share from operations $ (0.01) $ (10.34) $ (3.98) $ (17.53)
========== ========== ========== ==========
Primary earnings(loss) per share gain on disposition $ 0.08 $ 0.00 $ 0.0000 $ 0.00
========== ========== ========== ==========
Primary earnings(loss) per share $ 0.08 $ (10.34) $ (3.98) $ (17.53)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an Integral part of these financial statements
71
<PAGE> 73
COUNTRY MAID FINANCIAL, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Total
Number Common Retained Stockholder
of Shares* Stock Earnings Equity
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Shares issued at inception 6,250,000
Shares from reverse acquisition
of Country Maid Financial 485,285 $2,679,639 $(4,422,291) $(1,742,652)
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)
========== ========== =========== ===========
</TABLE>
72
<PAGE> 74
TERRITORIAL INNS MANAGEMENT INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIODS ENDED SEPTEMBER 31,1998 AND DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Total
Number Common Retained Stockholder
of Shares* Stock Earnings Equity
--------- ------ --------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 10,000 $1,000 $ (65,243) $ (64,243)
Net loss (175,337) (175,337)
------ ------ --------- ---------
Balance, December 31, 1996 10,000 1,000 (240,580) (239,580)
Net loss (39,780) (39,780)
------ ------ --------- ---------
Balance, December 31, 1997 10,000 1,000 (280,360) (279,360)
Net loss (103,446) (103,446)
------ ------ --------- ---------
Balance, September 31, 1998 10,000 $1,000 $(383,806) $(382,806)
====== ====== ========= =========
</TABLE>
The accompanying notes are an Integral part of these financial statements
73
<PAGE> 75
COUNTRY MAID FINANCIAL, INC./TERRITORIAL INNS MANAGEMENT, INC. (Oregon)
CONSOLIDATED STATEMENT OF CASH FLOWS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
CMF TIMO TIMO TIMO
December, September 30, December 31, December 31,
1998 1998 1997 1996
---------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 520,493 $ (103,446) $ (39,780) $ (175,337)
Add: depreciation not requiring the use of cash 0 2,619 1,734
Less gain from discontinued operations (568,957)
Increase (Decrease)
Due From Properties (68,180) (106,290) (189,610) (349,181)
Prepaid expense 0 (840) 0 0
Accounts Payable 15,521 13,806 (34,048) 34,612
Accrued Payroll & Payroll Taxes 19,091 (15,448) (13,843) (54,001)
Due To Properties 0 82,836 332,638 646,934
---------- ---------- ---------- ----------
Net cash Flow From Operations (82,032) (129,382) 57,976 104,761
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (350) (2,194) (6,668)
Cash used in Investing Activities (350) (2,194) (6,668)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock 60,000 0 0 0
---------- ---------- ---------- ----------
Net Cash Flows from Financing Activities 60,000 0 0 0
---------- ---------- ---------- ----------
Net Cash Flows (22,032) (129,732) 55,782 98,093
Cash Balance Beginning 0 $ 6,923 (48,859) (146,952)
---------- ---------- ---------- ----------
Cash Balance Ending $ (22,032) $ (122,809) $ 6,923 $ (48,859)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an Integral part of these financial statements
74
<PAGE> 76
COUNTRY MAID FINANCIAL, INC./TERRITORIAL INNS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF THE COMPANY
Territorial Inns Management, Inc. (Nevada) ("TIMN") is a subsidiary of Country
Maid Financial, Inc. and is a successor to Territorial Inns Management, Inc.
(Oregon) ("TIMO") as TIMO was reorganized in September, 1998 as TIMN.
TIMO was organized in April 1992 and began operations during calendar year 1994.
The TIMO was engaged in providing management services to motel properties for a
fee. The fee is computed at a rate of 5% of gross receipts. This revenue is
recognized on the accrual basis as the revenue is recorded by the properties.
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 TIMN. The Directors of the Company determined that the
acquisition of TIMN provided the potential for the Company to obtain significant
assets and shareholder equity. The combination has been recorded as reverse
acquisition of Country Maid Financial, Inc. by TIMN. As described in Note 3
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 is engaged in providing management of motel properties for a fee and
by acquiring operating leases with options to purchase. TIMN currently is in the
process of acquiring several within the next six months. The Company plans to
continue to acquire motel operating leases, with management agreements, and
purchase options from motel owners throughout the United States and potentially
Canada. The Company has identified certain motel properties that can be acquired
at a value equivalent to 2.5 to 3.0 times the annual room gross revenue. The
owners of these motels have expressed a willingness to accept a purchase option
payment of up to twenty percent (20%) of the motel portfolio's current value and
annual lease payments in an amount equal to seven and one-fifth percent (7.2%)
of the portfolio value. The Company's management believes that these motel
properties can be managed in such a manner as to yield thirty-three percent
(33%) of the annual gross room revenue as net operating income of the Company.
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
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 through 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.
75
<PAGE> 77
FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenue and
expenses during the period. Actual results could differ from those estimates.
EARNINGS PER SHARE
Earnings per share have been calculated using the weighted average method for
shares outstanding.
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, 1998 are
presented below:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1998
----------- -----------
<S> <C> <C>
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
----------- -----------
</TABLE>
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 Note
1.
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 (computed
as of the measurement date August 14, 1998):
<TABLE>
<S> <C>
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
----------
</TABLE>
76
<PAGE> 78
<TABLE>
<S> <C>
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
----------
</TABLE>
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.
4. 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.
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.
5. 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.
77
<PAGE> 79
ITEM 14
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company does not have any changes or disagreements with accountants on
accounting and financial disclosure.
78
<PAGE> 80
ITEM 15
FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description Page
---------- ----------- ----
<S> <C> <C>
3.1 Restated Articles of Incorporation
3.2 Bylaws
4.1 Specimen Common Stock Certificate
4.2 Certificate of Designation of Preferred Stock dated May 10, 1999
10.1 Form of Management Agreement of Territorial Inns Management,
Inc. (Schedule of Properties)
10.2 Form Property Management Agreement of Territorial Inns
Management, Inc. (Schedule of Agreed Terms)
10.3 Property Management Agreement between Territorial Inns
Management, Inc. and JKLM for Summer Hill Apartments,
Cotulla, TX
10.4 Stock Purchase Agreement dated September 30, 1998 between
Country Maid Financial, Inc. and Shareholders of Territorial
Inns Management, Inc.
10.5 Office Lease Agreement dated December 20, 1999, between
Hanlin and Weathers and Territorial Inns Management, Inc.
10.6 Stock Purchase Agreement dated October 1, 1998 between
Country Maid Financial, Inc. and C. Richard Kearns and Dixie Kearns
10.7 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
21.1 List of Company Subsidiary
27.1 Financial Data Schedule
</TABLE>
72
<PAGE> 81
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: April 14, 2000 By: /s/ C. Richard Kearns
--------------------------------
C. Richard Kearns
Chief Executive Officer
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description Page
---------- ----------- ----
<S> <C> <C>
3.1 Restated Articles of Incorporation
3.2 Bylaws
4.1 Specimen Common Stock Certificate
4.2 Certificate of Designation of Preferred Stock dated May 10, 1999
10.1 Form of Management Agreement of Territorial Inns Management,
Inc. (Exhibit as Schedule of Properties)
10.2 Form Property Management Agreement of Territorial Inns
Management, Inc. (Schedule of Agreed Terms)
10.3 Property Management Agreement between Territorial Inns
Management, Inc. and JKLM for Summer Hill Apartments,
Cotulla, TX
10.4 Stock Purchase Agreement dated September 30, 1998 between
Country Maid Financial, Inc. and Shareholders of Territorial
Inns Management, Inc.
10.5 Office Lease Agreement dated December 20, 1999, between
Hanlin and Weathers and Territorial Inns Management, Inc.
10.6 Stock Purchase Agreement dated October 6, 1998 between Country Maid
Financial, Inc. and C. Richard Kearns and John C. Moneymaker
10.7 Stock Redemption Agreement dated May 1, 1999 between Country
Maid Financial, Inc. and C. Richard Kearns
10.8 Lease with Option to Purchase dated June 28, 1999
21.1 List of Company Subsidiary
27.1 Financial Data Schedule
</TABLE>
