-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WQcO1tgTB//Q+cVClPFe8ECuouELx5ecsIbI4X+n58WC+tce4nl6fqd1o08YhPoM PydV2Uo4LhjKS9GHfoL1ug== 0000891020-00-000806.txt : 20000417 0000891020-00-000806.hdr.sgml : 20000417 ACCESSION NUMBER: 0000891020-00-000806 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRY MAID FINANCIAL INC CENTRAL INDEX KEY: 0001072133 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 341471323 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: SEC FILE NUMBER: 000-26267 FILM NUMBER: 601900 BUSINESS ADDRESS: STREET 1: 2500 S MAIN STREET STREET 2: PO BOX 942 CITY: LEBANON STATE: OR ZIP: 97355 BUSINESS PHONE: 5414511414 MAIL ADDRESS: STREET 1: 2500 S MAIN STREET STREET 2: PO BOX 942 CITY: LEBANON STATE: OR ZIP: 97355 10-12G/A 1 AMENDMENT NO. 2 TO FORM 10 1 As Filed With the Securities and Exchange Commission on April 14, 2000 Registration No. 000-26267 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 2 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. 2 TABLE OF CONTENTS
Page No. ------- 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
3 ITEM 1 BUSINESS COUNTRY MAID FINANCIAL, INC. ("Country Maid Financial" or the "Company"), through its operating subsidiary Territorial Inns Management, Inc., a Nevada corporation ("TIM"), is engaged in the business of management and operation of motel properties. The Company's portfolio currently consists of the management of seventeen motel properties and one apartment complex in seven different states (Florida, Georgia, Illinois, 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 to allow the Company finalize the financing terms of the lease with the motel owners. 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. 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. 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 principal executive offices are located at 2500 South Main Street, Lebanon, Oregon, 97355 and its telephone number is (541) 451-1414. 2 4 THE COMPANY'S OPERATING STRUCTURE - ---------------------------- COUNTRY MAID FINANCIAL, INC. - ---------------------------- | ---------------- ----------------------- MOTEL OWNER TERRITORIAL INNS ---------------------------------- MANAGEMENT, INC. Lease with Option to Purchase Motel valued at 275% ("TIM") of gross revenue (100+ rooms) ---------------- ----------------------- | | - -------------------------------- ---------------------------------- REVENUE TO COMPANY PAYMENTS TO MOTEL OWNER: Room Sales: $1,000,000 (1) Annual lease payments: Operating Expenses: $ 670,000 7.2% of current value Lease Payment: $ 198,000 Net Income (2) Purchase option consideration: Before Taxes: $ 132,000 stock equal to 20% of total (per motel) value of motel - -------------------------------- ----------------------------------
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. BUSINESSRISK 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 3 5 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. 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 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. 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." 4 6 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)
1992 1993 1994 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ ------ ----------- ----------- Revenue $19.0 $19.5 $20.3 $21.1 $22.7 $24.3 $23.0-$25.0 $24.0-$26.0 GOP 29.5% 30.5% 36.2% 37.0% 38.2% 40.2% 42.9% 43.0% Pre-Tax Inc $ 0.0 $ 0.7 $ 1.7 $ 2.6 $ 3.7 $ 4.8 $ 5.6 $ 6.2
- ---------- GOP - Percent of Revenue (1) "Lodging Outlook," Smith Travel Research, endorsed by the American Hotel and Motel Association, December 1998. It should be noted that Smith Travel Research has not provided any form of consultation, advice or counsel regarding any aspects of, and is in no way associated, with this Registration Statement. (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 5 7 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. 6 8 EXPERIENCED SENIOR EXECUTIVE MANAGEMENT AND ON-SITE PERSONNEL The Company's senior management team is experienced and has worked together for an extended period of time to develop, operate and manage motel properties. The executive management team of the Company consist of its Chief Executive Officer, C. Richard Kearns; President, Ellis Stutzman, and Secretary Mark Owen. Mr. Kearns has worked with Mr. Stutzman in the management of motel properties since 1984, and with Mr. Owen since 1986. These officers have jointly managed over 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. The franchises provide marketing and a toll-free reservation system for the motels. Customers have standard expectations and familiarity with national franchises in certain regions. The motel franchisers may also have agreements with suppliers and vendors for maintenance and furnishings in which the individual motel franchise is invited to participate. The motels are required to conform to the standards of the franchises. The fee paid to the franchisers usually entails an enrollment fee and a fixed percentage of the gross revenue of the motel thereafter payable on a monthly basis. GROWTH STRATEGY 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." 7 9 ABILITY TO MEET FINANCIAL OBLIGATIONS The Company expects to generate sufficient income from the revenues of the motel properties, on an average basis, to meet the operating expenses of the properties. Other than the two shareholder loans currently outstanding, the Company does not have plans to seek debt financing. The Company plans to conduct a public offering of its common stock to raise approximately $3,000,000 for working capital within the next twelve months. LONG-TERM LEASE AGREEMENTS WITH PURCHASE OPTIONS The Company's standard lease with option to purchase (the "Leases") is generally on a long-term basis with rights of renewal in five-year increments up to twenty years exercisable at the Company's election and the landlord's consent, which should not be withheld unreasonably. Lease payments generally will either consist of a fixed amount, payable monthly, with no additional rent based on the gross revenue or of a straight percentage lease payment consisting of twenty percent (20%) of the gross revenue of the property, calculated monthly, without a fixed minimum payment. The Lease is a triple net lease that requires the Company to pay all costs and expenditures of the motel property including real estate taxes and salaries of employees, and to maintain the leased motels in good condition and repair in conformity with all applicable legal requirements. The motel owner is solely obligated to pay any outstanding mortgages or liens on the property. The Leases generally also provide that the Company is responsible for obtaining adequate and standard insurance for the property and the Company may be required to indemnify the motel owner for losses due to any failure to maintain insurance or for other liabilities caused by the actions of the Company or third parties on the property. The motel owner may terminate the Lease upon an event of default, which includes the failure to remit lease payments and any other uncured default of the terms of the lease, including: a) failure to maintain the casualty insurance requirements of the lease; b) failure to perform the terms of the agreements and continuance of non-performance for a period of 30 days; c) the default of Landlord or Tenant beyond the specified cure period of any other related Leases; d) any revocation or limitation of a material license or permit for the lawful operation of the lodging facility; e) any material representation or warranty made by the parties under the lease agreement; and f) in the event that a party to the Lease files bankruptcy or a proceeding is filed against the party seeking liquidation, reorganization, arrangement, adjustment or composition of debts of the party. Upon a termination due to an event of default, the Company will be liable for the payments that would have been payable for the remainder of the unexpired term of the lease along with other costs incurred by the landlord, unless the motel owners thereafter lease the property to other tenants and the proceeds received are used to offset amounts due under the terms of the Leases. An option to purchase contained in the lease allows the Company to exercise the option to purchase the property for a fixed price determined on the commencement date of the lease. 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 8 10 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. 9 11 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 is included as part of the gross revenue of property used to calculate the monthly lease payments payable to the motel owner. Best Inns: On or about November 9, 1998, the Company and Best Inns, Inc., a Kansas corporation ("Best Inns Kansas"), executed a Letter of Intent, which 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. During the litigation, Best Inns Kansas and the Company mutually agreed to not proceed with the lease purchase option until the legal matters resolved. However, the Company continues to manage the nine Best Inns properties and annual gross revenues have increased by $1,200,000 during the Company's first 12 months of management. 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 a limit amount of $5,000. SUMMARY OF PORTFOLIO The following table sets forth, as of February 29, 2000, certain information with respect the properties in the Company's portfolio: 10 12
PROPERTY NUMBER OF ROOMS DATE CONSTRUCTED TERMINATION DATE -------- --------------- ---------------- ---------------- 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
11 13
PROPERTY NUMBER OF ROOMS DATE CONSTRUCTED TERMINATION DATE -------- --------------- ---------------- ---------------- 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
(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. 12 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, the Company did not incur costs related to research and development activities. GOVERNMENT REGULATIONS The Company is subject to environmental regulations under various federal, state and local laws. Certain of these laws may require a current or previous owner or operator of real estate to clean up designated hazardous or toxic substances or petroleum product releases, such as gasoline, that may contaminate the properties from an adjacent business. In addition, the owner or operator may be held liable to a governmental entity or to third parties for damages or costs incurred by such parties in connection with the contamination. Certain of the Company's lodging facilities are located on, adjacent to or in the vicinity of, properties, including gasoline stations, that contain or have contained storage tanks or that have engaged or may in the future engage in activities that may release petroleum products or other hazardous substances into the soil or groundwater. While there can be no assurance that in the future the foregoing environmental conditions may not have a material effect on the Company, management is not aware of any such materially adverse impacts to the Company due to the existence of contaminants under or near its properties. Except as described above, management is not aware of any environmental condition with respect to its lodging facilities that could have a material adverse impact on the Company's financial condition or results of operations. 13 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 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 September 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. 14 16 HISTORY OF SUBSTANTIAL LOSSES; NO ASSURANCE OF PROFITABILITY The Company had not reached profitability as of fiscal year end 1999 and had suffered substantial losses in the previous three fiscal years. 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. The Company incurred operating losses of $48,464, which were 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 in the amount of $316,360 were offset by operating expenses in the amount of $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. 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. 15 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 is generally generating revenues at 2_ times the low season of December and January, while the revenues of remaining months are average amounts between the high and low. UNCERTAIN TAX EFFECTS OF LEASES The success of the Company's plan to obtain leases with options to purchase motel properties maybe materially affected by several tax related issues. A motel owner who has substantial equity in a 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. 16 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. 17 19 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 February 29, 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 18 20 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 selected investors who are creditors of Mr. Kearns. As of February 29, 2000, 2,000,000 shares have been redeemed from Mr. Kearns 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. 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 19 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 February 29, 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-six percent (46%) 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 22 COMPETITION As discussed above, the market for economy motels and lodging properties is highly competitive. There are no substantial barriers to initial entry, and the Company expects competition to persist, intensify and increase in the future. There can be no assurance that competitors will not develop management terms or models that render the Company's plans obsolete or less marketable, or that the Company will be able to compete successfully. See "Item 1. Business--Competition in the Lodging Industry." LACK OF DIVERSIFICATION The Company does not intend to invest at this time in any other assets, businesses or securities other than what is described in this Registration Statement. The Company will be subject to the risks associated with lack of diversification, including, but not limited to, the dependence on the lodging industry and the inability to offset losses from one industry to another. The Company currently does not have the resources to diversify its operations to benefit from the possible spreading of risks. In the event that the lodging industry is at a downturn, the Company may not be able to sustain sufficient operating income to meet its obligations and expenses 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 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 February 29, 2000, 7,369,968 of the 7,606,896 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, 48,521,682 were issued on or before February 28, 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. FORWARD-LOOKING STATEMENTS "SAFE HARBOR" STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 A number of the matters and subject areas discussed in the preceding "Risk Factors" section, and elsewhere in this Registration Statement, that are not historical or current facts deal with potential future circumstances and developments. The discussion of these matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience involving any one or more of these matters or subject areas. The operation and results of the Company's business also may be subject to the effect of other risks and uncertainties in addition to the relevant qualifying factors identified in the "Risk Factors" section, and elsewhere in this Registration Statement, including but not limited to the following: The ability of the Company to maintain the expected level of revenue of each property, the economy of the lodging industry, the adequacy of the Company's systems and infrastructure to meet the Company's expansion, marketing plans and customer demand, the success of efforts to improve and satisfactorily address issues relating to the management and the operations of the properties; The ability of the Company to obtain a profitable margin based on the number of motel properties managed and leased by the Company and the sufficiency of the gross revenue of the properties to provide financial viability to the Company's business; and The Company's competitors' decision to enter into similar markets and their ability to use resources to acquire motel properties ahead of the Company. 22 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.
YEAR ENDED YEAR ENDED December 31, 1999 December 31, 1998 ----------------- ----------------- 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 Stock holdings 0 Other assets Total assets 81,378 68,180 Current liabilities 362,683 116,644 Long-term debt 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
23 25 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.
NINE MONTHS YEAR YEAR YEAR ENDED ENDED ENDED ENDED September 30, December 31, December 31, December 31, 1998 1997 1996 1995 ------------- ------------ ------------ ------------ (DOLLARS IN THOUSANDS) 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)
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 26 OVERVIEW OF CURRENT OPERATIONS As of December 31, 1999, 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. 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 the remaining three 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 December 31, 1999, 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. The Company has entered into one long- 25 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 and $302,929 for the fiscal year ended December 31, 1999. These amounts represent a substantial increase from the previous fiscal year ended March 31, 1998, during which the Company was not operating and, therefore, did not pay a material amount as salaries. Growth in salaries and payroll taxes has been directly related to expansion of the Company's operating strategy. The Company had assumed the management and operation of a total of seventeen properties by the end of 1999. As of February 29, 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 financials 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 expects to close the lease transactions with Select I.A., Inc. and Best Inns in the third quarter of 1999 and Best Inns by December 2000. The aggregate income of those properties exceeds the amount of estimated operating expenses anticipated by the Company at this time. The Company expects the positive cash flow to steadily increase as the total number of properties managed and leased by the Company increases. This increase may be offset by the capital expenditures related to acquiring new operations and adding new employees. The Company has a Letter of Intent to lease ten motel properties located in Minnesota, North Dakota, South Dakota and Wisconsin from Select I.A., Inc., to close in the third quarter of 1999. The lease will be a triple net lease where the Company will pay for all expenses and costs of operations and pay a fixed annual lease payment of $1,750,000, 26 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 and $81,378 at December 31, 1999, 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. 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 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 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 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. The lessee is TIM. 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."
NUMBER OF DATE TERMINATION PROPERTY ROOMS CONSTRUCTED DATE - -------- --------- ----------- --------------- 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
28 30
NUMBER OF DATE TERMINATION PROPERTY ROOMS CONSTRUCTED DATE - -------- --------- ----------- --------------- 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
29 31
NUMBER OF DATE TERMINATION PROPERTY ROOMS CONSTRUCTED DATE - -------- --------- ----------- --------------- 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
(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 February 29, 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.
(1) (2) (3) (4) Title Name and Address Shares Percentage of Class of Beneficial Owner Beneficially Owned(1) of Class(2) - ------------ ------------------------ --------------------- ----------- Common Stock C. Richard Kearns(3) 2,192,751(4) 28.45 2500 South Main Street Lebanon, OR 97355 Common Stock John C. Moneymaker 323,595 4.19 1930 E. Meadowmere Springfield, MO 65807 Common Stock Terrence J. Trapp 550,000 7.13 274 Snyder Mtn. Rd. Evergreen, CO 80439
30 32
(1) (2) (3) (4) Title Name and Address Shares Percentage of Class of Beneficial Owner Beneficially Owned(1) of Class(2) - ------------ ------------------------ --------------------- ----------- 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) 12.84 522 Diving Hawk Trail Madison, WI 53713 Common Stock All Officers and Directors 3,506,346 45.59 as a Group (5 persons)
(1) Pursuant to applicable rules of the Securities and Exchange Commission, "beneficial ownership" as used in this table means the sole or shared power to vote shares (voting power) or the sole or shared power to dispose of shares (investment power). Unless otherwise indicated the named individual has sole voting and investment power with respect to the shares shown as beneficially owned. In addition, a person is deemed the beneficial owner of those securities not outstanding which are subject to options, warrants, rights or conversion privileges if that person has the right to acquire beneficial ownership within sixty days after February 29, 2000. (2) Percentage of beneficial ownership is based upon 7,706,896 shares of common stock outstanding as of February 29, 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 February 29, 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 February 29, 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 33 The directors and executive officers of the Company and their respective ages as of February 29, 2000are as follows:
POSITIONS AND OFFICES NAME AGE HELD WITH THE COMPANY - ---- --- --------------------- C. Richard Kearns 52 Chief Executive Officer, Director, Chairman of the Board John C. Moneymaker 51 Director Terrence J. Trapp 51 Director Ellis J. Stutzman 45 President Mark D. Owen 36 Secretary/Treasurer, Director of Operations
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS Following is a discussion of the business background of each director and executive officer. C. Richard Kearns, Ellis J. Stutzman and Mark D. Owen are full-time employees of the Company. Directors Terrence J. Trapp and John C. Moneymaker devote only such time as may be necessary for the Company's business and affairs: C. Richard Kearns. Mr. Kearns has served as a director of the Company since 1992 and as Chief Executive Officer and Chairman of the Board since October 1, 1998. He has also served as a director and as Chief Executive Officer of 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 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 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
LONG-TERM COMPENSATION --------------------------- SECURITIES FISCAL ANNUAL COMPENSATION UNDERLYING NAME AND YEAR ---------------------- STOCK OPTIONS/ PRINCIPAL POSITION ENDING SALARY OTHER AWARDS WARRANTS - ----------------------- ------------ ------ --------- ------ ------------ C. Richard Kearns(1) Dec. 31, 1998 $0.00 $1,814.17 -(2) Chief Executive Officer Dec. 31, 1999 $7,256.65
- ---------- (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 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 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 sold 2,500,000 shares, which reduced 36 38 the number of shares beneficially held by Mr. Kearns to 1,692,751 constituting approximately 21.33% of the issued and outstanding shares of the Company's common stock. As a result of the Stock Redemption Agreement, the number of outstanding shares did not change and therefore the current shareholders did not suffer a 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 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, including Willow Springs in Cheney, Washington. Mr. Kearns is also 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 is the tenant of Select Inn, Tulia, Texas, also managed by the Company. It is 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. 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 February 29, 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 39 subsidiary Country Maid Farms. As of February 29, 2000, the total amount due to Mr. Kearns and Mr. Moneymaker was $1,032,695. One payment of $120,000 was made toward the balance of the loan in March 1999 to Mr. Kearns. 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 is to accrue at 8% per annum, if any remaining, beginning July 1, 1999. Furthermore, in the event that the Company does not make the payments to the shareholders, the shareholders would have a cause of action against the Company. 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 The Company's common stock trades on the OTC Bulletin Board under the symbol "CMFI." The following table sets forth the range of high and low bid prices for the Company's common stock on a quarterly basis for the 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. 38 40 QUARTERLY COMMON STOCK PRICE RANGES(1)
High Low ---- --- Period: Fiscal Year ending March 31, 1998 First Quarter ending June 30, 1997 10.00 6.00 Second Quarter ending 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
(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 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 February 29, 2000 was 272 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 February 29, 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 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 February 29, 2000, 7,420,068 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, 48,521,682 were issued on or before February 28, 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 February 29, 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. Furthermore, the NASD has proposed certain regulation changes that affect the OTC Bulletin Board, which, if and when implemented, will affect both issuers and market makers. The effect on the OTC Bulletin Board cannot be determined at this time. In the event the Company's securities are not included on the OTC Bulletin Board and do not qualify for NASDAQ, quotes for the securities may be included in the "pink sheets" for the over-the-counter market. NEW OTC BULLETIN BOARD ELIGIBILITY STANDARDS In 1998, the NASD amended Rule 6530, relating to the eligibility standards of OTC Bulletin Board companies, to require that a member's eligibility for quotation in its service include the registration of its securities pursuant to Section 12 of the Securities Exchange Act of 1934 ("Exchange Act") and thereafter compliance with the reporting requirements of the Exchange Act. 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 not be delisted by the NASD from the OTC Bulletin Board for failure to timely file the proper periodic report. The Company's failure to be effectively registered or timely file the proper periodic report may negatively affect the ability of the Company's shareholders to trade stock on the OTC Bulletin Board and the value of the Company's stock. 40 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 February 28, 1997 through February 29, 2000:
(a) (b) (c) (d) Date, Amount, Title Purchasers/Target Class Consideration Exemption ------------------- ----------------------- ------------- --------- 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
41 43
(a) (b) (c) (d) Date, Amount, Title Purchasers/Target Class Consideration Exemption ------------------- ----------------------- ------------- --------- 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
(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 selected investors who are creditors of Mr. Kearns. As of February 29, 2000, 2,000,000 shares have been redeemed from Mr. Kearns 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. The foregoing could give rise to 42 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 February 29, 2000, there were 7,706,896 shares of common stock outstanding, which were held of record by 272 shareholders. There were no outstanding stock options or warrants of common stock. REVERSE STOCK SPLIT On October 9, 1998, the Company effectuated a reverse stock split in the ratio of 100:1 for all of the outstanding and issued common stock. Prior to the reverse stock split, there were 48,521,682 total shares outstanding. Immediately subsequent to the reverse stock split, there were 485,285 total shares outstanding. The total number of shares authorized by the Company was not changed. STOCK DIVIDEND The Company declared a stock dividend March 16, 1999, effectuated April 7, 1999, to all shareholders of record as of 5:00 p.m. Pacific Standard Time on the same day, wherein each holder of at least ten shares of common stock of the Company was awarded one share of common stock for every ten owned. Prior to the issuance of shares based on the stock dividend, there were 7,215,285 shares of common stock outstanding and issued. Subsequent to the distribution of the stock dividend, there were 7,936,928 shares outstanding. The total number of shares authorized by the Company was not changed. PREFERRED STOCK Pursuant to the Articles of Incorporation, as amended, the Company has authorized 10,000,000 shares of preferred stock, no par value. As of July 30, 1999, there were 650 shares of Class C Preferred Stock agreed to be issued pursuant to the Lease Agreement with Southfork, Inc. The Company's Board of Directors has the authority to determine the price, rights, preferences, privileges and restrictions thereof, including voting rights, without any further vote or action by the Company's shareholders. The voting and other rights of the holders of common stock could be subject to, and may be adversely affected by, 43 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 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 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 February 29, 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 48 ITEM 13 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENTS INDEX
Page No. ------- Country Maid Financial, Inc. and Subsidiary FISCAL YEARS ENDING DECEMBER 31, 1999 AND 1998 Report of Independent Certified Public Accountants 49 Financial Statements (Audited) Consolidated Balance Sheet 50 Consolidated Statement of Net Income/(Loss) 51 Consolidated Statement of Cash Flows 52 Consolidated Statement of Shareholders' Equity 55 Notes to Consolidated Financial Statements 56 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 62 Financial Statements (Audited) Consolidated Balance Sheet 63 Consolidated Statement of Net Income/(Loss) 64 Consolidated Statement of Cash Flows 67 Statement of Shareholders' Equity 65-66 Notes to Consolidated Financial Statements 68
47 49 COUNTRY MAID FINANCIAL, INC. AND SUBSIDIARY FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 TABLE OF CONTENTS
PAGE ---- Accountant's Report 49 Balance Sheet 50 Statement of Net Income (Loss) year ended December 31 51 Statement of Cash Flows year ended December 31 52 Statement of Net Income(Loss) three months ended December 31 53 Statement of Cash Flows three months ended December 31 54 Statement of Shareholders' Equity 55 Notes to Financial Statements 56-59
48 50 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 49 51 COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999 and 1998 ASSETS
1999 1998 ---------- ---------- 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 ========== ==========
The accompanying notes are an Integral part of these financial statements 50 52 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
1999 1998 ---------- -------- 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 ========== ========
The accompanying notes are an Integral part of these financial statements 51 53 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
1999 1998 --------- --------- 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) ========= =========
The accompanying notes are an Integral part of these financial statements 52 54 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
1999 1998 -------- -------- 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 ======== ========
The accompanying notes are an Integral part of these financial statements 53 55 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
1999 1998 ---------- ---------- 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) ========== ==========
The accompanying notes are an Integral part of these financial statements 54 56 COUNTRY MAID FINANCIAL, INC. and SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE PERIOD FROM INCEPTION OCTOBER 1,1998 TO DECEMBER 31,1998
Total Number Common Retained Stockholder of Shares* Stock Earnings Equity --------- --------- ---------- ---------- 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) ========= ========= ========== ==========
The accompanying notes are an Integral part of these financial statements 55 57 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 56 58 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. 57 59 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:
DECEMBER 31, DECEMBER 31, 1998 1999 ----------- ----------- 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
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: Assets $ -0- Liabilities 1,742,652 Common Stock 2,679,639 Retained deficit (4,422,291) -----------
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. 58 60 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. 59 61 FINANCIAL STATEMENTS COUNTRY MAID FINANCIAL, INC. DECEMBER 31, 1998 TERRITORIAL INNS MANAGEMENT, INC. SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND 1996 60 62 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
PAGE ---- ACCOUNTANT'S REPORT ....................................................... 62 BALANCE SHEET ............................................................. 63 STATEMENT OF NET INCOME(LOSS) ............................................. 64 STATEMENT OF RETAINED EARNINGS(DEFICIT) ................................... STATEMENT OF CASH FLOWS ................................................... 67 NOTES TO FINANCIAL STATEMENTS ............................................. 68-70
61 63 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 62 64 COUNTRY MAID FINANCIAL, INC/TERRITORIAL INNS MANAGEMENT, INC (Oregon) BALANCE SHEET
CMF TIMO TIMO TIMO December 31, September 30, December 31, December 31, 1998 1998 1997 1996 ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
The accompanying notes are an Integral part of these financial statements 63 65 COUNTRY MAID FINANCIAL, INC./TERRITORIAL INNS MANAGEMENT, INC. (Oregon) STATEMENT OF NET INCOME(LOSS) SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND 1996
CMF TIMO TIMO TIMO December 31, September 30, December 31, December 31, 1998 1998 1997 1996 ------------ ------------- ------------ ------------ 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) ========== ========== ========== ==========
The accompanying notes are an Integral part of these financial statements 64 66 COUNTRY MAID FINANCIAL, INC. STATEMENT OF SHAREHOLDERS' EQUITY FOR THE PERIOD ENDED DECEMBER 31, 1998
Total Number Common Retained Stockholder of Shares* Stock Earnings Equity ---------- ---------- ----------- ----------- 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) ========== ========== =========== ===========
65 67 TERRITORIAL INNS MANAGEMENT INC. STATEMENT OF SHAREHOLDERS' EQUITY FOR THE PERIODS ENDED SEPTEMBER 31,1998 AND DECEMBER 31, 1996 AND 1997
Total Number Common Retained Stockholder of Shares* Stock Earnings Equity --------- ------ --------- ----------- 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) ====== ====== ========= =========
The accompanying notes are an Integral part of these financial statements 66 68 COUNTRY MAID FINANCIAL, INC./TERRITORIAL INNS MANAGEMENT, INC. (Oregon) CONSOLIDATED STATEMENT OF CASH FLOWS SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND 1996
CMF TIMO TIMO TIMO December, September 30, December 31, December 31, 1998 1998 1997 1996 ---------- ------------- ------------ ------------- 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) ========== ========== ========== ==========
The accompanying notes are an Integral part of these financial statements 67 69 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. 68 70 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:
MARCH 31, DECEMBER 31, 1998 1998 ----------- ----------- Deferred Tax Assets: Taxable (income)loss $ 1,960,324 $ (532,493) Loss carryforward 2,866,147 4,826,147 ----------- ----------- TOTAL $ 4,826,471 $ 4,293,978 Tax rate 34% 34% ----------- ----------- Deferred Tax Assets 1,641,001 1,459,953 Deferred Tax Assets Valuation Allowance (1,641,001) (1,459,953) ----------- ----------- NET DEFERRED TAX ASSET $ 0 $ 0 ----------- -----------
Due to cumulative losses in recent years and the uncertainty of future earnings the probability of deriving any benefits from the deferred tax asset is unlikely. In addition the Tax Reform Act of 1986 severely reduces the deductibility of these losses due to the changes in ownership discussed in 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): 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 ----------
69 71 ASSETS: Prepaid expenses $ 9,170 Fixed assets, net 272,243 Other assets 248,550 ---------- Assets taken (book value) 529,963 ---------- Excess liabilities from discontinued operations $ 568,957 ----------
The market value of the assets of the subsidiary is not known but it is unlikely that the value is anywhere near the total liabilities assumed by the shareholders. The measurement date for the disposition of the Farm is August 14, 1998, and the disposal date is October 6, 1998. 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. 70 72 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. 71 73 ITEM 15 FINANCIAL STATEMENTS AND EXHIBITS 72 74 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 72 75
EXHIBIT INDEX Exhibit No. Description Page - ---------- ----------- ---- 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
EX-3.1 2 RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF COUNTRY MAID FINANCIAL, INC. A WASHINGTON CORPORATION Pursuant to the provisions of RCW 23B.10.070 of the Washington Business Corporation Act, the following Restated Articles of Incorporation are submitted for filing. ARTICLE I. NAME The name of the Corporation is Country Maid Financial, Inc. ARTICLE II. DURATION The period of its duration is perpetual. ARTICLE III. REGISTERED OFFICE AND AGENT The registered office of the Corporation in the State of Washington is 2300 - 130th Avenue NE, Suite A103, Bellevue, Washington 98005 and the registered agent for the Corporation is Jones Law Group, PLLC. ARTICLE IV. PURPOSES AND POWERS The purposes and powers of the Corporation are: 1. To engage in any lawful activities for which corporations may be organized. 2. To do anything which shall appear necessary or beneficial to the Corporation in connection with (a) its operation, (b) accomplishment of its purposes, or (c) exercise of its powers set forth in these Articles. 2 ARTICLE V. CAPITALIZATION The total number of shares of all classes of stock which the Corporation shall have authority to issue is 490,000,000 shares of common stock, no par value, and 10,000,000 of preferred stock, no par value. No capital stock, after the amount of the subscription price or par value has been paid, is subject to assessment to pay the debts of the Corporation. The power to issue all classes, kinds and series of stock permitted by law is expressly vested in the Board of Directors, subject to this Article. ARTICLE VI. CONSENT TO ACTION Any action which may be taken at a meeting of the shareholders or Directors may be taken without a meeting if all shareholders or Directors entitled to vote on the action consent in writing to the action taken. The written consent shall have the same force and effect as a unanimous vote of the shareholders or Directors. ARTICLE VII. CUMULATIVE VOTING No shareholder shall be entitled to cumulate his votes for election of Directors. ARTICLE VIII. PREEMPTIVE RIGHTS Unless otherwise determined by the Board of Directors, shareholders of the Corporation have no preemptive rights. No shareholder of the Corporation shall be entitled, as a matter of right, to purchase or subscribe for any stock of any class which the Corporation may issue or sell, whether or not exchangeable for any stock of the Corporation of any class or classes and whether out of unissued shares authorized by the Articles of Incorporation of the Corporation as originally filed or by any amendment thereof or out of shares acquired in the future. Nor, unless otherwise determined by the Board of Directors, shall any holder of any shares of the capital stock of the Corporation be entitled, as a matter of right, to purchase or subscribe for any obligation which the Corporation may issue or sell that shall be convertible into or exchangeable for any shares of the stock of the Corporation of any class or classes, or to which shall be attached or appurtenant to any warrant or warrants or any other instrument or instruments that shall confer upon the holder or holders of such obligation the right to subscribe for or purchase from the Corporation any shares of its capital stock of any class or classes. 2 3 ARTICLE IX. BOARD OF DIRECTORS The number of Directors shall be fixed by the Bylaws of the Corporation. The Board of Directors consists of three Directors, whose names and addresses are: C. Richard Kearns 2500 S. Main Lebanon, Oregon 97355 John C. Moneymaker 2500 S. Main Lebanon, Oregon 97355 Terrence J. Trapp 2500 S. Main Lebanon, Oregon 97355 ARTICLE X. CONFLICTS OF INTEREST No contracts or other transactions between the Corporation and any other corporation, and no act of the Corporation shall in any way be affected or invalidated by the fact that any of the Directors of the Corporation is pecuniarily or otherwise interested in, or is a Director or officer of, such other corporation; and any Director individually, or any firm of which any Director may be a member, may be a party to, or may be pecuniarily or otherwise interested in any contracts or transactions of the Corporation, provided that the fact that he or such firm is so interested shall be disclosed or shall have been known to the Board of Directors or a majority thereof. ARTICLE XI. AMENDMENT OF BYLAWS AND ARTICLES The Corporation reserves the right to amend, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereinafter prescribed by law, and all rights and powers conferred by these Articles of Incorporation on shareholders and directors are subject to this reserved power. The Board of Directors is expressly authorized to make, alter or repeal any or all of the Bylaws of the Corporation, to the fullest extent provided by the Washington Business Corporation Act. 3 4 ARTICLE XII. DIRECTORS The members of the governing Board shall be known as Directors. The Directors of the Corporation need not be stockholders. The number of Directors may at any time be increased or decreased by the Directors at any annual or special meeting. Any directorship to be filled by reason of an increase in the number of Directors may be filled by the Board of Directors for a term of office continuing only until the next election of Directors. If there are nine or more Directors, or if the Corporation is a public Corporation, the Board of Directors shall be divided into three classes, Class I, Class II, and Class III, which shall be as nearly equal in number as possible. Each Director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which the Director was elected; provided however, that each initial Director in Class I shall hold office until the first annual meeting of stockholders; each initial Director in Class II shall hold office until the second annual meeting of stockholders, and each initial director in Class III shall hold office until the third annual meeting of stockholders. The number of Directors may at any time be increased or decreased by the unanimous vote of the Board of Directors provided that no decrease shall have the effect of shortening the term of any incumbent Director. In the event of any increase or decrease in the authorized number of Directors, (a) each Director then serving shall nevertheless continue as a Director of the class of which he is a member until the expiration of his current term, or his prior death, retirement, resignation or removal, and (b) the newly created or eliminated directorships resulting from the increase or decrease shall be apportioned by the Board of Directors among the three classes of Directors so as to maintain the classes as nearly equal as possible. Directors may be removed from office for cause only. In addition, the approval of stockholders representing not less than a majority of each class of the issued and outstanding stock entitled to vote at the election of Directors shall be required for removal of any Director. Notwithstanding any of the foregoing provisions of this Article, each Director shall serve until his successor is elected and qualified or until his death, retirement, resignation or removal. Should a vacancy occur or be created, whether arising through death, resignation or removal of a Director or through an increase in the number of Directors of any class, the vacancy shall be filled by a majority vote of the remaining Directors of the class in which the vacancy occurs, or by the sole remaining Director of that class if only one Director remains, or by the majority vote of the remaining Directors of the other two classes if there be no remaining member of the class in which the vacancy occurs. A Director so elected to fill a vacancy shall serve for the remainder of the then present term of office of the class to which he was elected. 4 5 ARTICLE XIII. USE OF CAPITAL SURPLUS The Board of Directors shall have power to determine the use and disposition of any surplus or net profits over and above the stated capital. The Board may distribute to its shareholders out of capital surplus of the Corporation a portion of its assets, in cash or property, subject to statutory provisions. The Board may apply such surplus or accumulated profits to the acquisition of the bonds, capital stock or other obligations of the Corporation. The Board shall have absolute discretion to determine the manner and terms of such acquisition. Shares of capital stock so acquired may be resold unless they have been retired in order to decrease the Corporation's stated capital. ARTICLE XIV. RESERVES AND WORKING CAPITAL The Board of Directors shall have power to determine the amount to be set aside from the earnings of the Corporation as working capital before paying any dividends or distributing any profits. The Board shall have absolute discretion to determine amounts to be set aside from the profits of the Corporation. Such amounts may be used as additional working capital, as a fund for the payment and retirement of the indebtedness of the Corporation, whether funded or otherwise, or as a surplus fund such beneficial corporate purposes as the Board may determine. ARTICLE XV. QUORUM OF SHAREHOLDERS A quorum at a meeting of shareholders is constituted by the representation in person or by proxy of forty percent (40%) of the shares entitled to vote. Shares shall not be counted to make up a quorum for a meeting if voting of them at the meeting has been enjoined or for any reason they cannot be lawfully voted at the meeting. The shareholders present at a duly held meeting at which a quorum is present may continue to do business until adjournment in spite of the withdrawal of enough shareholders to leave less than a quorum. ARTICLE XVI. ISSUANCE OF SHARES IN SERIES The shares of any preferred or special class may be divided into and issued in series. If not otherwise determined by these Articles, the Board of Directors shall have authority to divide any or all classes into series, and fix and determine the relative rights and preferences of the shares of any series so established. 5 6 ARTICLE XVII. INDEMNIFICATION To the fullest extent permitted by the Washington Business Corporation Statute as it presently exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. The Corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he or she, his or her testator or intestate is or was a director, officer or employee of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as a director, officer or employee at the request of the Corporation or any predecessor to the Corporation. Neither any amendment nor repeal of this Article XVII, nor the adoption of any provision of the Corporation's Articles of Incorporation inconsistent with this Article XVII, shall eliminate or reduce the effect of this Article XVII in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article XVII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. I certify that I am an officer of the above named Corporation and am authorized to execute this application on behalf of the Corporation. Dated: May , 1999 COUNTRY MAID FINANCIAL, INC. Mark D. Owen, Secretary 6 EX-3.2 3 BYLAWS 1 EXHIBIT 3.2 BYLAWS OF COUNTRY MAID FINANCIAL, INC. A WASHINGTON CORPORATION ADOPTED MAY 1, 1999 1.0 OFFICES 1.1 The registered office of Country Maid Financial, Inc. in the State of Washington shall be Jones Law Group, PLLC, 2300 130th Avenue NE, Suite A-103, Bellevue, Washington 98005. The Corporation may establish other offices either within or without the State of Washington, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require. 2.0 BOARD OF DIRECTORS 2.1 General Powers and Duties. Subject to the provisions of the Revised Code of Washington and any limitations in the Articles of Incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board of Directors may elect any member of the Board as Chairman. He shall, if present, preside at all meetings of the Board of Directors. He shall have other powers and duties as the Board prescribes, but shall not be considered an officer of the Corporation by virtue of his duties as Chairman. 2.2 Number, Tenure and Qualifications. The number of Directors of the Corporation shall be no fewer than one (1) nor more than nine (9). The number of Directors may at any time be increased or decreased by the Directors or by the shareholders at any regular or special meeting provided that no decrease shall have the effect of shortening the term of any incumbent Director except as otherwise provided in these Bylaws. Directors shall be elected at the annual meeting of shareholders, and except as provided below in this section, the term of office of each Director shall be until the next annual meeting of shareholders and the election and qualification of his successor. Any directorship to be filled by reason of an increase in the number of Directors may be filled by the Board of Directors for a term of office continuing only until the next election of Directors, or by shareholders for the term of office associated with the class to which Directors are elected. Directors need not be shareholders of the Corporation or residents of the State of Washington. If there are three or more directors, the Board of Directors may be divided into three classes, Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each Director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which the Director was elected; provided that each initial Director in Class I shall hold office until the first annual meeting of shareholders; each initial Director in Class II shall hold office until the second annual meeting of shareholders, and each initial director in Class III shall hold office until the third annual meeting of shareholders. Not withstanding the foregoing provisions, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. 2 2.3 Regular Meetings. A regular meeting of the Board of Directors shall be held without notice other than the notice given by these Bylaws immediately after and at the same place as the annual meeting of shareholders. Additional regular meetings shall be held at the principal office of the Corporation in the absence of any designation in the resolution. 2.4 Special Meetings. Special meetings of the Board of Directors for any purpose or purposes may be called by or at the request of the President, Chairman of the Board or any two directors, and shall be held at the principal place of business of the Corporation or at any other place as the Directors may determine. 2.5 Action of Directors by Communications Equipment. Any regular or special meeting of the Directors may be called and held over telephone or other electronic means, and communication from a Director by telephone or other electronic means constitutes attendance at the meeting so held. 2.6 Notice. Notice of any special meeting shall be given at least forty-eight (48) hours before the time fixed for the meeting, by written or oral notice delivered personally or mailed to each Director at his business address, by facsimile, by telegram, or by teletype, wire or wireless equipment which transmits a facsimile of the notice. If mailed, the notice shall be deemed to be delivered when deposited in the United States mail, with postage prepaid, not less than five (5) days prior to the commencement of the above stated notice period. If notice is given by telegram, the notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Any Director may waive notice of any meeting. The attendance of a Director at a meeting shall constitute a waiver of notice of the meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of the meeting. 2.7 Quorum. Except as otherwise required by law, a majority of the number of Directors fixed by these Bylaws, or as amended, shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than a majority is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. At an adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally notified. The Directors present at the duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough Directors to leave less than a quorum, if any action taken is approved by at least a majority of the remaining Directors. 2.8 Board Decisions. The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. However, an actual majority shall be required for: (a) Recommending to the shareholders an amendment to the Articles of Incorporation; (b) Adopting a plan of merger or consolidation; (c) Recommending to the shareholders the sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all the property and assets of the Corporation other than in the usual and regular course of its business; (d) Recommending to the shareholders a voluntary dissolution of the Corporation or a revocation of the Corporation; (e) Amending the Bylaws of the Corporation; 2 3 (f) Filling vacancies on the Board of Directors; (g) Authorizing or approving reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; (h) Authorizing or approving the issuance, sale or contract for sale of shares, or determining the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee to do so within the limits specifically prescribed by the Board of Directors. 2.9 Vacancies. Any vacancy occurring in the Board of Directors, including one created by an increase in the number of Directors, shall be filled by the affirmative vote of a majority of the remaining Directors, though less than a quorum of the Board of Directors, or by a sole remaining Director. A Director elected to fill a vacancy not created by an increase in the number of Directors shall be elected for the unexpired term of his predecessor in office. A Director elected to fill a vacancy created by an increase in the number of directors shall be elected for a term of office continuing until the next election of Directors. 2.10 Board Action By Written Consent Without A Meeting. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the written consent signed by each director is filed with the minutes of proceedings of the board or committee. Written consents representing actions taken by the Board of Directors or committee may be executed by telex, telecopy or other facsimile transmission and such facsimile shall be valid and binding to the same extent as if it were an original. 2.11 Compensation. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of the Directors or reimburse the Directors for their expenses, if any, for attendance at each meeting of the Board of Directors, including a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as Director. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. 2.12 Presumption of Assent. A Director who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment of the meeting or shall forward his dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. The right to dissent shall not apply to a Director who voted in favor of the action. 2.13 Approval of Loans to Officers. The Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiary, including any officer or employee who is a director of the Corporation or its subsidiary, whenever, in the judgment of the Directors, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at common law or under any statute. 3 4 2.14 Executive Committee. By resolution passed by a majority of the entire Board of Directors, the Board of Directors may designate one (1) or more committees, each committee to consist of one (1) or more Directors, to constitute an executive committee to the extent provided in the resolution and shall have and may exercise all the authority of the Board of Directors in the management of the Corporation, but no such committee shall have the power or authority to: (a) Recommend to the shareholders the amendment to the Articles of Incorporation; (b) Adopt a plan of merger or consolidation; (c) Recommend to the shareholders the sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all the property and assets of the Corporation otherwise than in the usual and regular course of its business; (d) Recommend to the shareholders a voluntary dissolution of the Corporation or a revocation of the Corporation; (e) Amend the Bylaws of the Corporation. (f) Fill vacancies on the Board of Directors; (g) Authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; (h) Authorize or approve the issuance, sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee to do so within the limits specifically prescribed by the Board of Directors; (i) Take any action expressly required by the Revised Code of Washington to be submitted to shareholders of the Corporation for approval. 2.15 Standards of Conduct for Directors. A Director shall discharge the duties of a Director, including the duties as a member of a committee, 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. In discharging the duties of a Director, a Director is entitled to rely in good faith upon information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by (1) an officer or employee of the Corporation whom the Director reasonably believes to be reliable and competent in the matters presented; (2) legal counsel, public accountants or other persons as to matters the Director reasonably believes are within the professional or expert competence of such legal counsel, public accountants or other persons who have been selected with reasonable care by or on behalf of the Corporation; or (3) a committee of the Board of Directors of which the Director is not a member if the Director reasonably believes the committee merits confidence. 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 compliance with these Bylaws. 4 5 3.0 SHAREHOLDERS 3.1 Annual Meeting. The annual meeting of the shareholders of the Corporation shall be held on such date, time and in such place, either within or without the State of Washington, as may be designated by resolution of the Board of Directors each year. At the meeting, directors shall be elected and any other proper business may be transacted. 3.2 Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the President or by the Board of Directors and shall be called by the President at the request of the holders of not less than a majority of the outstanding shares of the Corporation entitled to vote at the meeting. 3.3 Place of Meeting. The Board of Directors may designate any place within or outside of the State of Washington as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. A waiver of notice signed by a majority of shareholders entitled to vote at a meeting may designate any place, either within or without the State of Washington, as the place for the holding of the meeting. 3.4 Notice of Meeting. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days, except as otherwise required by statute, before the date of the meeting, either personally or by mail, by or at the direction of the President, Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at the meeting. If mailed, the notice shall be deemed to be delivered when deposited in the United States mail with postage prepaid, addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation. Any shareholder may waive notice of any meeting by written notice signed by him or his duly authorized attorney-in-fact, either before or after the meeting. 3.5 Record Date. For the purpose of determining the shareholders entitled to notice of, or to vote at, any meeting of shareholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which record date shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day preceding the date of notice, or if notice is waived, at the close of business on the day preceding the date of the meeting. Written notice of any meeting of shareholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. An affidavit of the Secretary or an Assistant Secretary of the Corporation shall, in the absence of fraud, be prima facie evidence of the facts stated therein. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. For the purpose of determining the shareholders entitled to consent to any corporate action of the Corporation in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining shareholders entitled to consent to corporate action of the Corporation in writing without a meeting, when no prior action by the Board of Directors is required under Washington law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation. If no record date has been fixed by the 5 6 Board of Directors and prior action by the Board of Directors is required under Washington law, the record date for determining which shareholders are entitled to consent to corporate action of the Corporation in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts a resolution taking such prior action. For the purpose of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which date shall be not more that sixty (60) days prior to such action. If no record date is fixed, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 3.6 Quorum. Forty percent (40%) of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than forty percent (40%) of the outstanding shares is represented at a meeting, then either (a) the Chairman of the meeting or (b) a majority of the shares so represented may adjourn the meeting from time to time without further notice. At the adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders. 3.7 Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. The proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. Any solicitation of proxies by the Directors or management of the Corporation shall be made by mailing the proxies by certified mail or providing them to the shareholder in an alternative acceptable manner at least not less than ten (10) days nor more than sixty (60) days before the date of the meeting for which the proxies are solicited. Each shareholder as of the record date shall receive a proxy. Proxies shall describe the location and purpose of the meeting and the matter or business for which the proxy is solicited. No proxy shall be valid after eleven (11) months from the date it is received by the secretary of the Corporation or other officer or agent authorized to tabulate votes unless otherwise provided in the proxy. 3.8 Voting of Shares. Subject to the provisions of any applicable law, each outstanding share entitled to vote shall be entitled to one vote on each matter submitted to a vote at a meeting of the shareholders. No shareholder shall be entitled to cumulate his votes for election of directors. 3.9 Consent to Action. Any action which may be taken at a meeting of the shareholders may be taken without a meeting if a consent in writing setting forth the action so taken is signed in original, facsimile or counterpart form by shareholders holding at least a majority of the voting power. 3.10 Action of Shareholders by Communications Equipment. Shareholders may participate in a meeting of shareholders by means of telephonic device by means of which all persons participating in the meeting can hear each other at the same time, and participation by these means shall constitute presence in person at a meeting. 6 7 3.11 Shareholder's Right of Inspection. Any shareholder, in person or by attorney or other agent, upon written demand under oath stating the purpose thereof, has the right during usual hours for business to inspect for any proper purpose the Corporation's stock ledger, a list of its shareholders, and its other books and records and to make copies or extracts therefrom. 4.0 OFFICERS 4.1 Number. The officers of the Corporation shall be a Chief Executive Officer, President, none, one or more Vice Presidents (the number of Vice Presidents to be determined by the Board of Directors), a Secretary, a Chief Financial Officer, a Controller and a Treasurer each of whom shall be elected by the Board of Directors. Other officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. Any two or more offices may be held by the same person. Each officer has the authority and shall perform the duties set forth in these Bylaws or, to the extent consistent with these Bylaws, the duties prescribed by the Board of Directors or by direction of an officer authorized by the Board of Directors to prescribe the duties of other officers. 4.2 Election and Term of Office. The officers of the Corporation to be elected by the Board of Directors shall be elected annually at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers is not held at the meeting, the election shall be held as soon thereafter as is convenient. Each officer shall hold office until his successor has been duly elected and qualifies or until his death or until he resigns or is removed in the manner provided by these Bylaws. 4.3 Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served by that removal, but the removal shall be without prejudice to the contractual rights, if any, of the person so removed. 4.4 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term in the manner prescribed by these Bylaws for the regular election or appointment of such office. 4.5 Standards of Conduct for Officers. An officer with discretionary authority shall discharge the duties of an officer under that authority in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the officer reasonably believes to be in the best interests of the Corporation. In discharging the duties of an officer, an officer is entitled to rely in good faith upon information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by (1) an officer or employee of the Corporation whom the officer reasonably believes to be reliable and competent in the matters presented or (2) legal counsel, public accountants or other persons as to matters the officer reasonably believes are within the professional or expert competence of such legal counsel, public accountants or (3) other persons who have been selected with reasonable care by or on behalf of the Corporation. An officer is not acting in good faith if the officer has knowledge concerning the matter in question that makes reliance otherwise permitted by these Bylaws unwarranted. An officer is not liable for any action taken as an officer, or any failure to take any action, if the officer performed the duties of the office in compliance with these Bylaws. If any certificate or report made or public notice given by an officer of the Corporation shall be 7 8 false or fraudulent in any material representation, any officer knowingly and intentionally signing the same shall be jointly and severally and personally liable to any person who has become a creditor or stockholder of the Corporation upon the faith of any such material representation therein to the amount of the debt contracted upon the faith thereof if not paid when due, or the damage sustained by any purchaser of or subscriber to its stock upon the faith thereof. The liability imposed by this section shall exist in all cases where the contents of any such certificate, report or notice of any material representation therein shall have been communicated either directly or indirectly to the person so becoming a creditor or stockholder and he became such creditor or stockholder upon the faith thereof. 4.6 Powers and Duties of the Chief Executive Officer. The Chief Executive Officer shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, at all meetings of the Board of Directors. He shall have ultimate responsibility and authority for management including but not limited to, the power to appoint committees, officers, agents or employees from time to time as he may, in his discretion, decide is appropriate to assist in the conduct of the affairs of the Corporation. He shall enforce these Bylaws and generally shall supervise and control the business, affairs and property of the Corporation. He shall have general and active supervision over the Corporation's officers and may sign, execute and deliver in the name of the Corporation corporate documents, instruments, powers of attorney, contracts, bonds and other obligations. 4.7 Powers and Duties of the President. The President shall have the authority and perform such duties as the Board of Directors authorizes or directs. If no Chief Executive Officer has been appointed, or in the event of the death of the Chief Executive Officer or his or her inability to act, the President shall perform the duties of the Chief Executive Officer, except as may be limited by resolution of the Board, with all the powers of, and subject to all of the restrictions upon, the Chief Executive Officer. 4.8. Duties of the Vice President(s). The Vice President(s) shall have the authority and perform duties as the Board of Directors or Chief Executive Officer may authorize or direct. 4.9 Duties of the Secretary. The Secretary shall subscribe the minutes of all meetings of the shareholders and the Board of Directors. He shall mail notices to the shareholders and the Directors of the Corporation of the holding of any meeting as prescribed by these Bylaws. If the Corporation has a seal, the secretary shall be the custodian of the seal and shall affix it to minutes, notices or other instruments executed by the Corporation as required. He shall have the authority and perform other duties as the Board of Directors or Chief Executive Officer may authorize or direct. 4.10 Duties of the Assistant Secretary. The Assistant Secretary, in the event of the appointment of an assistant secretary by the Board of Directors, shall, in the Secretary's absence or in the case of the Secretary's inability to act or in case it shall be inconvenient for the Secretary to so act, perform the duties of the secretary as may be necessary. He shall have the authority and perform other duties as the Board of Directors or Chief Executive Officer may authorize or direct. 4.11 Duties of the Chief Financial Officer. The Chief Financial Officer for the Corporation shall have charge of and be responsible for all funds and securities belonging to the Corporation and shall keep and deposit the funds for and on behalf of the Corporation in a bank or banks to be designated by the Board of Directors. In the absence of a designation he may select the bank or banks in which to deposit the funds. He shall have the authority and perform other duties as the Board of Directors or Chief Executive Officer may authorize or direct. 4.12 Duties of the Controller. The Controller for the Corporation shall be charged with 8 9 certain duties in relation to the fiscal affairs of the Corporation, principally to examine and audit the accounts, to keep records, and report the financial situation from time to time. He shall have the authority and perform other duties as the Board of Directors may authorize or direct. 4.13 Duties of the Treasurer. The Treasurer shall have the authority and perform such duties as the Board of Directors authorize or direct. 4.14 Subordinate Officers and General Managers. The Board of Directors may create subordinate offices and employ subordinate officers or agents as it from time to time deems expedient and may fix the compensation of the officers or agents and define their powers and duties, provided the powers and duties do not constitute a delegation of the authority as is reposed in the Directors by law, which shall be exercised and performed exclusively by them. The Board of Directors shall also have the power to appoint a General Manager, who shall hold office at the pleasure of the Board. The Board of Directors shall have the power to delegate to the General Manager the executive power and authority as it may deem necessary to facilitate the handling and management of the Corporation's property and interests. 4.15 Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving a salary by reason of the fact that he is also a Director of the Corporation. 5.0 CONTRACTS, CORPORATE FUNDS, LOANS, CHECKS AND DEPOSITS 5.1 Contracts. Without limiting any powers elsewhere granted by these Bylaws to the President or other officer of the Corporation, the Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and the authority may be general or confined to specific instances. 5.2 Corporate Funds. All funds of the Corporation shall be under the supervision of the Board of Directors and shall be handled and disposed of in the manner and by the officers or agents of the Corporation as provided in these Bylaws or as the Board of Directors may authorize by proper resolutions from time to time. 5.3 Loans. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. The authority may be general or confined to specific instances. 5.4 Checks, Drafts or Orders. All checks, drafts, or other orders for the payment of money, notes, or other evidence of indebtedness issued in the name of the Corporation shall be signed by an officer or officers, agent or agents of the Corporation and in a manner as shall from time to time be determined by resolution of the Board of Directors. 5.5 Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in banks, trust companies, or other depositories as the Board of Directors may in its discretion select. 9 10 6.0 CERTIFICATES FOR SHARES; TRANSFERS 6.1 Certificates for Shares. Certificates representing shares of the Corporation shall be in a form as shall be determined by the Board of Directors. The certificates shall be signed by the President or a Vice President, if any. If the Corporation has more than one shareholder, the certificate shall also be signed by the Treasurer, the Secretary or an Assistant Secretary. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented by the certificates are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued on the terms and indemnity to the Corporation as the Board of Directors may prescribe. 6.2 Registrar. The registrar is the person designated by the Corporation to keep official shareholder records, including names and addresses of shareholders and number of shares owned. The registrar may hold one or more offices or no offices of the Corporation. 6.3 Transfer of Shares. Transfer of shares of the Corporation shall be made in the manner specified in the Uniform Commercial Code. The Corporation shall maintain stock transfer books and any transfer shall be registered only on request and surrender of the stock certificate representing the transferred shares, duly endorsed. The Corporation shall have the absolute right to recognize as the owner of any shares of stock issued by it, the person or persons in whose name the certificate representing the shares stands according to the books of the Corporation for all proper Corporation purposes, including the voting of the shares represented by the certificate at a regular or special meeting of shareholders, and the issuance and payment of dividends on the shares. 6.4 Shares of Another Corporation. Shares owned by the Corporation in another corporation, domestic or foreign, may be voted by an officer, agent or proxy as the Board of Directors may determine or, in the absence of a determination, by the President of the Corporation. 6.5 Subscriptions. Subscriptions to the shares shall be paid at times and in installments as the Board of Directors may determine. The Board of Directors may adopt resolutions prescribing penalties for default on subscription agreements. 7.0 FISCAL YEAR 7.1 The fiscal year of the Corporation is the calendar year unless otherwise changed by the Board of Directors. The Board of Directors may change the fiscal year of the Corporation from time to time. 8.0 DIVIDENDS 8.1 Subject to the restrictions of the Revised Code of Washington, the Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and on the terms and conditions provided by law and its Articles of Incorporation. 10 11 9.0 SEAL 9.1 The Board of Directors may adopt a corporate seal, which shall be circular in form and shall have inscribed on it the name of the Corporation, the year incorporated, the state of incorporation and the words "corporate seal." The seal shall be stamped or affixed to documents as may be prescribed by law or by the Board of Directors. 10.0 CONFLICT OF INTEREST 10.1 No contract or other transaction between the Corporation and one or more of its Directors or any other corporation, firm, association or entity in which one or more of its Directors are directors or officers or are financially interested, shall be either void or voidable because of the relationship or interest or because the Director or Directors are present at the meeting of the Board of Directors or a committee of Directors which authorizes, approves or ratifies a contract or transaction or because his or their votes are counted for that purpose, if: (a) The material facts of a relationship or interest are disclosed or known to the Board of Directors or committee which in good faith authorizes, approves or ratifies the contract or transaction by a vote or consent sufficient for the purpose without counting the votes or consents of the interested Director(s); or (b) The material facts of a relationship or interest is disclosed or known to the shareholders entitled to vote and they in good faith authorize, approve or ratify a contract or transaction by vote or written consent; or (c) The contract or transaction is fair and reasonable as to the Corporation at the time it is authorized, approved and ratified by the Board of Directors, committee designated by the Board of Directors, or the shareholders. 11.0 NOTICE AND CONSENT 11.1 Waiver of Notice. Whenever any notice is required to be given to any shareholder or Director of the Corporation under the provisions of these Bylaws, the Articles of Incorporation, or by law, a waiver in writing, signed in original, facsimile or counterpart by the person or persons entitled to notice, whether before or after the time stated in the notice, shall be deemed equivalent to the giving of a notice. Any shareholder or Director may waive notice of any meeting by a notice signed by him or his duly authorized attorney, either before or after the meeting. Attendance of a shareholder or Director of the Corporation at a meeting shall constitute waiver of notice of a meeting except where a shareholder or Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or adjourned. 11.2 Consent to Action. Any action which may be taken at a meeting of the shareholders, may be taken without a meeting if a consent in writing setting forth the action so taken is signed in original, facsimile or counterpart by shareholders holding at least a majority of the voting power. Any action which may be taken at a meeting of the Board of Directors may be taken without a meeting if written consent is signed by all members of the Board or Directors entitled to vote on the action. The consent shall have the same force and effect as a unanimous vote of the shareholders or Directors. Notice requirements of these Bylaws which apply to meetings of shareholders and Directors are deemed waived by all Directors and shareholders if a Consent to Action is signed in lieu of holding an actual meeting. 11 12 12.0 RESTRICTIONS ON TRANSFER 12.1 Transfer of shares. No securities of this Corporation or certificates representing the securities shall be transferred in violation of any law or of any restriction on transfer set forth in the Articles of Incorporation or amendments to the Articles, or the Bylaws; or contained in any buy/sell agreements, right of first refusal, or other agreement restricting a transfer which has been executed by the Corporation, or filed with the Secretary of the Corporation and signed by the parties to the agreement. The Corporation shall not be bound by any restrictions not so filed and noted. 12.2 Restrictive Legend. The Corporation and any party to any agreement shall have the right to have a restrictive legend imprinted upon any of the certificates and any certificates issued in replacement or exchange or with respect to them. 13.0 AMENDMENTS 13.1 Except as expressly reserved to the Board of Directors by the Revised Code of Washington for certain modifications, the power to alter, amend or repeal the Articles of Incorporation is vested exclusively in the shareholders and must be approved by a majority vote of all classes of shareholders having the right to vote. Unless the board determines that, because of a conflict of interest or other special circumstances, it should make no recommendation to the shareholders, amendments to the Corporation's Articles of Incorporation shall be recommended to the shareholders by the Board of Directors. 13.2 Changes in and additions to the Bylaws by the Board of Directors shall be reported to the shareholders at their next regular or special meeting and shall be subject to the approval or disapproval of the shareholders at the meeting. If no action is then taken by the shareholders on a change in or addition to the Bylaws, the change or addition shall be deemed to be fully approved and ratified by the shareholders. 14.0 INDEMNIFICATION AND LIABILITY 14.1 Indemnification of Directors. The Corporation shall indemnify officers and Directors to the fullest extent possible under Washington law, against expenses (including attorney's fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this section, a "director" or "officer" of the Corporation includes any person (a) who is or was a director or officer of the corporation, (b) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was a director or officer of a corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. 14.2 Neither the Corporation, its Directors nor its officers will be in any way liable to the shareholders where legal counsel has been relied on in a matter. 14.3 Indemnification of Others. The Corporation shall have the power, to the maximum extent and in the manner permitted by the Revised Code of Washington, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this section, an "employee" or "agent" of the Corporation (other than a director or officer) includes any person (a) who is or was an employee or agent of the Corporation, (b) who is or was serving 12 13 at the request of the Corporation as an employee or agent of another corporation partnership, joint venture, trust or other enterprise, or (c) who was an employee or agent of a Corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. CERTIFICATION AS TO THE BYLAWS OF THE CORPORATION I, the undersigned, being the Secretary of the Corporation do hereby certify the foregoing to be the Bylaws of the Corporation. Mark D. Owen, Secretary 13 EX-4.1 4 SPECIMEN COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 SPECIMEN COMMON STOCK CERTIFICATE NUMBER SHARES SPECIMEN COUNTRY MAID FINANCIAL, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON COMMON STOCK CUSIP 222356 20 6 SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT Is The Owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF NO PAR VALUE EACH OF COUNTRY MAID FINANCIAL, INC. transferable only on the books of the Corporation in person or by attorney upon surrender of this certificate duly endorsed or assigned. This Certificate and the shares represented hereby are subject to the laws of the State of Washington, and to the Articles of Incorporation and Bylaws of the Corporation, as now or hereafter amended. This certificate is not valid until countersigned by the Transfer Agent. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: CORPORATE SEAL SECRETARY-TREASURER CEO COUNTERSIGNED AND REGISTERED: AMERICAN SECURITIES TRANSFER & TRUST, INC. P.O. Box 1506 Denver, Colorado 80201 By ---------------------------------------- Transfer Agent & Registrar Authorized Signature 2 COUNTRY MAID FINANCIAL, INC. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - ............ Custodian ............. TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act.................................. in common (State)
Additional abbreviations may also be used though not in the above list. - -------------------------------------------------------------------------------- For Value Received, hereby sell, assign and transfer unto PLEASE INSERT SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- _____ Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ______________________________________ attorney-in-fact to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated --------------------------------------------------- NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. Signature(s) Guaranteed: The signature(s) must be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15. 2 EX-4.2 5 CERTIFICATE OF PREFERRED STOCK DESIGNATION 1 EXHIBIT 4.2 CERTIFICATE OF DESIGNATION OF COUNTRY MAID FINANCIAL, INC. A WASHINGTON CORPORATION Country Maid Financial, Inc. ("Company"), a corporation organized and existing under and by virtue of the Washington Business Corporation Act, DOES HEREBY CERTIFY: A. That the Board of Directors of the Company, by unanimous vote at a special meeting of directors, adopted a resolution on April 29, 1999 proposing and declaring advisable the following: RESOLVED, that the Board of Directors pursuant to the authority expressly vested in it by the Articles of Amendment to the Company's Articles of Incorporation, filed with the Secretary of State on September 23, 1998, designate 500,000 shares of Convertible Class A Series I Preferred Stock. The powers, designations, preferences and rights are as follows: CLASS A SERIES I PREFERRED 1.0 DIVIDENDS 1.1 The holders of Class A Series I Preferred Stock are entitled to cumulative dividends from the date of issue, when and if declared by the Board of Directors, out of profits or capital legally available for that purpose according to RCW 23B.06.400, at a rate of eight percent (8%) per annum of the subscription price which is the amount paid by the holder to the Company as consideration for the certain number of preferred stock received as recognized by the Board of Directors ("Subscription Price"). The dividend will be payable monthly beginning thirty days after the first date of issue. The Board of Directors has no right to declare a dividend to common shareholders or other securities ranking junior to the Preferred Stock unless all prior dividends on the Class A Series I Preferred Stock are paid in full. Distribution by the Company of dividends on capital stock may result in certain tax effects to shareholders. No right to any dividends shall accrue to holder under this paragraph in the event the Company shall fail to declare dividends. 2.0 CONVERSION 2.1 The Class A Series I Preferred Stock is convertible at the option of the holder, but not earlier than twelve (12) months after the date of the holder's subscription of the Preferred Stock ("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") which will be equivalent to the mean between the closing bid and asked quotations for the Company's common stock in the over-the-counter market as quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or any other reliable quotation system if the common stock is not listed on NASDAQ, for 1 2 the 60 trading days last preceding the date of conversion. 2.2 Unless the Company, at its election, acts to obtain effectiveness of a registration statement under the Securities Act covering the Conversion Shares, the Class A Series I 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. 2.3 Conversion eliminates all rights and preferences resulting from the Class A Series I Preferred Stock. The Company covenants that the Conversion Shares, when issued, will be validly issued, fully paid and non-assessable. 2.4 No fractional share of common stock will be issued upon conversion of the Class A Series I Preferred Stock, but if the conversion results in a fractional share, the Company will, at its option, either round the fractional share upward to the next whole integer or pay to the converting holder an amount, in U.S. funds, not less than the cash conversion value of the fractional interest. 2.5 In the event the Board of Directors of the Company acts to convert Class A Series I Preferred Stock, the Company will take all steps reasonably necessary to permit the conversion of the Class A Series I Preferred Stock and the issuance of the Conversion Shares under the applicable state securities laws of those states in which the Class A Series I Preferred Stock is originally sold. The Company will take any reasonable steps which it determines, in its sole discretion, are necessary to permit the conversion of the Class A Series I Preferred Stock and the issuance of the Conversion Shares under the laws of any other state in which the holder then resides, on the written request to do so by the holder, but in no event shall the Company be required to consent to the general service of process in any state other than those states in which the Class A Series I Preferred Stock being offered is originally sold. If the holder resides in any state where the Company cannot, with the exercise of reasonable diligence and without consenting to general service of process, obtain an exemption for the issuance of the Conversion Shares, the holder may not, as a result, be able to receive the Conversion Shares in exchange for Class A Series I Preferred Stock and the Company is under no obligation to issue the Conversion Shares in those circumstances. 3.0 REDEMPTION 3.1 The Class A Series I 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 as described above in paragraph 2.1 plus an amount equal to all declared and accrued dividends ("Redemption Price"). Upon notice of redemption, Preferred Stockholders shall have a 30-day period after delivery of the Company's notice to convert the Preferred Stock into Conversion Shares. 3.2 No mandatory sinking fund payments or other similar provisions have been established to redeem the aggregate principal amount of the Class A Series I Preferred Stock issued, together with dividends, if any. 4.0 LIQUIDATION 4.1 If there is a liquidation of the Company, a holder of Class A Series I 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 this class and series of Class A Series I Preferred Stock . 2 3 5.0 VOTING 5.1 The Class A Series I 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. 6.0 MISCELLANEOUS 6.1 There are no restrictions on the Company's ability to sell, lease, or encumber the assets of the Company. There are no restrictions requiring the maintenance of any asset ratio or the creation or maintenance of reserves by the Company. Holders of Class A Series I Preferred Stock have no preemptive rights. The Class A Series I Preferred Stock, on issuance against full payment of the purchase price, will be fully paid and nonassessable. B. That the Board of Directors of the Company, by unanimous vote at a special meeting of directors, adopted a resolution on April 29, 1999, proposing and declaring advisable the following: RESOLVED, that the Board of Directors pursuant to the authority expressly vested in it by the Certificate of Incorporation, designate 500,000 shares of Convertible Class B Series I Preferred Stock. The powers, designations, preferences and rights are as follows: CLASS B SERIES I PREFERRED 1.0 STOCK DIVIDENDS 1.1 The holders of Class B Series I Preferred Stock are entitled to cumulative stock dividends from the date of issue, at a rate of eight percent (8.0%) per annum of the Subscription Price, payable quarterly, by the issuance of the common stock of the Company based on the Average Stock Price, which will be equivalent to the mean between the closing bid and asked quotations for the Company's common stock in the over-the-counter market as quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or any other reliable quotation system if the common stock is not listed on NASDAQ, for the 30 trading days last preceding the date of conversion. The Board of Directors has no right to declare a dividend to common shareholders or other securities ranking junior to the Class B Series I Preferred Stock unless all prior dividends on the Class B Series I Preferred Stock have been paid in full. No right to any dividends shall accrue to holder under this paragraph in the event the Company shall fail to declare dividends. 2.0 CONVERSION 2.1 The Class B Series I Preferred Stock is convertible at the option of the holder, but not earlier than twelve (12) months after the date of the holder's subscription of the Preferred Stock ("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") which will be equivalent to the mean between the closing bid and asked quotations for the Company's common stock in the over-the-counter market as quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or any other reliable quotation system if the common stock is not listed on NASDAQ, for the 60 trading days last preceding the date of conversion. 3 4 2.2 Unless the Company, at its election, acts to obtain effectiveness of a registration statement under the Securities Act covering the Conversion Shares, the Class B Series I 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. 2.3 Conversion eliminates all rights and preferences resulting from the Class B Series I Preferred Stock. The Company covenants that the Conversion Shares, when issued, will be validly issued, fully paid and non-assessable. 2.4 No fractional share of common stock will be issued upon conversion of the Class B Series I Preferred Stock, but if the conversion results in a fractional share, the Company will, at its option, either round the fractional share upward to the next whole integer or pay to the converting holder an amount, in U.S. funds, not less than the cash conversion value of the fractional interest. 2.5 In the event the Board of Directors of the Company acts to convert Class B Series I Preferred Stock, the Company will take all steps reasonably necessary to permit the conversion of the Class B Series I Preferred Stock and the issuance of the Conversion Shares under the applicable state securities laws of those states in which the Class B Series I Preferred Stock is originally sold. The Company will take any reasonable steps which it determines, in its sole discretion, are necessary to permit the conversion of the Class B Series I Preferred Stock and the issuance of the Conversion Shares under the laws of any other state in which the holder then resides, on the written request to do so by the holder, but in no event shall the Company be required to consent to the general service of process in any state other than those states in which the Class B Series I Preferred Stock being offered is originally sold. If the holder resides in any state where the Company cannot, with the exercise of reasonable diligence and without consenting to general service of process, obtain an exemption for the issuance of the Conversion Shares, the holder may not, as a result, be able to receive the Conversion Shares in exchange for Class B Series I Preferred Stock and the Company is under no obligation to issue the Conversion Shares in those circumstances. 3.0 REDEMPTION 3.1 The Class B Series I 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 as described above in paragraph 2.1 plus an amount equal to all declared and accrued dividends ("Redemption Price"). Upon notice of redemption, Preferred Stockholders shall have a 30-day period after delivery of the Company's notice to convert the Preferred Stock into Conversion Shares. 3.2 No mandatory sinking fund payments or other similar provisions have been established to redeem the aggregate principal amount of the Class B Series I Preferred Stock issued, together with dividends, if any. 4.0 LIQUIDATION 4.1 If there is a liquidation of the Company, holder of Class B Series I Preferred Stock is entitled to a pro rata liquidation preference in an amount equal to the Subscription Price per share plus any amount equal to the value of the declared and accrued stock dividends to the date of distribution, before any distribution or payment to the holders of common stock or any other security ranking junior to this class and series of Class B Series I Preferred Stock. 4 5 5.0 VOTING RIGHTS 5.1 The Class B Series I 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. 6.0 MISCELLANEOUS 6.1 There are no restrictions on the Company's ability to sell, lease, or encumber the assets of the Company. There are no restrictions requiring the maintenance of any asset ratio or the creation or maintenance of reserves by the Company. Holders of Class B Series I Preferred Stock have no preemptive rights. The Class B Series I Preferred Stock, on issuance against full payment of the purchase price, will be fully paid and nonassessable. C. That the Board of Directors of the corporation, by unanimous vote at a special meeting of directors, adopted a resolution on April 29, 1999, proposing and declaring advisable the following: RESOLVED, that the Board of Directors pursuant to the authority expressly vested in it by the Certificate of Incorporation, designate 500,000 shares of Convertible Class C Series I Preferred Stock. The powers, designations, preferences and rights are as follows: CLASS C SERIES I PREFERRED 1.0 NO DIVIDENDS 1.1 The holders of Class C Series I Preferred Stock are not entitled to dividends. 2.0 CONVERSION 2.1 The Class C Series I Preferred Stock is convertible at the option of the holder, but not earlier than twelve (12) months after the date of the holder's subscription of the Preferred Stock ("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") which will be equivalent to the mean between the closing bid and asked quotations for the Company's common stock in the over-the-counter market as quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or any other reliable quotation system if the common stock is not listed on NASDAQ, for the 60 trading days last preceding the date of conversion. 2.2 Unless the Company, at its election, acts to obtain effectiveness of a registration statement under the Securities Act covering the Conversion Shares, the Class C Series I 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. 2.3 Conversion eliminates all rights and preferences resulting from the Class C Series I Preferred Stock. The Company covenants that the Conversion Shares, when issued, will be validly issued, fully paid and non-assessable. 2.4 No fractional share of common stock will be issued upon conversion of the Class C 5 6 Series I Preferred Stock, but if the conversion results in a fractional share, the Company will, at its option, either round the fractional share upward to the next whole integer or pay to the converting holder an amount, in U.S. funds, not less than the cash conversion value of the fractional interest. 2.5 In the event the Board of Directors of the Company acts to convert Class C Series I Preferred Stock, the Company will take all steps reasonably necessary to permit the conversion of the Class C Series I Preferred Stock and the issuance of the Conversion Shares under the applicable state securities laws of those states in which the Class C Series I Preferred Stock is originally sold. The Company will take any reasonable steps which it determines, in its sole discretion, are necessary to permit the conversion of the Class C Series I Preferred Stock and the issuance of the Conversion Shares under the laws of any other state in which the holder then resides, on the written request to do so by the holder, but in no event shall the Company be required to consent to the general service of process in any state other than those states in which the Class C Series I Preferred Stock being offered is originally sold. If the holder resides in any state where the Company cannot, with the exercise of reasonable diligence and without consenting to general service of process, obtain an exemption for the issuance of the Conversion Shares, the holder may not, as a result, be able to receive the Conversion Shares in exchange for Class C Series I Preferred Stock and the Company is under no obligation to issue the Conversion Shares in those circumstances. 3.0 REDEMPTION 3.1 The Class C Series I 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 as described above in paragraph 2.1 ("Redemption Price"). Upon notice of redemption, Preferred Stockholders shall have a 30-day period after delivery of the Company's notice to convert the Preferred Stock into Conversion Shares. 3.2 No mandatory sinking fund payments or other similar provisions have been established to redeem the aggregate principal amount of the Class C Series I Preferred Stock issued. 4.0 LIQUIDATION 4.1 If there is a liquidation of the Company, holder of Class C Series I Preferred Stock is entitled to a pro rata liquidation preference in an amount equal to the Subscription Price per share, before any distribution or payment to the holders of common stock or any other security ranking junior to this class and series of Class C Series I Preferred Stock. 5.0 VOTING RIGHTS. 5.1 The Class C Series I 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. 6.0 MISCELLANEOUS 6.1 There are no restrictions on the Company's ability to sell, lease, or encumber the assets of the Company. There are no restrictions requiring the maintenance of any asset ratio or the creation or maintenance of reserves by the Company. Holders of Class C Series I Preferred Stock have no preemptive rights. The Class C Series I Preferred Stock, on issuance against full payment of the purchase price, will be fully paid and nonassessable. 6 7 IN WITNESS WHEREOF, the Company has caused this certificate to be signed by C. Richard Kearns, its Chief Executive Officer. COUNTRY MAID FINANCIAL, INC. a Washington corporation By: C. Richard Kearns, Chief Executive Officer State of Oregon County of I certify that I know or have satisfactory evidence that C. Richard Kearns is the person who appeared before me, and said person acknowledged that he signed this instrument, on oath stated that he was authorized to execute the instrument and acknowledged it as the Chief Executive Officer of Country Maid Financial, Inc. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: Signature Title My appointment expires 7 EX-10.1 6 MANAGEMENT AGREEMENT OF TERRITORIAL INNS 1 EXHIBIT 10.1 MANAGEMENT AGREEMENT DATED: BETWEEN: Territorial Inns Management, Inc. ("MANAGER") a Nevada corporation AND: , Inc., ("OWNER") a corporation 1.0 RECITALS 1.1 MANAGER has experience in the field of motel management and has operated motels in various areas throughout the United States for several years. 1.2 OWNER is the owner of the motel properties listed on Exhibit A attached hereto and made a part hereof (individually, a "PROPERTY" and collectively, the "PROPERTIES"), and is desirous of engaging the Manager for the purposes of applying its knowledge and experience in the field of motel management and as advisor of the Properties. 2.0 SERVICES 2.1 MANAGER does hereby agree to apply its knowledge and experience in the field of motel management for the benefit of OWNER, as those abilities may be applied to the PROPERTIES. The services shall be evidenced by application of market criteria, cost criteria, purchasing criteria and employment criteria available to MANAGER and developed by the MANAGER, all for the purposes of managing the PROPERTIES. The MANAGER shall also act in an advisory capacity to OWNER in the event any recommendations of MANAGER would have the effect of requiring an administrative and/or corporate action to implement the operations of OWNER. 2.2 The specific services to be performed by the MANAGER and the powers conferred to MANAGER for the performance of the services, are as follows: (a) to oversee the application of budgetary controls and criteria in the operation of the PROPERTIES in accordance with an approved budget. (b) to set up and oversee all financial reporting procedures necessary for proper, expeditious and usable monthly, quarterly or annual accounting for the PROPERTIES. (c) to set up and oversee the analysis of all financial reports relative to operation, and report to OWNER as to deficiencies in the operation which result in certain operational expenses or income as a result of operation being adversely in deviation with the budgetary criteria set up for each specific category. (d) to pay all operational bills, including but not limited to, rent, taxes, payroll, insurance and disposable operational items from amounts authorized to be disbursed from the concentration accounts 1 2 and certain other bank accounts of OWNER in accordance with an approved budget. (e) to have full power, authority and responsibility to, on behalf of OWNER, operate the PROPERTIES in the following particulars: (1) including the staffing of the PROPERTIES with adequate personnel, with complete authority to hire and discharge said personnel at the sole discretion of MANAGER All personnel so hired, including an on site manager shall be hired for or in behalf of OWNER and payment for their compensation shall be paid out of the funds of OWNER as earlier set out herein; (2) to order supplies and other materials from any designated source, at the sole discretion of the MANAGER; (3) to determine the type and amount of promotional sales aids to be used for the PROPERTIES; (4) to determine and contract for, on behalf of OWNER any and all work to be performed at the PROPERTIES in connection with the capital improvement program and any and all other necessary repairs required on the PROPERTIES in accordance with an approved budget; (5) to keep OWNER advised as to any necessary compliance with all local, state and federal laws which govern the operation of the PROPERTIES; (6) to do any and all other things not herein enumerated which are required for the successful and economical operation of the PROPERTIES. (f) to contract for and maintain property damage, liability, workmen's compensation and all other necessary insurance to adequately protect OWNER and its property. The amount of insurance to be carried shall be jointly determined by MANAGER and OWNER. All insurance premiums shall be paid for out of OWNERS funds; (g) to hire and contract for services, on OWNERS behalf, of accountants, attorneys and any and all other professional services required, not only for the operation of the PROPERTIES but for the protection of any and all other professional services required but for the protection of any and all legal rights arising therefrom. Any and all employment so contracted shall be at the sole expense of OWNER and the OWNER shall be liable for the fees incurred for said performances. 2.3 All of the above-outlined services and the advice pertaining thereto shall be rendered in consideration for the management fee provided for herein, but in no respect by the rendering of these services shall any of the costs of performance of those services not directly employed by the MANAGER as employees of the MANAGER be the responsibility of or be paid by the MANAGER, i.e., accountants, lawyers, operational employees and on site manager. 2 3 3.0 MANAGEMENT FEE 3.1 OWNER does hereby engage the services of the MANAGER for the purpose of managing the PROPERTIES and for those services shall pay to MANAGER the following amounts only, which fees shall be based upon the aggregate performance of the PROPERTIES as a group: (a) a base management fee payable monthly equal to ___% per annum of gross revenues after the payment of all sales taxes ("ADJUSTED GROSS REVENUES") (the "BASE MANAGEMENT FEE"); [THE COMPANY MAY ELECT TO INCLUDE AN INCENTIVE FEE] (b) a first level incentive fee equal to ___% of ADJUSTED GROSS REVENUES (to a total of 5.0% of ADJUSTED GROSS REVENUES) payable monthly with any necessary adjustments at the end of the calendar year in question, if the Properties have achieved a level of net operating income (without deduction for a first level incentive fee) sufficient to pay debt service on the loan as set forth in the loan agreement (the "FIRST LEVEL INCENTIVE FEE"); and (c) a second level incentive fee equal to ___% of ADJUSTED GROSS REVENUES (to a total of 6.0% of ADJUSTED GROSS REVENUES) payable at the end of the calendar year in question, if the PROPERTIES have achieved a level of net operating income equal to the projections prepared by the noteholders as set forth in the loan agreement (the "SECOND LEVEL INCENTIVE FEE"). The SECOND LEVEL INCENTIVE FEE shall be payable thirty (30) days following the delivery of audited financial statements to the noteholders for the calendar year to which said installment relates. 3.2 The amount to be paid MANAGER under this AGREEMENT shall be the total compensation received by MANAGER and shall be used by MANAGER to pay all the employees of MANAGER as well as any and all expenses of MANAGER incurred in the performance of its duties hereunder. All employees necessary for the operation of the PROPERTIES, including on site motel managers, shall be the expense of OWNER and shall not be a setoff in any manner against the management fee to be paid MANAGER under the terms of this AGREEMENT. It is contemplated under the terms of this AGREEMENT that the employees of the MANAGER will operate out of the offices of the MANAGER located in Lebanon, Oregon, and will be separate and distinct from the operational employees necessary for the direct management and operations of the PROPERTIES. 4.0 TERM OF AGREEMENT 4.1 All parties to this AGREEMENT are aware of the costs and expenses which will necessarily be incurred by MANAGER in preparation for and beginning the performance required of it under the terms and conditions of this AGREEMENT, and it is therefore agreed by the parties that the primary term of this AGREEMENT shall be for a term of not less than five (5) years and that OWNER may, at its sole option, extend the term of this AGREEMENT for one (1) additional period of not less than five (5) years by giving verbal or written notice of its intention to so exercise its option, thirty (30) days prior to the expiration of the primary term of this AGREEMENT. 4.2 The parties may terminate this AGREEMENT for a material breach of the AGREEMENT. 5.0 MANAGER/OWNER RELATIONSHIP 3 4 5.1 Nothing contained in this AGREEMENT, nor any the definitions or designations contained in this AGREEMENT, shall make the relationship created by this AGREEMENT of MANAGER to OWNER anything other than that of an independent contractor. The acts of MANAGER shall not be binding upon or criteria liability for or on behalf of OWNER without OWNER'S express consent; except, that neither the acts of the employees of the OWNER, nor the acts of any persons who were or are hired by the MANAGER on behalf of OWNER, nor the acts of those whose services are contracted for by the MANAGER on behalf of the OWNER, shall in anyway be the responsibility of or create any liability on the part of the MANAGER to the OWNER or to any third persons. OWNER shall indemnify and hold harmless the MANAGER from any liability or responsibility of the acts of all persons other than MANAGER or MANAGER'S employees. 6.0 LIMITATION OF MANAGER AUTHORITY 6.1 MANAGER shall have no authority and shall not without the consent of the OWNER: (a) obligate OWNER for, or otherwise purchase or lease any capital item costing more than five thousand dollars ($5,000), including but not limited to equipment or redecorating or structural changes; (b) utilize any company funds for any purpose not directly connected with the operation of the PROPERTIES; 7.0 COVENANTS 7.1 MANAGER will comply with all the rules and regulations of the OWNER and shall be governed by the decisions of the OWNER and shall follow such instructions and directives that may be given to it by OWNER from time to time. 7.2 OWNER acknowledges that MANAGER will reveal to it various trade secrets and confidential information including but not limited to methods of operation and training methods. OWNER covenants that it will not disclose to anyone, either during or after the term of this AGREEMENT, any trade secrets or confidential information disclosed by MANAGER by virtue of its association with OWNER under the terms of this AGREEMENT. 8.0 NOTICES 8.1 Any notice required or permitted to be given under this AGREEMENT shall be in writing and shall be deemed to have been given when deposited in the United States Postal Service, registered or certified mail, postage prepaid, return receipt requested, and addressed as follows: If to MANAGER: With a copy to Territorial Inns Management, Inc. Jones Law Group, P.L.L.C. P.O. Box 942 2300 130th Avenue N.E. Lebanon, OR 97355 Bellevue, WA 98005 If to OWNER: With a copy to: ---------------------------------- ----------------------------- ---------------------------------- ----------------------------- ---------------------------------- ----------------------------- 4 5 8.2 Either party may, from time to time by notice, as provided, designate a different address or addresses to which notice shall be sent. 9.0 GENERAL PROVISIONS 9.1 Entire Agreement. This AGREEMENT constitutes the sole and only agreement between the parties and supersedes any prior understanding either oral or written between the parties. This AGREEMENT cannot be amended, altered or abridged in any paragraph, unless it is done in writing signed by both parties. 9.2 Severability. If any term or provision of this AGREEMENT or the application to any person or circumstance shall to any extent be invalid or unenforceable in any jurisdiction, the remainder of this AGREEMENT and application of such term or provision to persons or circumstances other than those to which it is held invalid or unenforceable or in any other jurisdiction shall not be affected, and each term or provision of this AGREEMENT shall be valid and enforceable to the fullest extent permitted by law. 9.3 No Waiver. No waiver or modification of any of the provisions of this AGREEMENT shall be valid unless in writing and signed by or on behalf of the party granting such waiver or modification. No waiver by any party of any breach or default hereunder shall be deemed a waiver of any repetition of such breach or default or shall be deemed a waiver of any other breach or default, nor shall it in any way affect any of the other terms or conditions of this AGREEMENT or the enforceability thereof. 9.4 Non Assignment and Successors. Neither this AGREEMENT nor any of the rights or duties hereunder may be assigned, transferred, or delegated without prior written agreement of both parties. This AGREEMENT shall be binding upon and, shall inure to the benefit of the parties and their respective successors and permitted assigns. 9.5 Attorneys' Fees. If any party brings any suit or action against the other for relief, declaratory or otherwise, arising out of this AGREEMENT, the prevailing party shall have and recover against the other party all costs and disbursements, including reasonable attorneys fees, in the action and on appeal. 9.6 Choice Of Law/Venue. This AGREEMENT shall be governed by the laws of the State of Oregon. Any legal disputes resulting from the execution or performance of this AGREEMENT shall be brought solely in the Courts of the State of Oregon, Linn County. 9.7 Counterparts. This AGREEMENT may be signed in counterparts. 5 6 10.0 EXECUTING SIGNATURES 10.1 IN WITNESS WHEREOF, the parties have signed this AGREEMENT. MANAGER: OWNER: TERRITORIAL INNS MANAGEMENT, INC. - --------------------------------- --------------------------------- By: By: ------------------------------ ------------------------------ Its: Its: ----------------------------- ----------------------------- 6 7 EXHIBIT A THE PROPERTIES 7 8 SCHEDULE OF PROPERTIES UNDER FORM OF MANAGEMENT AGREEMENT (EXHIBIT 10.1) Best Western I-35 Inn 4014 Miller St. Bethany, MO 64424 Owner: Territorial Inns, an Oregon partnership Select Inn 100 Bulldog Blvd. Borger, TX 79007 Owner: LHA, LLC Willow Springs 5 "B" Street Cheney, WA 99004 Owner: C.R. Kearns Select Inns Rt. 1 Box 60 Tulia, TX 79088 Owner: LHA, LLC The terms for each of the above referenced properties are the same. 8 EX-10.2 7 PROPERTY MANAGEMENT AGREEMENT OF TERRITORIAL INNS 1 EXHIBIT 10.2 PROPERTY MANAGEMENT AGREEMENT Dated: Between: And: Territorial Inns Management Company Inc., an Oregon Corporation ________________________ (hereinafter referred to as "Owner") is the owner of the _________________________________________ (hereinafter referred to as "Property"). References to "Owner" in this agreement recognizes the owner as with whom this agreement is made. Territorial Inns Inc. (hereinafter referred to as "Manager") is a management company whose stockholders are in the business of owning and operating motels. Whereas, the Owner desires to employ the Manager for the management of the Property, and the Manager is willing to accept such employment subject to the terms and conditions hereinafter set forth; Now Therefore, in consideration of the foregoing and of the terms and conditions hereinafter set forth, the Manager and the Owner hereby agree to the following: 1. Employment of the Manager. The Owner hereby employs the Manager to act as the general operating manager of the Property, and grants to the Manager the authority to direct, supervise, and manage the operation of the property on behalf of the Owner and for the owner's account, in conjunction with the Owner's board of directors. 2. Term of Agreement The term of this agreement shall be from ________________ until ____________________. 3. Management Fee. The management fee paid by the Owner to the Manager each month shall be __% of the gross room revenue of the Property for the immediately preceding month. Fees are to be paid after debt service and operating expenses but before Owner's draws. Management fees will accrue in any event. Management fees are to be paid monthly and are due by the 5th day of the month based on the revenues of the preceding month. 4. Ownership of Property, Description. The Owner owns the property and agrees to provide all equipment, furniture, fixtures, inventory, and other personal property appurtenant to and necessary for the operation of the lodging facility and restaurant. 5. Manager's Duties. During the term of this agreement , the Manager shall use it's best efforts in the management and operation of the business, services and sales of the Property. The Manager's right to manage and operate the Property shall be exclusive to the Manager except that the Manager shall be subject to policy and procedures approval by the Owner's board of directors. In 1 2 pursuance of the foregoing, the Manager shall have the following duties and perform the following services: 5.1 Use its best efforts and due diligence in the renting of all rooms and facilities to desirable guests and tenants. 5.2 Receive, consider, and handle the complaints of all tenants, guests, or users of any of the services of the facilities of the property. 5.3 Establish and maintain price and rate schedules for all services and facilities of every kind or nature connected with the operation of the Property and to collect all receipts and income derived from the same. 5.4 Hire, promote, discharge, and in all other ways supervise the work of all employees and staff connected with the property pursuant to paragraph 12 below. 5.5 Establish and maintain an accounting system for the purpose of bookkeeping, cost control, budget, payroll records, all reports and taxes incident thereto, and such other accounting and clerical services as are necessary for the proper management of the Property. 5.6 Pay in the Owners name all labor expenses at property and maintain payroll records. 5.7 Enter into contracts in the name of and at the expense of the Owner for the furnishings to the Property of electricity, gas, water, steam, telephone, cleaning, pest control, elevator and boiler maintenance, air conditioning maintenance, television maintenance, and for any other utilities or services which the Manager determines are necessary and proper to conduct the business at the Property. 5.8 With prior consent of the Owner, arrange of the making or installing, at Owner's expense and in the name of the Owner, of alterations, repairs, maintenance, replacements, equipment, or the installation and the purchasing of materials and supplies incidental to the property. 5.9 Keep and maintain such accounts of deposit in a banking institution(s), pursuant to paragraph 6 below, as the Manager deems appropriate for the orderly control of all funds and monies received by the Manager for or on behalf of the Owner, with the Owner's approval in connection with the business of the property. 5.10 Generally do all things and take all actions which the Manager, in its sole discretion, deems necessary or appropriate for the operation and management of the Property within the terms of this agreement. Owner's board of directors reserve the following management rights without obligation to Manager: 5.11 To ask for reports on and review the complaints of tenants, guests, or users of any of the services or facilities of the property and make suggestions to the Manager for handling the complaints. 2 3 5.12 Review the bookkeeping system. 5.13 Review requests for alterations, repairs, maintenance, replacements, equipment, or the installation and the purchasing of materials and supplies incidental to the operation of the property. 5.14 Review bank accounts, receipts and deposits. 5.15 Review all contracts, expenditures, payments and disbursements approved by the Manager. 5.16 Review periodic reports required under paragraph 11. 5.17 Make periodic inspections of the property pursuant to paragraph 18. 6. Deposit of Funds/Books of Account. Subject to the terms and conditions of this agreement, all revenues from Property operation shall be deposited in one or more accounts established by the Owner. Accounts shall be maintained exclusively for the benefit of Owner and not commingled with any of Manager's funds. 7. Expenditures. Out of such accounts, Owner will pay for all obligations and expenditures properly incurred for and on the account of the property, including Manager's compensation and expense reimbursement, insurance premiums, taxes, and expenses for supplies, repairs, maintenance and improvements. 8. Business Name. The business name shall be conducted under the name of the _________________. 9. Advertising. The Manager shall arrange and contract for, at the Owner's expense, all advertising and promotion which the Manager may deem necessary for the operation of the property, not to exceed $10,000 (plus billboard advertising) annually without the Owner's written consent. If any advertising is done in conjunction with advertising of other lodging establishments owned or managed by the Manager, the cost of such advertising shall be prorated among the various businesses and properties benefited. 10. Credit Cards. The Owner authorizes the Manager to accept such credit cards as the Manager may determined from time to time and establish and maintain an appropriate credit card billing system. 11. Books of Account. Owner shall keep and maintain the Property's book of account in accordance with GAAP so as to properly reflect the Property's receipts and disbursements. 12. Employees. The Manager shall hire, promote, discharge, and supervise the work of the executive staff, including a general manager, assistant managers, department heads, auditors, accountants and the like. Through such executive staff, the Manager the Manager shall supervise the hiring, promotion, discharge and work of all other operating and service employees performing services in or about the property, all in the name of the Owner's payroll. The Manager shall not be liable to any employees for their wages or compensation, nor to the Owner or others for any act or omission of the 3 4 part of such employees. The Manager will properly file in a timely manner all operational reports for payroll, taxes and insurance. In the event that the Manager pays any employee from it's own funds, it will be reimbursed, in full, by Owner. The Manager may, with the Owner's approval, assign one or more of the Manager's employees to the property on a temporary basis, in which event the Owner agrees to reimburse the Manager for all the actual expenses of that employee, including salary, transportation to and from the Property and for all room and board of such employee while at the Property. 13. Legal Action The Manager may institute , in it's own name or in the name of the Owner, at the expense of the Owner, with Owner's approval, any necessary legal action or proceedings to collect charges, rent or other income from the property or oust or dispossess guests, tenants, or other persons in possession, or to cancel or terminate any tenancy. The Manager may, but shall not be required to, pursue or defend any other legal actions or proceedings in any way connected with the operations of business of the property. 14. Licenses. The Owner owns or possesses all necessary licenses and permits required for the operation of the Property. At it's own expense, the Owner will keep all such necessary licenses and permits in full force and effect during the term of this agreement, and agrees to execute and deliver all applications necessary to keep such permits and licenses current. 15. Insurance. The Owner shall obtain and the Manager shall maintain at Owner's expense, through companies agreed upon by parties hereto, such policies of insurance, including but not limited to public and employer's liability, workman's compensation, fire and extended coverage, liability and such other customary insurance as the Manager deems necessary for the protection of the interests of the Property, the Owner and the Manager. All policies of insurance shall name the Owner and the Manager and such other parties as may be required by the provisions of any mortgage as the insured thereunder as their respective interests may appear. 16. Debt Service and Ad valorem Taxes. From Owner funds, Manager shall make all payments of real and personal property taxes and principal and interest on notes, mortgages, contracts, and capital leases. Evidence of payment shall be submitted to the Owner upon request. 17. Compliance with Laws and Regulations. The Manager and the Owner agree that each shall make all reasonable efforts, but only at the Owner's expense, to comply with all applicable laws, rules, regulations, requirements, and ordinances of any federal, state or municipal authority, and the requirements of any insurance companies covering any of the risks against which the property is insured. The Owner agrees to keep in full force and effect any franchise or licensing agreements relating to the business of the Property, and the Manager agrees to operate the Property in keeping with such franchise or licensing agreement. 18. Inspection by Owner. The Manager shall accord to the Owner and it's duly authorized agents the right to enter upon any part of the Property at all reasonable times for the purpose of examining or inspecting the Property, it's records or its operation or for any other purpose which Owner, in it's discretion, shall deem advisable. 19. Owner's Credit. The Manager shall not pledge the Owner's credit without the Owner's prior consent except as may be in keeping with the terms and scope of this agreement. The Manager shall not, in the name of the Owner, borrow any money or execute any promissory note or other encumbrance without the prior consent of the Owner. 4 5 20. Travel Expense. Parties hereto agree that expenses of travel to and from the property that is made by Management personnel and appointees for the purpose of management business shall be paid by owner within 30 days from completion of travel. 21. Liability/Indemnity. The Manager shall not be liable to Owner or to any other person for any act or omission, negligent, tortious, or otherwise, of the Manager or any agent or employee of the Manager or the Owner in the performance of this agreement, except only in the case of fraud or gross negligence of the Manager. The Owner hereby agrees to indemnify and hold harmless the Manager from and against any liability, loss, damage, cost or expense, (including attorney's fees) which might be incurred by or maintained against the Manager by reason of any such act or omission, or from any other cause arising out of the Manager's association with the Property. 23. Termination. Either party may terminate this agreement by giving 60 days notice of such termination to the other party. Such notices shall be in written form and delivered to the other party at the following addresses: ___________________________________________________Owner ___________________________________________________Manager 24. Applicable Law. This agreement shall be governed by and construed pursuant to the laws of the State of Texas. 25. Amendment. This agreement shall not be changed, amended or otherwise modified except by another agreement in writing signed by Owner and Manager. 26. Assignment, Binding Effect. This agreement may not be assigned by either party without the prior consent of the other party. This agreement shall be binding upon and inure to the benefit of the respective parties hereto and their heirs, personal representatives, successors and permitted assigns. 27. Supplemental Schedule. The Supplemental Schedule attached to this agreement shall be deemed to be a part of this agreement for all purposes. Agreed to and dated this_______day of ________, 199________ Manager Owner Territorial Inns Management Company Inc. - --------------------------------------------- 5 6 SUPPLEMENTAL SCHEDULE This Supplemental Schedule is attached to the Territorial Inns Management Co Inc. contract dated_________________________and is to be a part thereof for all purposes. Owner ----------------------------------------- Address ----------------------------------------- Name of Property -------------------------------- Address of Property ----------------------------- Term of Agreement: Banking Institution for Owner's account (s) ------ Minimum working funds balance in Manager's Accounts $ Management Fee: The Management fee to be paid to the Manager each month shall be ____ of the gross room revenue, as defined in the Management Contract. Manager: Owner --------------------------- --------------------------- 6 7 SCHEDULE OF TERMS OF AGREEMENTS UNDER FORM OF PROPERTY MANAGEMENT AGREEMENT (EXHIBIT 10.2) (1) Nendels Inn, Kennewick, WA Effective date: January 1, 1994 Term: Terminable upon 60 days written notice Management Fee: 2.5% of gross room revenue (2) Colonial Motor Inn, Yakima, WA Effective date: January 1, 1994 Term: January 1, 1994 to December 31, 1999 Management Fee: 5% of gross room revenue (3) Village Inn, Cotulla, TX Effective date: June 14, 1994 Term: June 14, 1994 to December 31, 1999 Management Fee: 5% of gross room revenue (4) Nendels Inn, Dodge City, KS Effective Date: April 29, 1996 Term: 5 years commencing April 29, 1996 Management Fee: 5% of gross room revenue Additional provisions: Additional paragraph in Section 3: If the Property has a food and/or beverage operation, and the Owner wishes to retain the Manager to conduct the operation of that business, the management fee shall be calculated at the rate of 3% of the gross food sales and 3% of the gross beverage sales. If the Owner has leased such an operation to a third party, then the Manager shall receive 3% of the lease amount monthly. Property Rehabilitation: If requested, the Manager agrees to plan, arrange for, order and oversee installation of capital expense and rehabilitation at the property in the amount of $50,000. per year. This service shall be included in the management fee agreed to in separate paragraph of this agreement. If such expenses exceed $50,000 in any given year the Manager will then be paid 3% of the cost of any amount over $50,000. If additional staff is needed for such installation, Owner agrees to pay salary and expenses over and above the 3% named above. 7 EX-10.3 8 PROPERTY MANAGEMENT AGREEMENT 1 EXHIBIT 10.3 PROPERTY MANAGEMENT AGREEMENT DATE : July 24 ,1996 BETWEEN : JKLM FAMILY LIMITED PARTNERSHIP, an Oregon limited partnership ("Owner") and TERRITORIAL INNS MANAGEMENT CO., INC., an Oregon corporation ("Manager"). R E C I T A L S : Owner is the owner of the Summer Hill Apartments in Cotulla, Texas (hereinafter referred to as the "Property"). Manager is in the business of managing, operating and maintaining motel and apartment properties. Owner desires to employ, engage and appoint Manager as its managing agent for the Property, and Manager is desirous of accepting this appointment, NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, Owner and Manager agree as follows: 1. Appointment. The Owner hereby appoints and employs Manager as the exclusive managing agent for the Property, and Manager hereby accepts such appointment. 2. Term. This Agreement shall commence as of the date hereof and shall remain in effect until terminated as hereinafter provided. 3. Management Fee. 3.1 Fee. Owner shall pay Manager a monthly fee in the amount of ten percent (10%) of the Gross Room Revenue of the Property for the immediately preceding month. Management fees are to be paid monthly and are due by the fifth (5th) day of the month based on the revenues of the preceding month. 3.2 Gross Room Revenue. For purposes of this section, Gross Room Revenue shall mean all of the rents paid, less any tenant credit or adjustment, and shall exclude deposits such as cleaning deposits, pet deposits, and security deposits. 4. Manager's Duties. Manager shall manage, coordinate, and supervise the operation, maintenance and management of the Property. Manager shall have such responsibilities, and shall perform and take or cause to be performed or taken all such services and actions customarily performed or taken by managing agents of property of similar nature, location and character to that of the Property as Manager shall deem necessary or advisable for the proper management of the Property, including, 1 2 without limitation, the duties set forth in 4.1 through 4.10 below. Unless other specifically provided in this Agreement, all services and actions that Manager is required or permitted to perform or take or cause to be performed or taken under this Agreement in connection with the management of the Property shall be performed or taken as the case may be on behalf of Owner and at Owner's sole expense. 4.1 Rentals. Manager shall rent all apartments on terms and conditions satisfactory to Owner to desirable tenants. 4.2 Enforcement. Except as directed otherwise by Owner, Manager shall monitor the compliance of all tenants with the terms and conditions of their rental agreements and take all such actions as Manager shall deem necessary or advisable to enforce all the rights and remedies of Owner under the rental agreements to protect the interests of Owner, including without limitation, the preparation and delivery to tenants of late payment, default, and other appropriate notices. With the prior written consent of Owner, Manager may retain counsel, collection agencies, and such other persons as Manager may deem appropriate or advisable to enforce by legal action the rights and remedies of Owner against any tenant in default in the performance of its obligations under a rental agreement. Manager shall promptly notify Owner of the progress of any such legal action. 4.3 Dispute Resolution. Manager shall receive and use its best efforts to attend to and resolve all complaints of tenants and shall attempt to resolve any complains, disputes, or disagreements by or among tenants but shall not expend more than Two Hundred Dollars ($200) to settle any dispute with the tenant without the prior written consent of Owner. 4.4 Rates. Manager shall establish and maintain price and rates schedules for all services and facilities of every kind or nature connected with the operation of the Property and shall collect all revenues derived therefrom for the account of Owner. 4.5 Advertising. Manager shall, at the expense of and with the prior approval of Owner, hire such advertising services and place such advertisements which the Manager may deem necessary for the operation of the Property. 4.6 Compliance. Manager shall take or cause to be taken all appropriate actions affecting the Property as Manager deems advisable to comply with all legal requirements applicable to the Property and those of any Board of Fire Underwriters or similar agency. Notwithstanding limitations set forth in Section 8.3 of this Agreement, Manager may without owner's prior written approval, take or cause to be taken such actions without limitation as to cost, the failure to do so would or might in Manager's judgment, expose Owner or Manager to criminal liability, provided that in each instance Manager shall, before taking or causing to be taken such action, use reasonable efforts under the circumstances to notify Owner or the need for the action and to obtain Owner's approval. Manager and Owner shall each promptly notify the other of any violation, order, rule or determination of any governmental authority or Board of Fire Underwriters or similar agency that affects the Property. 4.7 Maintenance. Manager shall cause the building to be maintained in good and safe condition comparable to that of other properly maintained properties of similar type and location to that of the Property. 2 3 To the capacity of all equipment and systems located in or servicing the property, Manager shall cause all such equipment and systems to be operated effectively and maintained in good repair. Further, Manager shall cause to be provided or made available to tenants those services which Owner is required to provide or make available under rental agreements. Manager shall enter into such service and maintenance contracts as Manager shall deem necessary or appropriate for the operation and maintenance of the building, including without limitation, telephone service, utilities, elevator, boiler and air conditioning maintenance, landscape maintenance, pest control, rubbish removal, and fuel. Manager shall purchase in reasonable quantities and at reasonable prices all supplies as Manager shall deem necessary or appropriate for the proper operation and maintenance of the Property. 4.8 Repairs. With the prior written consent of Owner, Manager shall cause such ordinary and necessary repairs to be made to the Property on all equipment and systems located in or servicing the Property, and shall cause such interior alterations and declarations to be made in the Property as Manager shall deem necessary or advisable for its proper operation and maintenance. The prior approval of Owner shall not be required for emergency repairs regardless of the cost of such repairs if, in the reasonable opinion of Manager, such repairs are immediately necessary for the preservation or protection of the Property or the safety of Tenants and other personnel in or on the Property, or are otherwise required to avoid the suspension of any necessary services to the Property, provided that in each such instance Manager shall, before causing any such emergency repair to be made, use reasonable efforts under the circumstances to notify Owner of the emergency situation and obtain its approval of that repair. 4.9 Property Rehabilitation. Manager shall plan, arrange for, order and oversee installation of capital improvements and rehabilitation of the Property as authorized in writing by Owner on a project-by-project basis, which authorization must be given before commencing such project. In the event the project costs do not exceed Six Thousand Dollars ($6,000) per year there shall be no additional fee for such services. In the event the project costs exceed Six Thousand Dollars ($6,000) in a year, (a) Manager shall provide Owner with a detailed cost budget in advance of commencing the work; (b) The Owner shall pay Manager a fee of four percent (4%) of the costs in excess of Six Thousand Dollars ($6,000) upon completion of the project, in addition to the Management Fee; and (c) With the prior written consent of Owner, Manager shall hire such additional personnel as Owner and Manager agree are required to complete the project and Owner shall pay the salary and employment related expenses of such personnel. 4.10 Miscellaneous. Generally do all things and take all actions necessary or appropriate for the operation and management of the Property within the terms of this Agreement. 5. Employees. 5.1 Hiring. To the extent Manager deems necessary for the conduct of the management 3 4 of the Property, Manager shall hire personnel who, in each instance, shall be employees of Owner (and not of Manager), provided, however, that any personnel hired by Manager whose wages are not provided for in the budget shall be employees of Manager and their wages and fringe benefits shall be paid by Manager without reimbursement by Owner. Manager shall direct and supervise all personnel hired by Manager in the performance of their duties and shall discharge those of them whose employment Manager shall determine to be unnecessary or undesirable. Manager shall use due care in the selection of personnel and employees on Owner's behalf and, having used such care, shall have no responsibility or liability for any act or admission, tortious or otherwise, of any such employee. 5.2 Wages. Manager shall pay all wages and other benefits properly payable to the employees hired by Manager, maintain adequate payroll records, remit to the property authorities all required income and social security withholding taxes on employment insurance payments, workers compensation payments and such other amounts with respect to wages and other benefits payable to such employees as may be required under applicable law, together in each case with all required reports or other filings, and shall maintain and administer all medical, disability and other insurance benefits and other fringe benefits as may from time to time be required under any union or other agreements or arrangements pertaining to the employment of such personnel. 5.3 Labor Contracts. Manager shall perform Owner's obligations under all union and other labor contracts affecting the employees of Owner who are rendering services in connection with the management of the Property, and shall monitor and enforce all of Owner's rights thereunder. 5.4 Assigned Employees. The Manager may, with the Owner's prior written approval, assign one or more of Manager's employees to the Property on a temporary basis, in which event the Owner agrees to reimburse the Manger for all the actual expenses of that employee, including wages, transportation to and from the Property and reasonable room and board of such employee while at the Property. 6. Limitations on Manager's Powers and Authority. 6.1 Expenditures. Except to the extent provided for in any approved budget or as otherwise specifically provided in this Agreement with respect to emergency situations or otherwise, Manager shall not, without the prior written approval of Owner, incur any single expense for a repair, alteration, service, supply or other matter whatsoever that would involve a cost in excess of Five Hundred Dollars ($500), except that air conditioners may be replaced at a cost of not more than $1,200. 6.2 Owner's Credit. The Manager shall not pledge the Owner's credit without the Owner's prior written consent. The Manager shall not in the name of Owner borrow any money or execute any promissory note or other encumbrance without the prior written consent of the Owner. 7. Deposit of Funds/Books of Account. 7.1 Operating Accounts. Manager shall open and maintain an account or accounts ("Operating Accounts") as Manager shall deem necessary or appropriate in a banking institution in the State of Texas, designated from time to time by Owner in Manager's name as agent for owner. Manager shall deposit in the Operating Accounts all funds collected by Manager under this Agreement. Manager shall make deposits into or withdrawals from the Operating Accounts as Manager shall deem necessary or advisable in connection with the management of the Property, provided, however, that all funds deposited in the Operating Accounts shall be and remain Owner's property. Expenditures made from such account shall include without limitation the Manager's compensation and expense reimbursements, 4 5 insurance premiums, real and personal property taxes, payments of amounts due on mortgages, contracts and capital leases affecting the Property and expenses for supplies, repairs, maintenance and improvements as incurred subject to the terms of this Agreement. 7.2 Security Deposits. Manager shall deposit and maintain in separate accounts approved by Owner in accordance with applicable laws all security deposits, if any, of tenants. 7.3 Monthly Reports. Manager shall prepare and deliver to Owner a monthly report for each month not later then the 25th day of the next following month setting forth statements of collections, disbursements, delinquencies, uncollectible accounts, balances of Operating Accounts, accountants payable, and other matters relating to the management of the Property. These statements shall upon Owner's request be accompanied by appropriate documentation of expenditures made by Manager under this agreement. 7.4 Remittances Within 25 Days After the End of Each Month. Manager shall remit to Owner all unexpended funds in the Operating Accounts on or before the 25th day of each month to the extent that the funds in the Operating Accounts exceed the amount reasonably estimated by Manager as necessary to provide for working capital. 7.5 Books and Records. Manager shall establish and maintain an accounting system for the purpose of bookkeeping, cost control, budget, payroll records, all reports and taxes incident thereto, and such other books of accounts, records, and documentation pertaining to the operation and maintenance of the Property as are customarily maintained by managing agents of properties similar in location and size to that of the Property. Manager shall prepare or cause to be prepared and filed all returns and other reports relating to the Property, other than income tax returns, as may be required by any governmental authority. 8. Operating Budgets. 8.1 Budget for First Operating Year. Manager shall prepare and submit to Owner prior to August 1, 1996 for Owner's approval a pro forma budget for the operation and maintenance of the Property covering the period from August 1, 1996 through December 31, 1996. Manager shall manage the Property consistent with and subject to the cost limitations set forth in the budget as the same may be adjusted with the prior written consent of Owner. 8.2 Annual Budgets. Manager shall prepare and submit to Owner for its approval at least thirty (30) days before the beginning of each calendar year a proposed pro forma budget for all costs pertaining to the operation and maintenance of the Property during the calendar year. Each budget shall be in substantially the same form as the approved budget in effect for the prior calendar year and, shall set forth expenditures on an annual basis. At the request of Owner, Manager shall make such reasonable modifications to each proposed pro forma budget it prepares in accordance with this Agreement until Owner shall have approved the budget in writing, which approval shall not be unreasonably withheld or delayed. 8.3 Limitations of Approved Budgets Except as Otherwise Specifically Provided in this Agreement. Manager shall incur costs and expenses in connection with the operation and maintenance of the Property during any calendar year within the limitations established by the budget for the operating year. Manager shall not, without Owner's prior written consent, incur costs and expenses to exceed the budgeted amount except as otherwise herein provided with respect to emergency situations. 5 6 Manager shall not be required to obtain Owner's prior approval with respect to, and Owner shall consent to adjustments to the budget, for the following: (a) Costs and expenses relating to utility charges, real estate taxes, insurances, or other matters that are not within Manager's reasonable control in which, if not incurred, would or might in Manager's judgment, adversely and materially affect the operation and maintenance of the Property; and (b) Other costs and expenses that this Agreement specifically provides Manager may incur without limitation. In addition, if any calendar year shall commence before Owner shall have approved the pro forma budget for that year, Manager shall use its reasonable judgment in incurring costs and expenses relating to the operation and maintenance of the Property until a budget for such year shall be in effect, and in doing so, shall be guided by the budget for the prior calendar year. 9. Owners' Duties. 9.1 Information. Owner shall make readily available to Manager any information in its possession pertaining to the layout of the buildings, the construction of the buildings, the heating, air conditioning, ventilating, plumbing, electrical and other mechanical systems and equipment servicing the property, as Manager may reasonably request. Owner shall also provide Manager with copies of or access to all agreements, licenses, certificates, contracts, bills, notices and other documents pertaining to the Property. 9.2 Insurance. The Owner shall obtain and the Manager shall maintain at Owner's expense, through companies agreed upon by Owner and Manager (which in all cases shall be an insurance company licensed to do business in the State of Texas), such policies of insurance, including but not limited to public and employers liability, workmens compensation, fire and extended coverage, liability and other insurance as may be necessary for the protection of the interests of Owner and Manager or as Manager otherwise may reasonably request in the performance of management of the Property. All policies of insurance shall name the Owner and the Manager and such other parties as may be required by the provisions of any mortgage as the insured thereunder as their respective interests may appear. 9.3 Deposit of Funds. Upon the execution of this Agreement, Owner shall deposit with Manager funds in an amount sufficient to pay the expenses shown in the budget as the anticipated expenditures of Manager under this Agreement for the first month of the term hereof. Owner shall also promptly deposit with Manager funds in such amounts as may be shown in the monthly statements delivered by Manager to Owner as necessary additional funds for the operation and maintenance of the Property. Further, if due to an emergency situation or otherwise at any time Manager shall notify Owner in writing that the balances of the operating accounts are insufficient to fund the management of the Property, Owner shall promptly supply Manager with the necessary funds. Manager shall deposit all the funds delivered by Owner to Manager as provided above in the appropriate Operating Account. 10. Owner's Access to Property and Records. Owner shall have rights to periodically inspect the Property and to review all records with respect to the Property, and Manager shall furnish any or all such records as may be requested by Owner, including but not limited to the following: 6 7 (a) the bookkeeping system; (b) requests for alterations, repairs, maintenance, replacements, equipment for the installation and the purchasing of materials and supplies incidental to the operation of the Property; (c) bank accounts, receipts and deposits; (d) all contracts, expenditures, payments and disbursements; and (e) periodic reports. 11. Credit Cards. The Owner authorizes the Manager to accept such credit cards as the Manager may determine from time to time and establish and maintain an appropriate credit card billing system. 12. Business Name. The business of the Property shall be conducted under the name of the Summer Hill Apartments or such other name as Owner may hereafter determine in its sole discretion. 13. Licenses. At Owner's expense, Manager shall keep all necessary licenses and permits required for the operation of the Property in full force and effect during the term of this Agreement, and Owner shall execute and deliver any documentation as requested by Manager to keep such permits and licenses current. 14. Compliance with Laws and Regulations. The Manager and the Owner agree that each shall make all reasonable efforts, at the Owner's expense, to comply with all applicable laws, rules, regulations, requirements and ordinances of any federal, state or municipal authority, and the requirements of any insurance companies covering any of the risks against which the Property is insured, with respect to the proper operation and maintenance of the Property. 15. Travel Expense. The parties agree that expenses of travel to and from the Property that is made by Manager personnel and agents for the purpose of managing the Property shall be borne by the Manager up to four visits per calendar year. If there are special visits required due to unexpected circumstances, the Owner will bear those costs subject to agreement in advance by the parties. All travel shall be economy class. 16. Indemnification. 16.1 Scope. Owner shall indemnify and hold harmless Manager, its principals officers, directors, shareholders, partners, employees, and agents (individually and collectively, the "Indemnitees") from and against all liabilities, claims, suits, damages, judgments, costs and expenses of whatever nature, including reasonable counsel fees and disbursements, to which the Indemnitees may become subject by reason of or arising out of any injury to or death of any person(s), damage to property, loss of use of any property, or otherwise in connection with the performance or nonperformance of Manager's obligations under this Agreement. Owner shall promptly reimburse the Indemnitees for all amounts, including reasonable attorneys' fees and disbursements, which they or any of them are required to pay in connection with or in defense of any of the matters for which they or any of them are entitled to indemnification as set forth above. 16.2 Conditions. The obligations of Owner to indemnify, hold harmless and reimburse the Indemnitees under Section 16.1 are subject to the following conditions: (a) The Indemnitees shall promptly notify Owner of any matter with respect to which Owner is required to indemnify, hold harmless, or reimburse the Indemnitees; and 7 8 (b) The Indemnitees shall not take any actions, including an admission of liability, which would bar Owner from enforcing any applicable coverage under policies of insurance held by Owner or would prejudice any defense of Owner in any appropriate legal proceedings pertaining to any such matter or otherwise prevent Owner from defending itself with respect to any such matter. 16.3 Excluded Matters. Notwithstanding the foregoing, Owner shall not be required to indemnify, hold harmless, or reimburse the Indemnitees with respect to any matter to the extent the same is covered by insurance or resulted from the gross negligence or willful malfeasance of the Indemnitees or actions taken by the Indemnitees outside of the scope of the Manager's authority under this Agreement or any express or implied direction of Owner. 17. Timely Performance. Owner and Manager shall each perform all of their respective obligations under this Agreement in a proper, prompt and timely manner. Each shall furnish the other with such information and assistance as the other may from time to time reasonably request in order to perform its responsibilities under this Agreement. Owner and Manager each shall take all such actions as the other may from time to time reasonably request and other cooperate with the other so as to avoid or minimize any delay or impairment of either party's performance of its obligations under this Agreement. 18. Assignment. 18.1 Permissible Assignments. Neither Owner nor Manager may assign this Agreement without the prior written consent of the other, provided, however, that either party may assign this Agreement to a successor corporation or partnership, a parent company, a wholly owned subsidiary corporation, or an entity which controls, is controlled by, or is under common control with Owner or Manager, as the case may be. 18.2 Assumption and Release. Each permitted assignee of this Agreement shall agree in writing to personally assume, perform, and be bound by all of the terms, covenants, conditions and agreements contained in this Agreement, and thereupon the assignor of this Agreement shall be relieved of all obligations under this Agreement except those which shall have accrued before the effectiveness of such assignment. 19. Termination. Either party may terminate this agreement by giving sixty (60) days prior written notice of such termination to the other party. Within fifteen (15) days after the expiration or termination of this Agreement, Manager shall pay over to Owner (i) any balance of funds held by Manager on Owner's account pursuant to this Agreement; and (ii) all books, records, leases, agreements and other documents that are necessary or pertinent to the future management of the Property. The provisions of this section shall survive the expiration or termination of this Agreement. 8 9 20. Notices. 20.1 General. Any and all notices or other communications given under this Agreement shall be deemed to have been properly given when delivered, if personally delivered, or three (3) days after the date mailed if sent certified or registered mail, return receipt requested and postage prepaid, and addressed to the parties at the following addresses: If to Manager, to: Territorial Inns Management Co., Inc. 1784 S Main Rd. Box 942 Lebanon, OR 97355 If to Owner, to: JKLM Family Limited Partnership EZL Corporation, General Partner P. O. Box 631 Camp Sherman, OR 97330 Any notice delivered by either party in any manner other than those described above shall be deemed properly given when received. Either party may change its address for the giving of notices under this Agreement by delivering to the other party ten (10) days' written notice of this change of address. 20.2 Emergency Notices. Either party may give the other notice of emergency situations, orally (personally, by telephone, or otherwise) or by telecopy, telex, telegram, or other method, provided that the party giving any emergency notice as provided above in this paragraph shall confirm the same by written notice in accordance with Section 20.1 above. 21. Governing Law. The parties expressly agree that this Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the state of Oregon, except to the extent that the laws of the State of Texas must be applied under conflict of law principles by reason of the situs of the Property in Texas. The parties hereby consent and waive any objections to the jurisdiction and venue of any state or federal court of general jurisdiction in Multnomah County, Oregon, with respect to any action or proceeding relating in any way to this Agreement and agree any action brought by one party against the other relating to this Agreement shall be brought in such a court in Multnomah County, Oregon. 22. Amendment. This Agreement shall not be changed, amended or otherwise modified except in writing signed by Owner and Manager. 23. Authorities. Each individual executing this Agreement on behalf of a partnership, corporation or other entity warrants that such individual is authorized to do so and that this Agreement will constitute the legally binding obligation of such entity. 24. Attorney Fees. If any suit, action, or proceeding shall be instituted to enforce or interpret this Agreement, the prevailing party shall be entitled to recover from the losing party, in addition to costs, such sums as the court may adjudge reasonable for the prevailing parties' attorney fees in such suit, action, proceeding or any appeal thereof. 9 10 25. Facsimile Transmission: Facsimile transmission of any signed original document, and retransmission, shall be the same as delivery of an original. At the request of either party, the parties will confirm facsimile transmitted signatures by signing an original document. 26. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Waiver of Breach. The waiver by any party of strict performance of any provisions in this Agreement shall not operate or be construed as a waiver of any subsequent breach. 28. Integration. This Agreement contains the entire agreement among the parties hereto pertaining to the subject matter hereof, and supersedes all prior agreements and contemporaneous agreements, oral and written, except those contemplated hereunder or not inconsistent herewith. 29. Captions. Captions in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 30. Effective Date. This agreement shall be effective as of the date of the closing of the transaction wherein the Owner acquires its title to and ownership in the Property. OWNER: JKLM FAMILY LIMITED PARTNERSHIP, an Oregon limited partnership ("Owner") EZL CORPORATION, an Oregon corporation, General Partner By: -------------------------------------- MANAGER: TERRITORIAL INNS MANAGEMENT COMPANY, INC., an Oregon corporation By: -------------------------------------- 10 EX-10.4 9 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.4 STOCK PURCHASE AGREEMENT DATE: September 30, 1998 BETWEEN: COUNTRY MAID FINANCIAL, INC., a Washington corporation ("PURCHASER") AND: FRANK A. BADGER C. DIAN GERSTNER TRUST PHILLIP GERSTNER AL HEINONEN CANDY JOHNSON C. RICHARD KEARNS THOMAS J. KRUEGER JOHN C. MONEYMAKER MARK D. OWEN ELLIS STUTZMAN BRIAN G. SUMPTION JOHN J. TOLLEFSEN TERRENCE J. TRAPP JERRY WEAVER DIANNE WHITEHEAD CASCADE PACIFIC EQUITY CORP., a Washington corporation NORTHWESTERN CAPITAL, LLC, a Washington limited liability company TERRITORIAL INNS MANAGEMENT, INC., a Nevada corporation ("SELLERS") 1.0 RECITALS 1.1 This Stock Purchase Agreement contemplates a reorganization described in Internal Revenue Code Section 368(b). PURCHASER is a Washington corporation. Those individuals and legal entities named above who constitute selling shareholders of Territorial Inns Management, Inc., a Nevada corporation ("TIM"), are collectively referred to as "SELLERS." SELLERS own one hundred percent (100%) of the outstanding common stock of TIM. SELLERS and PURCHASER are collectively referred to as the "Parties." 1.2 SELLERS desire to sell, and PURCHASER desires to purchase, all of the issued and outstanding shares ("TARGET SHARES") of the common stock of TIM owned by the SELLERS, for the consideration and on the terms set forth in this AGREEMENT. Each share of TIM common stock will be exchanged 6,250 shares of common stock of COUNTRY MAID FINANCIAL, INC. 1.3 In consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows: 1 2 2.0 DEFINITIONS 2.1 "AGREEMENT" means this Stock Purchase Agreement and all attached Exhibits and Schedules, the terms of which are incorporated by reference herein. 2.2 "APPLICABLE CONTRACT" means any contract material to the operation of PURCHASER's business under which PURCHASER has or may acquire any rights, or under which PURCHASER has or may become subject to any obligation or liability, or by which PURCHASER or any of the assets owned or used by PURCHASER may become bound. 2.3 "CLOSING" or "CLOSING DATE" means the date and time as of which the exchange of shares actually takes place which shall occur on October 12, 1998, or such later date as the Parties may mutually agree upon. 2.4 "COUNTRY MAID COMMON STOCK" means the common stock of COUNTRY MAID FINANCIAL, INC., a Washington corporation, no par value. 2.5 "COUNTRY MAID FINANCIAL, INC." means COUNTRY MAID FINANCIAL, INC., a Washington corporation with its principle place of business located at 2500 Main Street, Lebanon, Oregon 97355 2.5 "EFFECTIVE DATE" means October 12, 1998. 2.6 "EXCHANGE AGENT" means the transfer agent, TranSecurities International, Inc., 2510 North Pines, Suite 202, Spokane, Washington 99206 or any other entity designated to transfer PURCHASER securities. 2.7 "GAAP" means United States generally accepted accounting principles as in effect from time to time. 2.8 "HAZARDOUS MATERIALS" means any waste or other substance that is listed, defined, designated, or classified as, or otherwise determined to be, hazardous, radioactive, or toxic or a pollutant or a contaminant under or pursuant to any environmental law, including any mixture or solution thereof, and specifically including petroleum and all derivatives thereof or synthetic substitutes therefor and asbestos or asbestos-containing materials. 2.9 "PERSON" means any natural person, corporation, firm, association, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. 2.10 "TIM COMMON STOCK" means the authorized common stock of TIM, par value of $.001 per share. The number of shares beneficially owned by each of the SELLERS is set forth on Schedule B accompanying this AGREEMENT. 2.11 "TIM" means Territorial Inns Management, Inc., a Nevada corporation with its principal place of business located at 2500 Main Street, Lebanon, Oregon 97355 2 3 3.0 SALE AND TRANSFER OF SHARES 3.1 Subject to the terms and conditions of this AGREEMENT, SELLERS shall sell to PURCHASER all of SELLERS' right, title and interest in their shares of TIM COMMON STOCK ("TARGET SHARES"). In exchange, PURCHASER shall issue and distribute COUNTRY MAID COMMON STOCK to SELLERS as follows: 3.1.1 As of the EFFECTIVE DATE, each Target Share shall be converted into the right to receive 6,250 shares of fully paid and nonassessable shares of COUNTRY MAID COMMON STOCK immediately following the EFFECTIVE DATE. 3.1.2 No share of TIM COMMON STOCK beneficially owned by SELLERS shall be deemed to have any rights other than those set forth above after the EFFECTIVE DATE. 3.2 Procedure for Share Exchange 3.2.1 At CLOSING, each SELLER shall surrender to PURCHASER an outstanding certificate or certificates representing all shares of TIM COMMON STOCK beneficially owned by SELLER, or in the alternative, SELLER shall provide PURCHASER with fully executed stock transfer documents, in form acceptable to the EXCHANGE AGENT and counsel for COUNTRY MAID FINANCIAL, INC., sufficient for the record holder of the Target Shares to use in surrendering SELLER's certificates to PURCHASER. In exchange, at CLOSING, each SELLER shall receive in exchange a certificate or certificates representing the number of shares of COUNTRY MAID COMMON STOCK into and for which the shares of TIM COMMON STOCK therefore represented by the surrendered certificate or certificates shall have been converted and exchanged as provided in this Agreement. 3.2.2 No fractional share of common stock will be issued upon exchange into COUNTRY MAID FINANCIAL, INC. COMMON STOCK. If the exchange results in a fractional share, COUNTRY MAID FINANCIAL, INC. will, at its option, either round the fractional share upward to the next whole integer or pay to the holder an amount, in U.S. funds, not less than the cash value of the fractional interest. 3.2.3 Until surrendered and exchanged, each outstanding certificate representing shares of TIM COMMON STOCK shall be deemed for all purposes to evidence ownership of and to represent the number of shares of COUNTRY MAID COMMON STOCK into and for which the shares of TIM COMMON STOCK shall be converted and shall be entitled to be exchanged as provided in this Agreement. If any certificate representing COUNTRY MAID COMMON STOCK is to be issued in a name other than that in which the certificate representing TIM COMMON STOCK surrendered is registered, it shall be a condition of such issuance that the certificate so surrendered shall be properly endorsed or accompanied by a stock power and otherwise in proper form for transfer and that the PERSON requesting such issuance shall pay to COUNTRY MAID FINANCIAL, INC. or its transfer agent any transfer or other taxes required by reason of the issuance of certificates representing COUNTRY MAID COMMON STOCK in a name other than that of the registered holder of the certificate surrendered, or establish to the satisfaction of COUNTRY MAID FINANCIAL, INC. or its transfer agent that the tax has been paid or is not applicable. An additional condition of transfer may be imposed on the transferor to establish the transfer's compliance with federal securities laws and relevant state securities laws. 3 4 4.0 REPRESENTATIONS AND WARRANTIES OF SELLERS 4.1 SELLERS represent and warrant to PURCHASER as follows that the statements contained in this Section 4.0 are correct and complete as of the date of this Agreement and will be correct and complete as of the CLOSING DATE except as set forth in the disclosure schedule accompanying this Agreement as Schedule A and initialed by the Parties (the "Disclosure Schedule"). The Disclosure Schedule will be arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Section 4.0. 4.2 The authorized capital stock of TIM consists of: (i) 20,000,000 shares of TIM COMMON STOCK, of which, on the date of this Agreement 1,000 shares are issued and outstanding, and (ii) 1,000,000 shares of TIM PREFERRED STOCK, of which, on the date of this Agreement, no shares have been issued. 4.3 The execution and delivery to PURCHASER by SELLERS of this AGREEMENT, constitutes the legal, valid, and binding obligation of SELLERS, enforceable against SELLERS in accordance with its respective terms. SELLERS have the absolute and unrestricted right, power, authority, and capacity to execute and deliver this AGREEMENT and any SELLERS' closing documents, if required, and to perform their obligations under this AGREEMENT and the SELLERS' closing documents. 4.4 To the best of SELLERS' knowledge, information and belief, neither the execution and delivery of this AGREEMENT nor the compliance with and fulfillment of the terms and provisions of this AGREEMENT: (a) will result in the breach of any term or provision of, or constitute a default under or conflict with the Articles of Incorporation or Bylaws of TIM; (b) is prohibited by or requires any notification, consent, authorization, or any judgment, order, writ, injunction, or decree which is binding upon TIM, except for such approvals or other action or inaction as may be required under the securities or corporate laws of the various states or other jurisdictions. 4.5 No Seller is or will be required to give any notice to or obtain any consent from any PERSON in connection with the execution and delivery of this AGREEMENT or the consummation or performance of any of its terms and provisions. 4.6 SELLERS are and will on the CLOSING DATE be the record and beneficial owners and holders of the TARGET SHARES, as set forth on Schedule B accompanying this AGREEMENT. All of the outstanding equity securities of TIM have been duly authorized and validly issued and are fully paid and nonassessable. 4.7 No representation or warranty of SELLERS in this AGREEMENT omits to state a material fact necessary to make the statements herein, in light of the circumstances in which they were made, not misleading. There is no fact known to any Seller that has specific application to Seller, other than general economic or industry conditions, and that materially adversely affects the value or ownership of the Target Shares that has not been previously disclosed to PURCHASER or set forth in this AGREEMENT. 4.8 SELLERS and their agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this AGREEMENT. 4 5 5.0 REPRESENTATIONS AND WARRANTIES OF PURCHASER 5.1 PURCHASER is a corporation organized, validly existing, and in good standing under the laws of the State of Washington. 5.2 This AGREEMENT constitutes the legal, valid, and binding obligation of PURCHASER, enforceable against PURCHASER in accordance with its terms. PURCHASER has the full power and authority (including full corporate power and authority) to execute and deliver this AGREEMENT and to perform its obligations hereunder unless otherwise stated in this AGREEMENT. 5.3 Neither the execution nor the delivery of this AGREEMENT, nor the compliance with and fulfillment of its terms and provisions: (a) will result in the breach of any term or provision of, or constitute a default under or conflict with the Articles of Incorporation or Bylaws of PURCHASER; and (b) is prohibited by or requires any notification, consent, authorization, or any judgment, order, writ, injunction, or decree which is binding upon PURCHASER, except for such approvals or other action or inaction as may be required under the securities or corporate laws of the various states or other jurisdictions. 5.4 It is the present intention of PURCHASER to continue the historic business purpose of TIM and to continue to use TIM's historic business assets in a business within the meaning of Federal Tax Regulation Section 1.368-1 (d). 5.5 PURCHASER and its agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this AGREEMENT. 5.6 PURCHASER has or will make available to SELLERS unaudited financial statements of PURCHASER for the fiscal years ended and unaudited preliminary financial information for the twelve-month period ended 1997. The financial statements will present fairly the financial position and results of operations of PURCHASER as of the dates and for the periods indicated therein in accordance with GAAP; provided, however, that the unaudited financial statements for the twelve-month period ended 1997 are preliminary, are subject to normal adjustments of a type consistent with prior years and may be presented without footnotes and certain financial statement disclosures normally required under GAAP. 5.7 The books of account, minute books, stock record books, and other records of PURCHASER, all of which have been made available to SELLERS, are complete and correct and have been maintained in accordance with sound business practices. The minute book of PURCHASER contains accurate and complete records of all meetings held of, and corporate actions taken by, the stockholders, the Boards of Directors, and committees of the Boards of Directors of PURCHASER. 5.8 There is no pending legal proceeding that has been commenced by or against PURCHASER or that otherwise relates to or may materially affect the business of, or any of the assets owned or used by PURCHASER, or that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the terms and provisions of this AGREEMENT. To the knowledge of PURCHASER no such proceeding has been threatened, and no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such proceeding. 5 6 5.10 Prior to CLOSING, PURCHASER shall make available to SELLERS, upon request, a complete and accurate list of all APPLICABLE CONTRACTS and if requested shall make the APPLICABLE CONTRACTS available to SELLERS for review at the offices of PURCHASER. 5.11 To the best of PURCHASER's knowledge, PURCHASER has substantially complied in all material respects with all labor and employment laws, including provisions thereof relating to wages, hours, equal opportunity, collective bargaining, Americans with Disabilities Act, and the payment of social security taxes. There is no unfair labor practice charge, complaint, or other action against the PURCHASER pending or, to PURCHASER's best knowledge, threatened before the National Labor Relations Board and the corporation is not subject to any order to bargain by the National Labor Relations Board; 5.12 Except as otherwise disclosed on Schedule A, to the best of its knowledge, information and belief, PURCHASER is not now, and at all times has not been in violation of or liable under, any environmental law. Except as otherwise disclosed on Schedule A, PURCHASER has no basis to expect, nor has any actual or threatened order, notice, or other communication from (i) any governmental body or private citizen acting in the public interest, or (ii) the current or prior owner or operator of any facilities, of any actual or potential violation or failure to comply with any environmental law, or of any actual or threatened obligation to undertake or bear the cost of any environmental, health, and safety liabilities with respect to any of the facilities or any other properties or assets (whether real, personal, or mixed) in which PURCHASER has had an interest, or with respect to any property or facility at or to which HAZARDOUS MATERIALS were generated, manufactured, refined, transferred, imported, used, or processed by PURCHASER. There are no pending, or to the knowledge of PURCHASER threatened, claims, encumbrances, or other restrictions of any nature, resulting from any environmental, health, and safety liabilities or arising under or pursuant to any environmental law, with respect to or affecting any of the facilities or any other properties and assets in which PURCHASER has or had an interest. 6.0 COVENANTS 6.1 The Parties agree as follows with respect to the period from and after the execution of this AGREEMENT: 6.1.1 Each of the Parties will use its reasonable best efforts to take all action and to do all things necessary in order to consummate and make effective the transactions contemplated by this AGREEMENT. 6.2 From and after the date of this AGREEMENT to and including the CLOSING DATE, SELLERS will cause TIM to: 6.2.1 Give any notices to third parties and obtain any third party consents that PURCHASER may request in connection with this AGREEMENT. 6.2.2 Grant PURCHASER, its agents, employees, accountants and attorneys, full access to, and the opportunity to examine and make copies of, all such books, records, documents, instruments and papers of and pertaining to TIM as PURCHASER may request. 6.2.3 Without the express written consent of PURCHASER, not engage in any transaction other than as contemplated by or described in this AGREEMENT, except in the ordinary course of business; 6 7 and 6.2.4 Maintain all governmental and nongovernmental permits, licenses consents, approvals and waivers necessary for its continued existence. 6.3 From and after the date of this Agreement to and including the CLOSING DATE, SELLERS will cause TIM to not do the following acts without the express written consent of PURCHASER: 6.3.1 Issue any shares of its common stock of any class (whether out of stock now authorized but unissued, stock held in its treasury, or stock hereafter created or authorized), or become committed to do so; 6.3.2 Split-up, combine, or reclassify any of its outstanding stock, or become committed to do so; 6.3.3 Grant or issue any options, warrants or rights to acquire, or any security convertible into or exchangeable for or which in any manner confers on the holder thereof the right to acquire, any shares of any class its capital stock, or become committed to do so; 6.3.4 Purchase, redeem, or otherwise acquire for a consideration any shares of its capital stock of any class, or become committed to do so; or 6.3.5 Declare or pay any dividend on, or make any other distribution or payment with respect to, any share or shares of its capital stock of any class, or become committed to do so. 6.4 Without the express written consent of PURCHASER, except in the ordinary course of business, from and after the date of this Agreement to and including the CLOSING DATE, SELLERS will cause TIM to not: 6.4.1 Create, incur or otherwise become directly or indirectly liable (whether as endorser, guarantor, surety or otherwise) for any indebtedness, or become committed to do so. 6.4.2 Make any investment (whether by acquisition or stock, capital contribution, or otherwise) in, or loan or advance to, any PERSON whatsoever, or become committed to do so. 6.4.3 Grant any salary or other compensation to any PERSON or become committed to do so; or 6.4.4 Enter into any employment agreement with any PERSON whatsoever. 6.5 From and after the date of this AGREEMENT to and including the CLOSING DATE, PURCHASER will use its best efforts to preserve intact the current business organization of PURCHASER, keep available the services of the current officers, employees, and agents of PURCHASER, and maintain the relations and good will with suppliers, customers, landlords, creditors, employees, agents, and others having business relationships with PURCHASER. 6.6 From and after the date of this AGREEMENT to and including the CLOSING DATE, SELLERS will cause TIM to otherwise report to PURCHASER concerning any material change in the status of the business, operations, and finances of TIM. SELLERS will promptly notify PURCHASER in writing if 7 8 (i) SELLERS become aware of any fact or condition that causes or constitutes a breach of any of SELLER's representations and warranties as of the date of this AGREEMENT, or (ii) if SELLERS become aware of the occurrence after the date of this AGREEMENT of any fact or condition that would, except as expressly contemplated by this AGREEMENT, cause or constitute a breach of any such representation or warranty had the representation or warranty been made as of the time of occurrence or discovery of the fact or condition. 6.7 Prior to the closing, SELLERS will not directly or indirectly solicit, initiate, or encourage any inquiries or proposals from, discuss or negotiate with, provide any non-public information to, or consider the merits of any unsolicited inquiries or proposals from, any PERSON relating to any transaction involving the sale of the business or assets of TIM (other than in the ordinary course of business). 7.0 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATION TO CLOSE The obligation of PURCHASER to effect the stock purchase contemplated by this AGREEMENT shall be subject to performance and compliance by SELLERS of each and all of the covenants and agreements of SELLERS contained in this AGREEMENT and to the satisfaction of each and all of the following conditions precedent: 7.1 The representations and warranties contained in this AGREEMENT shall be true and correct on and as of the CLOSING DATE, with the same force and effect as if made on and as of the CLOSING DATE. 7.2 SELLERS shall have performed and complied with all of their covenants stated in this AGREEMENT in all material respects through the CLOSING DATE. 7.3 There shall not be any judgment, order, decree, stipulation, injunction, or charge in effect preventing consummation of any of the transactions contemplated by this AGREEMENT. 8.0 TERMINATION 8.1 This AGREEMENT may, by written notice given prior to or at the CLOSING, be terminated as follows: (a) by either PURCHASER or SELLERS if a material breach of any provision of this AGREEMENT has been committed by the other party and such breach has not been waived; (b) by mutual written consent of PURCHASER and SELLERS; or (c) by either PURCHASER or SELLERS if the CLOSING has not occurred (other than through the failure of any party seeking to terminate this AGREEMENT to comply fully with its obligations under this AGREEMENT) on October 12, 1998, or such later date as the Parties may mutually agree upon. 8.2 Each Party's right of termination is in addition to any other rights it may have under this AGREEMENT or otherwise, and the exercise of a right of termination will not be an election of remedies; provided, however, that if this AGREEMENT is terminated by a party because of a breach of the AGREEMENT by the other party or because one or more of the conditions to the terminating party's obligations under this AGREEMENT is not satisfied as a result of the other party's failure to comply with its 8 9 obligations under this AGREEMENT, the terminating party's right to pursue all legal remedies will survive such termination unimpaired. 9.0 INDEMNIFICATION 9.1 All representations, warranties, covenants, and obligations in this AGREEMENT, and any other certificate or document delivered pursuant to this AGREEMENT will survive the CLOSING. The right to indemnification, payment of damages or other remedy based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this AGREEMENT or the CLOSING DATE, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of damages, or other remedy based on such representations, warranties, covenants, and obligations. 9.2 SELLERS, jointly and severally, and PURCHASER mutually agree to indemnify and hold each other harmless along with their respective representatives, stockholders, controlling persons, and affiliates (collectively, the "Indemnified Persons") for, and will pay to the Indemnified Persons the amount of, any loss, liability, claim, damage (including incidental and consequential damages), expense (including costs of investigation and defense and reasonable attorneys' fees) or diminution of value, whether or not involving a third-party claim, arising, directly or indirectly, from or in connection with any breach of any representation, warrant, covenant or obligation made by the other Party in this AGREEMENT. 10.0 GENERAL PROVISIONS 10.1 PURCHASER will bear the expenses incurred in connection with the preparation, execution, and performance of this AGREEMENT and its terms and conditions, including all fees and expenses of agents, representatives, counsel, and accountants. 10.2 The Parties agree to furnish upon request to each other such further information, and to execute and deliver to each other such other documents, and to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this AGREEMENT and the documents referred to in this AGREEMENT. 10.3 The rights and remedies of the parties to this AGREEMENT are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this AGREEMENT or the documents referred to in this AGREEMENT will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this AGREEMENT or the documents referred to in this AGREEMENT can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this AGREEMENT or the documents referred to in this AGREEMENT. 9 10 10.4 This AGREEMENT supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to and incorporated in this AGREEMENT) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This AGREEMENT may not be amended except by a written agreement executed by the party to be charged with the amendment. 10.5 Neither party may assign any of its rights under this AGREEMENT without the prior consent of the other parties, except that PURCHASER may assign any of its rights under this AGREEMENT to any subsidiary of PURCHASER. This AGREEMENT will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this AGREEMENT will be construed to give any PERSON other than the parties to this AGREEMENT any legal or equitable right, remedy, or claim under or with respect to this AGREEMENT or any provision of this AGREEMENT. This AGREEMENT and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this AGREEMENT and their successors and assigns. 10.6 If any provision of this AGREEMENT is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this AGREEMENT will remain in full force and effect. Any provision of this AGREEMENT held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 10.7 The headings in this AGREEMENT are provided for convenience only and will not affect its construction or interpretation. 10.8 With regard to all dates and time periods set forth or referred to in this AGREEMENT, time is of the essence. 10.9 This AGREEMENT will be governed by the laws of the State of Oregon without regard to conflicts of laws principles. Exclusive venue for any dispute in connection with this AGREEMENT shall be in the Circuit Court, Linn County, Oregon. 10.10 This AGREEMENT may be signed in as many counterparts is as necessary and all signatures so executed shall constitute one AGREEMENT, binding on all Parties as if each was a signatory on the original. 11.0 NOTICES Any party may give any notice, request, demand, claim, instruction, or other document under this section using any other means but no such notice, request, demand, claim, instruction, or other document shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended at the address stated below. Any party may change its address for any purpose by giving notice of the change of address to the other party in the manner provided in this section. If to SELLERS: Frank A. Badger C. Dian Gerstner Trust 2052 Englewood Drive 1020 NW Pulver Lane East Grand Rapids, MI 49506 Albany, OR 97355 10 11 Phillip Gerstner Al Heinonen P.O. Box 306 3004 Oakwood Avenue SE Fox, OR 97831 Albany, OR 97321 Candy Johnson C. Richard Kearns P.O. Box 942 P.O. Box 942 Lebanon, OR 97355 Lebanon, OR 97355 Thomas J. Krueger John C. Moneymaker 522 Diving Hawk Trail 1930 E. Meadowmere Madison, WI 53713 Springfield, MO 65807 Mark Owen Ellis Stutzman P.O. Box 942 P.O. Box 942 Lebanon, OR 97355 Lebanon, OR 97355 Brian G. Sumption John J. Tollefsen 633 East Third Street 16212 Bothell Way SE Richland Center, WI 53581 Mill Creek, WA 98012 Terrence J. Trapp Jerry Weaver 274 Snyder Mountain Road 39150 Gribbs Road Evergreen, CO 80439 Lebanon, OR 97355 Dianne Whitehead Cascade Pacific Equity Corp. 725 Harmony 7600 Terrace Avenue, Suite 205 Lebanon, OR 97355 Middleton, WI 53562 Northwestern Capital, LLC Territorial Inns Management, Inc., P.O. Box 942 a Nevada corporation Lebanon, OR 97355 P.O. Box 942 Lebanon, OR 97355 If to PURCHASER: With a copy to: Country Maid Financial, Inc. Jones Law Group, PLLC P.O. Box 942 2300 130th Avenue N.E., Suite A-103 Lebanon, OR 97355 Bellevue, WA 98005 12.0 SIGNATURES 12.1 IN WITNESS WHEREOF, the parties have executed and delivered this AGREEMENT as of the date first written above. PURCHASER: COUNTRY MAID FINANCIAL, INC. a Washington corporation 11 12 By: C. Richard Kearns, Date Chief Executive Officer SELLERS: Territorial Inns Management, Inc., a Nevada corporation Ellis Stutzman, President Date Frank A. Badger Date C. Dian Gerstner Trust Date Phillip Gerstner Date Al Heinonen Date Candy Johnson Date C. Richard Kearns Date Thomas J. Krueger Date John C. Moneymaker Date Mark D. Owen Date Ellis Stutzman Date Brian G. Sumption Date John J. Tollefsen Date 12 13 Terrence J. Trapp Date Jerry Weaver Date Dianne Whitehead Date Cascade Pacific Equity Corp., Date a Washington corporation By Its Authorized Representative Northwestern Capital, LLC, Date a Washington limited liability company By Its Authorized Representative 13 14 SCHEDULE A DISCLOSURE SCHEDULE (pursuant to Section 5.12) 1. There is currently only one lawsuit outstanding that may affect the assets of the Company entitled State of South Dakota Department of environment and Natural Resources v. Country Maid Foods, Inc., a Missouri corporation, regarding allegations of environmental violations, a copy of the complaint is available upon request by any of the SELLERS. 14 15 SCHEDULE B Northwestern Capital, LLC 16 Shares John J. Tollefsen 16 Shares John C Moneymaker 32 Shares Terrence J. Trapp 80 Shares Ellis Stutzman 32 Shares Mark D. Owen 32 Shares Candy Johnson 8 Shares Dianne Whitehead 16 Shares Al Heinonen 8 Shares Jerry Weaver 8 Shares Phillip Gerstner 8 Shares C. Dian Gerstner Trust 8 Shares C. Richard Kearns 576 Shares Brian Sumption 8 Shares Tom Krueger 8 Shares Frank Badger 8 Shares Cascade Pacific Equity Corp. 136 Shares TOTAL NUMBER OF SHARES 1,000 SHARES
15 EX-10.5 10 OFFICE LEASE AGREEMENT 1 EXHIBIT 10.5 THIS INDENTURE OF LEASE, entered into this 20th day of December, 1999, between Hanlin and Weathers, Richard L. Hanlin and Wilma L. Hanlin, Trustees of the Richard L. Hanlin Revocable Trust and Thomas Weathers hereinafter called the lessor, and Territorial Inns Management, Inc. (Richard Kearns, CEO), hereinafter called the lessee, WITNESSETH: In consideration of the covenants herein, the lessor hereby leases unto the lessee those certain premises, as is, situated in the City of Lebanon, County of Linn and State of Oregon, hereinafter called the premises, described as follows: 2500 S. Main Road A parcel of land situated in the Southeast Quarter of the Southeast Quarter of Section 15, Township 12 South, Range 2 West, Willamette Meridian, Linn County, Oregon, described as follows: Beginning at a 1/2 inch iron rod marking the Southwest corner of that property described in the Deed to Morgan Enterprises, Inc. recorded in Microfilm Volume 237, Page 863, Linn County Records of Deeds; thence South 240.03 feet to the North line of Walker Road at a point 23.48 feet West of a 1/2 inch iron pipe marking the Southwest corner of that property described in deed to the Circle K Corporation, recorded in Microfilm Volume 223, Page 837, Linn County Records; thence East 23.48 feet to said 1/2 inch iron pipe, thence North 0 degrees 12'30," East 115. feet to the Northwest corner of the said property deeded to the Circle K Corporation, thence North 89 degrees 57'30" East along the North line and the North line extended of said the Circle K Corporation property 135.00 feet to the West line of South Main Street, thence North along said West line, 115.60 feet to a 1/2 inch iron rod marking an angles point in said West line and the Southeast corner of said Morgan Enterprises property; thence North 86 degrees 37'30" West, 159.88 feet along the South line of said Morgan Enterprises property to the point of beginning. To Have and to Hold the premises commencing with the __________ day of December, 1999, and ending at midnight on the __________ day of December, 2009, for a rental of $375,000 for the whole term, which lessee agrees to pay, at P.O. Box 1022, City of Roseburg, State of OR 97470, at the following times and in the following amounts, to wit: $3125.00 per month. Rent shall be payable on the first day of each month in advance. Rent shall be prorated from December __________, 1999, through December 31, 1999. Time is of the essence of the performance of each of Lessee's obligations under this Lease. In consideration of the leasing of the premises and of the mutual agreements herein contained, the parties agree as follows: (1) LESSEE'S ACCEPTANCE OF LEASE. The lessee accepts this letting and agrees to pay to the order of the lessor the monthly rentals above stated for the full term of this lease, in advance, at the times and in the manner aforesaid. 2 (2a) USE OF PREMISES. The lessee shall use the premises during the term of this lease for the PREMISES conduct of the following business: Management and general offices and for no other purpose whatsoever without lessor's written consent. (2b) The lessee will not make any unlawful, improper of offensive use of the premises; the lessee will not suffer any strip or waste thereof; the lessee will not permit any objectionable noise or odor to escape or to be emitted from the premises or do anything or permit anything to be done upon or about the premises in any way tending to create a nuisance; the lessee will not sell or permit to be sold any product, substance or service upon or about the premises, excepting such as lessee may be licensed by law to sell and as may be herein expressly permitted. (2c) The lessees will not allow the premises at any time to fall into such a state of repair or disorder as to increase the fire hazard thereon; the lessee will not install any power machinery on the premises except under the supervision and with written consent of the lessor; the lessee will not store gasoline or other highly combustible materials on the premises at any time; the lessee will not use the premises in such a way or for such a purpose that the fire insurance rate on the improvements on the premises is thereby increased or that would prevent the lessor from taking advantage of any rulings of any agency of the state in which the premises are situated, or which would allow the lessor to obtain reduced premium rates for long term fire insurance policies. (2d) The lessee shall comply at lessee's own expense with all laws and regulations of any municipal, county, state, federal or other public authority respecting the use of the premises. These include, without limitation, all laws, regulations and ordinances pertaining to air and water quality, Hazardous Materials as herein defined, waster disposal, air emissions, and other environmental matters. As used herein, Hazardous Material means any hazardous or toxic substance, material, or waste, including but not limited to those substances, materials, and waste listed in the U.S. Department of Transportation Hazardous Materials Table or by the U.S. Environmental Protection Agency as hazardous substances and amendments thereto, petroleum products or such other substances materials, and waster that are or become regulated under any applicable local, state, or federal law. (2e) The lessee shall regularly occupy and use the premises for the conduct of lessee's business, and shall not abandon or vacate the premises for more than ten days without written approval of lessor. (2f) Lessee shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the premises by lessee, its agents, employees, contractors, or invitees without the prior written consent of lessor, which consent will not be unreasonably withheld so long as lessee demonstrates to lessor's reasonable satisfaction what such Hazardous Material is necessary or useful to lessee's business and will be used, kept, and stored in a matter that will comply at all times with all laws regulating any such Hazardous Material so brought upon or used or kept on or about the premises. (3) UTILITIES. The lessee shall pay for all heat, light, water, power, and other services or utilities used on the premises during the term of this lease. (4a) REPAIR AND IMPROVEMENTS. The lessor shall not be required to make any repairs, alterations, additions or improvements to or upon the premises during the term of this lease, except only those hereinafter specifically provided for; the lessee hereby agrees to maintain and keep the premises, including all interior and exterior walls and doors, heating ventilation and cooling systems, interior wiring, plumbing and drain pipes to sewers or septic tank, in good order and repair during the entire term of this lease, at lessee's own cost and expense, and to replace all glass which may be broken or damaged 3 during the term hereof in the windows and doors of the premises with glass of as good or better quality as that now in use; it is further agreed that the lessee will make no alterations, additions or improvements to or upon the premises without the written consent of the lessor first being obtained. (4b) The lessee agrees to make all necessary structural repairs to the building, including exterior walls, foundation, roof, gutters and downspouts, and the abutting sidewalks. The lessor reserves and at any and all times shall have the right to alter, repair or improve the building of which the premises are a part, or to add thereto, and for that purpose at any time may erect scaffolding and all other necessary structures about the premises with such materials as lessor may deem necessary therefor, and lessee waives any claim to damages, including loss of business resulting therefrom. (5) LESSOR'S RIGHT OF ENTRY. It shall be lawful for the lessor, the lessor's agents and representatives, at any reasonable time to enter into or upon the premises for the purpose of examining into the condition thereof, or for any other lawful purpose. (6) RIGHT OF ASSIGNMENT. The lessee will not assign, transfer, pledge, hypothecate, surrender or dispose of this lease or any interest herein, sublet, or permit any other person or persons whomsoever to occupy the premises without the written consent of the lessor being first obtained in writing; this lease is personal to lessee; lessee's interests, in whole or in part, cannot be sold, assigned, transferred, seized or taken by operation at law, or under or by virtue of any execution or legal process, attachment or proceedings instituted against the lessee, or under or by virtue of any bankruptcy or insolvency proceedings had in regard to the lessee, or in any other manner, except as above mentioned. (7) LIENS. The lessee will not permit any lien of any kind, type or description to be placed or imposed upon the improvements in which the premises are situated, or any part thereof, or the land on which they stand. (8) ICE, SNOW DEBRIS. If the premises are located at street level, then at all times lessee shall keep the sidewalks in front of the premises free and clear of ice, snow, rubbish, debris and obstruction; and if the lessee occupies the entire building, the lessee will not permit rubbish, debris, ice or snow to accumulate on the roof of the building so as to stop up or obstruct gutters or downspouts or cause damage to the roof, and will save harmless and protect the lessor against any injury whether to lessor or to lessor's property or to any other person or property caused by lessee's failure in that regard. (9) OVERLOADING OF FLOORS. The lessee will not overload the floors of the premises in such a way as to cause any undue or serious stress or strain upon the building in which the premises are located, or any part thereof, and the lessor shall have the right, at any time, to call upon any competent engineer or architect whom the lessor may choose, to decide whether or not the floors of the premises, or any part thereof are being overloaded so as to cause any undue or serious stress or strain on the building, or any part thereof, and the decision of the engineer or architect that the stress or strain is such as to endanger or injure the building, or any part thereof, then and in that event the lessee agrees immediately to relieve the stress or strain, either by reinforcing the building or by lightening the load which causes such stress or strain, in a manner satisfactory to the lessor. (10) ADVERTISING SIGNS. The lessee will not use the outside walls of the premises, or allow signs or devices of any kind to be attached thereto or suspended therefrom, for advertising or displaying the name or business of the lessee or for any purpose whatsoever without the written consent of the lessor; however, the lessee may make use of the windows of the premises to display lessee's name and business when the workmanship of such signs shall be of good quality and permanent nature; 4 provided further that the lessee may not suspend or place within said windows or paint thereon any banners, signs, sign-boards or other devices in violation of the intent and meaning of this action. (11) LIABILITY INSURANCE. At all times during the term hereof, the lessee will, at the lessee's own INSURANCE expense, keep in effect and deliver to the lessor liability insurance policies in form, and with an insurer, satisfactory to the lessor. Such policies shall insure both the lessor and the lessee against all liability for damage to persons or property in, upon, or about the premises. The amount of such insurance shall be not less that $1,000,000.00 for injury to one person, not less than $1,000,000.00 for damage to property, or a combined single limit of not less than $1,000,000.00. It shall be the responsibility of lessee to purchase casualty insurance with extended coverage so as to insure any structure on the premises against damage caused by fire or the effects of fire (smoke, hear, means of extinguishment, etc.) or any other means of loss. It shall be the responsibility of the lessee to insure all of the lessee's belongings upon the premises, of whatsoever nature, against the same. With respect to these policies, lessee shall cause the lessor to be named as an additional insured party. Lessee agrees to and shall indemnify and hold lessor harmless against any and all claims and demands arising from the negligence of the lessee, lessee's officers, agents, invitees and/or employees, as well as those arising from lessee's failure to comply with any covenant of this lease on lessee's part to be performed, and shall at lessee's own expense defend the lessor against any and all suits or actions arising out of such negligence, actual or alleged, and all appeals therefrom and shall satisfy and discharge any judgment which may be awarded against lessor in any such suit or action. Casualty insurance shall be in an amount approved. (12) FIXTURES. All partitions, plumbing, electrical wiring, additions to or improvements upon the premises, whether installed by the lessor or lessee, shall be and become a part of the building in which the premises are located as soon as installed and the property of the lessor unless otherwise herein provided. (13) LIGHT AND AIR. This lease does not grant any rights of access to light and air over the premises or any adjacent property. (14) DAMAGE BY CASUALTY, FIRE, AND DUTY TO REPAIR. In the event of the destruction of the improvements in which the premises are located by fire or other casualty, either party hereto may terminate this lease as of the date of fire or casualty, provided, however, that in the event of damage to the improvements by fire or other casualty to the extent of 25 percent or more of the sound value thereof, the lessor may or may not elect to repair the same; written notice of lessor's election shall be given lessee within fifteen days after the occurrence of the damage; if notice is not so given, lessor conclusively shall be deemed to have elected not to repair; in the event lessor elects not to repair, then and in that even this lease shall terminate with the date of the damage; but if the improvements in which the premises are located be but partially destroyed and the damage so occasioned shall not amount to the extent indicated above, or if greater than said extent and lessor elects to repair, as aforesaid, then the lessor shall repair the same with all convenient speed and shall have the right to take possession of and occupy, to the exclusion of the lessee, all or any part thereof in order to make the necessary repairs, and the lessee hereby agrees to vacate upon request, all or any part thereof which the lessor may require for the purpose of making necessary repairs, and the lessee hereby agrees to vacate upon request, all or any part thereof which the lessor may require for the purpose of making necessary repairs, and for the period of time between the day of such damage and until such repairs have been substantially completed there shall be such an abatement of rent as the nature of the injury or damage and its interference with the occupancy of the premises by the lessee shall warrant; however, if the premises be but slightly injured and the damage so occasioned shall not cause any material interference with the occupation of the 5 premises by lessee, then there shall be no abatement of rent and the lessor shall repair the damage with all convenient speed. (15) WAIVER OF SUBROGATION RIGHTS. Neither the lessor nor the lessee shall be liable to the other for loss arising out of damage to or destruction of the premises, or the building or improvement of which the premises are a part or with which they are connected, or the contents of any thereof, when such loss is caused by any of the perils which are or could be included within or insured against by a standard form of fire insurance with extended coverage, including sprinkler leakage insurance, if any. All such claims caused by the negligence of either lessor or lessee or by any of their respectable agents, servants or employees. It is the intention and agreement of the lessor and the lessee that the rentals reserved by this lease have been fixed in contemplation that both parties shall gully provide their own insurance protection at their own expense, and that both parties shall look to their respectable insurance carriers for reimbursement of any such loss, and further, that the insurance carriers involved shall not be entitled to subrogation under any circumstances against any party to this lease. Neither the lessor not the lessee shall have any interest or claim in the other's insurance policy or policies, or the proceeds thereof, unless specifically covered therein as a joint assured. (16) EMINENT DOMAIN. In case of the condemnation or purchase of all or any substantial part of the premises by any public or private corporation with the power of condemnation this lease may be terminated, effective on the date possession is taken by either party hereto on written notice to the other and in that case the lessee shall not be liable for any rent after the termination date. Lessee shall not be entitled to and hereby expressly waives any right to any part of the condemnation award or purchase price. (17) FOR SALE AND FOR FOR RENT SIGNS During the period of 60 days prior to the date above fixed for the termination of this lease, the lessor herein may post on the premises or in the windows thereof signs of moderate size notifying the public that the premises are "for sale" or "for lease." (18) DELIVERING UP PREMISES ON TERMINATION. At the expiration of the lease term or upon any sooner termination thereof, the lessee will quit and deliver up the premises and all future erections or additions to or upon the same, broom-clean, to the lessor or those having lessor's estate in the premises, peaceably, quietly, and in as good order and condition, reasonable use and wear thereof, damage by fire, unavoidable casualty and the elements alone excepted, as the same are now in or hereafter may be put in by the lessor. (19) ADDITIONAL COVENANTS OR EXCEPTIONS. The intent and agreement between parties is that this lease shall be a N-N-N** lease, that is, with lessee bearing all costs of operation and maintenance. Lessee agrees to have all of the outside weather sealed with "Olympic" typed applied no later than 9/15/2000. Lessee will also have gutters and downspouts cleaned within 60 days. Lessor will remove and/or replace certain trees at their own expense. **N-N-N means that Lessee pays real and personal property taxes and assessments, all insurance, including but not limited to liability and fire insurance with extended coverage including sprinkler leakage insurance and all repairs and maintenance and all other costs and expenses associated with ad related to the premises. The rights of assignment as set our in paragraph 6 of the Lease shall apply to any transfer of a controlling interest in Territorial Inns Management, that is, Lessee may not transfer, assign or dispose of the controlling interest in said corporation without the written consent of Lessor being first obtained in 6 writing. Lessee shall provide to Lessor proof of insurance coverage for all insurance required under this Lease on or before Dec. 20th of each year. Each insurance policy for which Lessee is responsible to pay shall contain a provision that the policy cannot be canceled by the insurance company without giving Lessor ten days written notice. ATTACHMENT, BANKRUPT, DEFAULT PROVIDED, ALWAYS, and these presents are upon these conditions, that (1) if the lessee shall be in arrears in the payment of rent for a period of ten days after the same becomes due, or (2) if the lessee shall fail or neglect to perform or observe any of the covenants and agreements contained herein on lessee's part to be done, kept, performed and observed and such default shall continue for ten days or more after written notice of such failure or neglect shall be given to lessee, or (3) if the lessee shall be declared bankrupt or insolvent according to law, or (4) if any assignment of lessee's property should be made for the benefit of credit, or (5) if on the expiration of this lease lessee fails to surrender possession of the premises, the lessor or those having lessor's estate in the premises, may terminate this lease and, lawfully, at lessor's option immediately or at any time thereafter, without demand or notice, enter into and upon the premises and every part thereof and reposes the same, and expel lessee and those claiming by, through and under lessee and remove lessee's effects at lessee's expense, forcibly if necessary and store the same, all without being deemed guilty of trespass and without prejudice to any remedy which otherwise might be used for arrears of rent or preceding breach of covenant. Neither the termination of this lease by forfeiture not the taking or recovery of possession of the premises shall deprive lessor of any other action, right, or remedy against lessee for possession, rent or damages, nor shall any omission by lessor to enforce any forfeiture, right or remedy to which lessor may be entitled be deemed a waiver by lessor of the right to enforce the performance of all terms and conditions of this lease by lessee. In the event of any re-entry by lessor, lessor may lease or relet the premises in whole or in part to any tenant or tenants who may be satisfactory to lessor, for any duration, and for the best rent, terms and conditions as lessor may reasonably obtain. Lessor shall apply the rent received from any such tenant first to the cost of retaking and reletting the premises, including remodeling required to obtain any such tenant, and then to any arrears of rent and future rent payable under this lease and any other damages to which lessor may be entitled hereunder. Any property which lessee leaves on the premises after abandonment or expiration of the lease, or for more than ten days after any termination of the lease by landlord, shall be deemed to have been abandoned, and lessor may remove and sell the property at public or private sale as lessor sees fit, without being liable for any prosecution therefor or for damages by reason thereof, and the net proceed of any such sale shall be applied toward the expenses of landlord and rent as aforesaid, and the balance of such amounts, if any, shall by held for and paid to the lessee. In the event the lessee for any reason shall hold over after the expiration of this lease, such holding over shall not be deemed to operate as a renewal or extension of this lease, but shall only create a tenancy of sufferance which may be terminated at will at any time by the lessor. ATTORNEY FEES AND COURT COSTS. In case suit or action is instituted to enforce compliance with any of the terms, covenants or conditions of this lease, or to collect the rental which may become COURT COSTS due hereunder, or any portion thereof, the losing party agrees to pay the prevailing parties reasonable attorney fee incurred throughout such proceeding, including at trial, on appeal, and for post-judgment collection. The lessee agrees to pay and discharge all lessor's cases and 7 expenses, including lessor's reasonable attorney's fees that shall arise from enforcing any provision or covenants of this lease even though no suit or action is instituted. Should the lessee be or become the debtor in any bankruptcy proceeding, voluntarily, involuntarily or otherwise, either during the period this lease is in effect or while there exists any outstanding obligation of the lessee created by this lease in favor of the lessor, the lessee agrees to pay the lessor's reasonable attorney fees and costs which the lessor may incur as the resale of lessor's participation in such bankruptcy proceedings. It is understood and agreed by both parties that applicable federal bankruptcy law or rules of procedure may affect, alter, reduce or nullify the attorney fees and cost awards mentioned in the preceding sentence. WAIVER Any waiver by the lessor of any breach of any covenant herein contained to be kept and performed by the lessee shall not be deemed or considered as a continuing waiver, and shall not operate to bar or prevent the lessor from declaring a forfeiture for any succeeding breach, either of the same condition or covenant or otherwise. NOTICES Any notice required by the terms of this lease to be given by one party hereto to the other or desired so to be given shall be sufficient if in writing, contained in a sealed envelope, and sent first class mail, with postage fully prepaid, and if intended for the lessor herein, then if addressed to the lessor at P.O. Box 1022, Roseburg, Oregon 97471 and if intended for the lessee, then it addressed to the lessee at 2500 S. Main Road, Lebanon, OR. 97355 (541) 451-1414. Any such notice shall be deemed conclusively to have been delivered to the addressee forty-eight hours after the deposit thereof in the U.S. Mail. HEIRS AND ASSIGNS. All right, remedies and liabilities herein given to or imposed upon either of the parties ASSIGNS hereto shall extend to inure to the benefit of and bind, as the circumstances may require, the heirs, successors, personal representatives and so for as this lease is assignable by the terms hereof, to the assigns of such parties. In construing this lease, it is understood that the lessor or the lessee may be more than one person; that if the context so require, the singular pronoun shall be taken to mean and include the plural, and that generally all grammatical changes shall be made amended and implied to make the provisions hereof apply equally to corporations and individuals. IN WITNESS WHEREOF, the parties have executed this lease on the day and year first hereinabove written, any corporation signature being by authority of its Board of Directors. LESSEE DATE LESSOR DATE - ------ ---- ------ ---- - ----------------------------------- --------------------------------------- - ----------------------------------- --------------------------------------- - ----------------------------------- --------------------------------------- EX-10.6 11 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.6 STOCK PURCHASE AGREEMENT DATE: October 6, 1998 BETWEEN: C. RICHARD KEARNS JOHN C. MONEYMAKER ("PURCHASERS") AND: COUNTRY MAID FINANCIAL, INC., a Nevada corporation ("SELLER") 1.0 RECITALS 1.1 SELLER desires to sell, and PURCHASERS desire to purchase, all of the issued and outstanding shares ("TARGET SHARES") of the common stock of COUNTRY MAID FARMS, INC., a Nevada corporation, owned by the SELLER, for the consideration and on the terms set forth in this AGREEMENT. 1.2 In consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows: 2.0 DEFINITIONS 2.1 "AGREEMENT" means this Stock Purchase Agreement and all attached Exhibits and Schedules, the terms of which are incorporated by reference herein. 2.2 "CLOSING" or "CLOSING DATE" means the date and time as of which the sale shall occur on October 6, 1998, or such later date as the Parties may mutually agree upon. 2.3 "CM FARMS" means COUNTRY MAID FARMS, INC. a Nevada corporation with its principal place of business located at 2500 South Main Street, Lebanon, Oregon 97355. 2.4 "COUNTRY MAID FINANCIAL, INC." means COUNTRY MAID FINANCIAL, INC., a Washington corporation with its principle place of business located at 2500 Main Street, Lebanon, Oregon 97355. 2.5 "EFFECTIVE DATE" means October 6, 1998. 2.6 "HAZARDOUS MATERIALS" means any waste or other substance that is listed, defined, designated, or classified as, or otherwise determined to be, hazardous, radioactive, or toxic or a pollutant or a contaminant under or pursuant to any environmental law, including any mixture or solution thereof, and specifically including petroleum and all derivatives thereof or synthetic substitutes therefor and asbestos or asbestos-containing materials. 2.7 "PERSON" means any natural person, corporation, firm, association, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. 1 2 3.0 SALE AND TRANSFER OF SHARES 3.1 Subject to the terms and conditions of this AGREEMENT, SELLER shall sell to PURCHASERS all of SELLER'S right, title and interest in the 329,680 shares of CM FARMS COMMON STOCK ("TARGET SHARES") currently owned by SELLER. In exchange, PURCHASERS shall indemnify SELLER from any outstanding liabilities of CM FARMS, Inc., excluding any liability for violations of environmental law, in particular relating to the lawsuit by the State of South Dakota as stated in Schedule A. 4.0 REPRESENTATIONS AND WARRANTIES OF SELLER 4.1 SELLER represent and warrant to PURCHASERS as follows that the statements contained in this Section 4.0 are correct and complete as of the date of this Agreement and will be correct and complete as of the CLOSING DATE except as set forth in the disclosure schedule accompanying this Agreement as Schedule A and initialed by the Parties (the "Disclosure Schedule"). The Disclosure Schedule will be arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Section 4.0. 4.2 The authorized capital stock of CM FARMS consists of: (i) 190,000,000 shares of CM FARMS COMMON STOCK, of which, on the date of this Agreement 329,680 shares are issued and owned by SELLER, and (ii) 10,000,000 shares of CM FARMS PREFERRED STOCK, of which, on the date of this Agreement, no shares have been issued. 4.3 The execution and delivery to PURCHASERS by SELLER of this AGREEMENT, constitutes the legal, valid, and binding obligation of SELLER, enforceable against SELLER in accordance with its respective terms. SELLER has the absolute and unrestricted right, power, authority, and capacity to execute and deliver this AGREEMENT and any SELLER's closing documents, if required, and to perform its obligations under this AGREEMENT and the SELLER's closing documents. 4.4 To the best of SELLER's knowledge, information and belief, neither the execution and delivery of this AGREEMENT nor the compliance with and fulfillment of the terms and provisions of this AGREEMENT: (a) will result in the breach of any term or provision of, or constitute a default under or conflict with the Articles of Incorporation or Bylaws of Country Maid Foods, Inc.; (b) is prohibited by or requires any notification, consent, authorization, or any judgment, order, writ, injunction, or decree which is binding upon Country Maid Foods, Inc., except for such approvals or other action or inaction as may be required under the securities or corporate laws of the various states or other jurisdictions. 4.5 SELLER is not required to give any notice to or obtain any consent from any PERSON, other than the approval of its shareholders, in connection with the execution and delivery of this AGREEMENT or the consummation or performance of any of its terms and provisions. 4.6 SELLER is and will on the CLOSING DATE be the record and beneficial owners and holders of the TARGET SHARES. All of the outstanding equity securities of CM FARMS have been duly authorized and validly issued and are fully paid and nonassessable. 2 3 4.7 No representation or warranty of SELLER in this AGREEMENT omits to state a material fact necessary to make the statements herein, in light of the circumstances in which they were made, not misleading. There is no fact known to SELLER that has specific application to SELLER, other than general economic or industry conditions, and that materially adversely affects the value or ownership of the TARGET SHARES that has not been previously disclosed to PURCHASERS or set forth in this AGREEMENT as disclosed on Schedule A. 4.8 SELLER and its agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this AGREEMENT. 5.0 REPRESENTATIONS AND WARRANTIES OF PURCHASERS 5.1 This AGREEMENT constitutes the legal, valid, and binding obligation of PURCHASERS, enforceable against PURCHASERS in accordance with its terms. PURCHASERS have the full power and authority to execute and deliver this AGREEMENT and to perform their obligations hereunder unless otherwise stated in this AGREEMENT. 5.3 Neither the execution nor the delivery of this AGREEMENT, nor the compliance with and fulfillment of its terms and provisions: (a) is prohibited by or requires any notification, consent, authorization, or any judgment, order, writ, injunction, or decree which is binding upon PURCHASERS, except for such approvals or other action or inaction as may be required under the securities or other applicable laws of the various states or other jurisdictions. 5.4 PURCHASERS and their agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this AGREEMENT. 5.5 There is no pending legal proceeding that has been commenced by or against PURCHASERS or that otherwise relates to or may materially affect the business of, or any of the assets owned or used by PURCHASERS, or that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the terms and provisions of this AGREEMENT. To the knowledge of PURCHASERS no such proceeding has been threatened, and no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such proceeding. 6.0 COVENANTS 6.1 The Parties agree as follows with respect to the period from and after the execution of this AGREEMENT: 6.1.1 SELLER will hold a shareholders' meeting within 120 days of the CLOSING DATE pursuant to the requirements of Nevada Revised Statutes to obtain shareholders approval of this AGREEMENT. Unless otherwise agreed to by the Parties in the event that approval cannot be obtained from the shareholders, this AGREEMENT shall be rescinded and SELLER shall have no further obligations to PURCHASERS and PURCHASERS shall have no further obligations to SELLER. 3 4 6.1.2 Each of the Parties will use its reasonable best efforts to take all action and to do all things necessary in order to consummate and make effective the transactions contemplated by this AGREEMENT. 6.2 From and after the date of this AGREEMENT to and including the CLOSING DATE, SELLER will cause CM FARMS to: 6.2.1 Give any notices to third parties and obtain any third party consents that PURCHASERS may request in connection with this AGREEMENT. 6.2.2 Grant PURCHASERS, its agents, employees, accountants and attorneys, full access to, and the opportunity to examine and make copies of, all such books, records, documents, instruments and papers of and pertaining to CM FARMS as PURCHASERS may request. 6.2.3 Without the express written consent of PURCHASERS, not engage in any transaction other than as contemplated by or described in this AGREEMENT, except in the ordinary course of business; and 6.2.4 Maintain all governmental and nongovernmental permits, licenses consents, approvals and waivers necessary for its continued existence. 6.3 From and after the date of this Agreement to and including the CLOSING DATE, SELLER will cause CM FARMS to not do the following acts without the express written consent of PURCHASERS: 6.3.1 Issue any shares of its common stock of any class (whether out of stock now authorized but unissued, stock held in its treasury, or stock hereafter created or authorized), or become committed to do so; 6.3.2 Split-up, combine, or reclassify any of its outstanding stock, or become committed to do so; 6.3.3 Grant or issue any options, warrants or rights to acquire, or any security convertible into or exchangeable for or which in any manner confers on the holder thereof the right to acquire, any shares of any class its capital stock, or become committed to do so; 6.3.4 Purchase, redeem, or otherwise acquire for a consideration any shares of its capital stock of any class, or become committed to do so; or 6.3.5 Declare or pay any dividend on, or make any other distribution or payment with respect to, any share or shares of its capital stock of any class, or become committed to do so. 6.4 Without the express written consent of PURCHASERS, except in the ordinary course of business, from and after the date of this Agreement to and including the CLOSING DATE, SELLER will cause CM FARMS to not: 6.4.1 Create, incur or otherwise become directly or indirectly liable (whether as endorser, guarantor, surety or otherwise) for any indebtedness, or become committed to do so. 6.4.2 Make any investment (whether by acquisition or stock, capital contribution, or 4 5 otherwise) in, or loan or advance to, any PERSON whatsoever, or become committed to do so. 6.4.3 Grant any salary or other compensation to any PERSON or become committed to do so; or 6.4.4 Enter into any employment agreement with any PERSON whatsoever. 6.5 From and after the date of this AGREEMENT to and including the CLOSING DATE, PURCHASERS will use its best efforts to preserve intact the current business organization of PURCHASERS, keep available the services of the current officers, employees, and agents of PURCHASERS, and maintain the relations and good will with suppliers, customers, landlords, creditors, employees, agents, and others having business relationships with PURCHASERS. 6.6 From and after the date of this AGREEMENT to and including the CLOSING DATE, SELLER will cause CM FARMS to otherwise report to PURCHASERS concerning any material change in the status of the business, operations, and finances of CM FARMS. SELLER will promptly notify PURCHASERS in writing if (i) SELLER become aware of any fact or condition that causes or constitutes a breach of any of SELLER's representations and warranties as of the date of this AGREEMENT, or (ii) if SELLER become aware of the occurrence after the date of this AGREEMENT of any fact or condition that would, except as expressly contemplated by this AGREEMENT, cause or constitute a breach of any such representation or warranty had the representation or warranty been made as of the time of occurrence or discovery of the fact or condition. 6.7 Prior to the closing, SELLER will not directly or indirectly solicit, initiate, or encourage any inquiries or proposals from, discuss or negotiate with, provide any non-public information to, or consider the merits of any unsolicited inquiries or proposals from, any PERSON relating to any transaction involving the sale of the business or assets of CM FARMS (other than in the ordinary course of business). 7.0 CONDITIONS PRECEDENT TO PURCHASERS' OBLIGATION TO CLOSE The obligation of PURCHASERS to effectuate the stock purchase contemplated by this AGREEMENT shall be subject to performance and compliance by SELLER of each and all of the covenants and agreements of SELLER contained in this AGREEMENT and to the satisfaction of each and all of the following conditions precedent: 7.1 The representations and warranties contained in this AGREEMENT shall be true and correct on and as of the CLOSING DATE, with the same force and effect as if made on and as of the CLOSING DATE. 7.2 SELLER shall have performed and complied with all of their covenants stated in this AGREEMENT in all material respects through the CLOSING DATE. 7.3 There shall not be any judgment, order, decree, stipulation, injunction, or charge in effect preventing consummation of any of the transactions contemplated by this AGREEMENT. 8.0 TERMINATION 8.1 This AGREEMENT may, by written notice given prior to or at the CLOSING, be terminated as follows: 5 6 (a) by either PURCHASERS or SELLER if a material breach of any provision of this AGREEMENT has been committed by the other party and such breach has not been waived; (b) by mutual written consent of PURCHASERS and SELLER; or (c) by either PURCHASERS or SELLER if the CLOSING has not occurred (other than through the failure of any party seeking to terminate this AGREEMENT to comply fully with its obligations under this AGREEMENT) on October 6, 1998, or such later date as the Parties may mutually agree upon. 8.2 Each Party's right of termination is in addition to any other rights it may have under this AGREEMENT or otherwise, and the exercise of a right of termination will not be an election of remedies; provided, however, that if this AGREEMENT is terminated by a party because of a breach of the AGREEMENT by the other party or because one or more of the conditions to the terminating party's obligations under this AGREEMENT is not satisfied as a result of the other party's failure to comply with its obligations under this AGREEMENT, the terminating party's right to pursue all legal remedies will survive such termination unimpaired. 9.0 INDEMNIFICATION 9.1 All representations, warranties, covenants, and obligations in this AGREEMENT, and any other certificate or document delivered pursuant to this AGREEMENT will survive the CLOSING. The right to indemnification, payment of damages or other remedy based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this AGREEMENT or the CLOSING DATE, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of damages, or other remedy based on such representations, warranties, covenants, and obligations. 9.2 SELLER and PURCHASERS mutually agree to indemnify and hold each other harmless along with their respective representatives, stockholders, controlling persons, and affiliates (collectively, the "Indemnified Persons") for, and will pay to the Indemnified Persons the amount of, any loss, liability, claim, damage (including incidental and consequential damages), expense (including costs of investigation and defense and reasonable attorneys' fees) or diminution of value, whether or not involving a third-party claim, arising, directly or indirectly, from or in connection with any breach of any representation, warrant, covenant or obligation made by the other Party in this AGREEMENT. 10.0 GENERAL PROVISIONS 10.1 SELLER will bear the expenses incurred in connection with the preparation, execution, and performance of this AGREEMENT and its terms and conditions, including all fees and expenses of agents, representatives, counsel, and accountants. 10.2 The Parties agree to furnish upon request to each other such further information, and to execute and deliver to each other such other documents, and to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this AGREEMENT and the documents referred to in this AGREEMENT. 6 7 10.3 The rights and remedies of the parties to this AGREEMENT are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this AGREEMENT or the documents referred to in this AGREEMENT will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this AGREEMENT or the documents referred to in this AGREEMENT can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this AGREEMENT or the documents referred to in this AGREEMENT. 10.4 This AGREEMENT supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to and incorporated in this AGREEMENT) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This AGREEMENT may not be amended except by a written agreement executed by the party to be charged with the amendment. 10.5 Neither party may assign any of its rights under this AGREEMENT without the prior consent of the other parties. This AGREEMENT will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this AGREEMENT will be construed to give any PERSON other than the parties to this AGREEMENT any legal or equitable right, remedy, or claim under or with respect to this AGREEMENT or any provision of this AGREEMENT. This AGREEMENT and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this AGREEMENT and their successors and assigns. 10.6 If any provision of this AGREEMENT is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this AGREEMENT will remain in full force and effect. Any provision of this AGREEMENT held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 10.7 The headings in this AGREEMENT are provided for convenience only and will not affect its construction or interpretation. 10.8 With regard to all dates and time periods set forth or referred to in this AGREEMENT, time is of the essence. 10.9 This AGREEMENT will be governed by the laws of the State of Oregon without regard to conflicts of laws principles. Exclusive venue for any dispute in connection with this AGREEMENT shall be in the Circuit Court, Linn County, Oregon. 10.10 This AGREEMENT may be signed in as many counterparts is as necessary and all signatures so executed shall constitute one AGREEMENT, binding on all Parties as if each was a signatory on the original. 11.0 NOTICES 7 8 11.1 Any party may give any notice, request, demand, claim, instruction, or other document under this section using any other means but no such notice, request, demand, claim, instruction, or other document shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended at the address stated below. Any party may change its address for any purpose by giving notice of the change of address to the other party in the manner provided in this section. If to SELLER: With a copy to: COUNTRY MAID FINANCIAL, INC. Jones Law Group, PLLC P.O. Box 942 2300 130th Avenue N.E., Suite A-103 Lebanon, OR 97355 Bellevue, WA 98005 If to PURCHASERS: C. Richard Kearns John C. Moneymaker 2500 Main Street 1930 E. Meadowmere Lebanon, OR 97355 Springfield, MI 65807 12.0 SIGNATURES 12.1 IN WITNESS WHEREOF, the parties have executed and delivered this AGREEMENT as of the date first written above. SELLER: COUNTRY MAID FINANCIAL, INC. a Washington corporation - ------------------------------ ---------------------- By: Ellis Stutzman, President Date PURCHASERS: - ------------------------------ ---------------------- C. Richard Kearns Date - ------------------------------ ---------------------- John C. Moneymaker Date 8 9 SCHEDULE A DISCLOSURE SCHEDULE (pursuant to Section 4.0 et seq.) 1. There is currently only one lawsuit outstanding that may affect the assets of the Country Maid Farms, Inc. entitled State of South Dakota Department of environment and Natural Resources v. Country Maid Financial, Inc., a Missouri corporation, regarding allegations of environmental violations, a copy of the complaint is available upon request by the PURCHASERS. 9 EX-10.7 12 STOCK REDEMPTION AGREEMENT 1 EXHIBIT 10.7 STOCK REDEMPTION AGREEMENT DATE: May 1, 1999 BETWEEN: C. RICHARD KEARNS ("SHAREHOLDER") AND: COUNTRY MAID FINANCIAL, INC., a Nevada corporation ("COMPANY") (jointly referred to as "PARTIES") 1.0 RECITALS 1.1 The COMPANY desires to redeem, and SHAREHOLDER desires to cancel and return to the COMPANY, up to Two Million Five Hundred Thousand (2,500,000) shares of the issued and outstanding shares of common stock owned by SHAREHOLDER, for the consideration and on the terms set forth in this AGREEMENT. 1.2 In consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the PARTIES agree as follows: 2.0 DEFINITIONS 2.1 "AGREEMENT" means this Stock Redemption Agreement and all attached Exhibits and Schedules, the terms of which are incorporated by reference herein. 2.2 "CLOSING" or "CLOSING DATE" means the date as of which the COMPANY completes the offering as stated in Section 6.0 and upon the date which SHAREHOLDER will authorize the number of shares as specified in Section 3.0 to be canceled and redeemed by the COMPANY, or such later date as the PARTIES may mutually agree upon. 2.3 "COUNTRY MAID FINANCIAL, INC." or the "COMPANY" means COUNTRY MAID FINANCIAL, INC., a Washington corporation with its principal place of business located at 2500 Main Street, Lebanon, Oregon 97355. 2.4 "EFFECTIVE DATE" is May 1, 1999. 2.5 "PERSON" means any natural person, corporation, firm, association, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. 2.6 "SELECTED INVESTORS" refers to the individuals listed on the attached Schedule A, who are creditors of SHAREHOLDER in his individual capacity. 1 2 3.0 REDEMPTION OF SHARES 3.1 Subject to the terms and conditions of this AGREEMENT, the COMPANY shall redeem up to Two Million Five Hundred Thousand (2,500,000) shares of the issued and outstanding shares of common stock ("TARGET SHARES") from SHAREHOLDER in an amount equal to the number of shares the COMPANY is able to sell to SELECTED INVESTORS in an offering conducted within the requirements of the Regulation D promulgated under the Securities Act of 1933. At the completion of the offering, as consideration to the COMPANY, the SHAREHOLDER agrees to permit the COMPANY to redeem an additional Ten Thousand shares of the common stock of the COMPANY. 4.0 REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER 4.1 SHAREHOLDER represents and warrants to COMPANY as follows that the statements contained in this Section 4.0 are correct and complete as of the date of this Agreement and will be correct and complete as of the CLOSING DATE. 4.2 The SHAREHOLDER is the beneficial owner, as defined in the Securities Act of 1933, free of any liens or encumbrances, of 4,192,606 shares of the common stock of the COMPANY. 4.3 The execution and delivery to COMPANY by SHAREHOLDER of this AGREEMENT, constitutes the legal, valid, and binding obligation of SHAREHOLDER, enforceable against SHAREHOLDER in accordance with its respective terms. SHAREHOLDER has the absolute and unrestricted right, power, authority, and capacity to execute and deliver this AGREEMENT and any of SHAREHOLDER'S closing documents, if required, and to perform his obligations under this AGREEMENT and SHAREHOLDER'S closing documents. 4.4 To the best of SHAREHOLDER'S knowledge, information and belief, the execution and delivery of this AGREEMENT and the compliance with and fulfillment of the terms and provisions of this AGREEMENT: (a) will not result in the breach of any term or provision of any contract to which SHAREHOLDER is a party; and (b) is not prohibited by or requires any notification, consent, authorization, or any judgment, order, writ, injunction, or decree which is binding upon SHAREHOLDER, except for such approvals or other action or inaction as may be required under the securities or corporate laws of the various states or other jurisdictions. 4.5 SHAREHOLDER is not required to give any notice to or obtain any consent from any PERSON in connection with the execution and delivery of this AGREEMENT or the consummation or performance of any of its terms and provisions. 4.6 No representation or warranty of SHAREHOLDER in this AGREEMENT omits to state a material fact necessary to make the statements herein, in light of the circumstances in which they were made, not misleading. There is no fact known to any SHAREHOLDER that has specific application to SHAREHOLDER, other than general economic or industry conditions, and that materially adversely affects the value or ownership of the TARGET SHARES that has not been previously disclosed to COMPANY or set forth in this AGREEMENT. 2 3 4.7 SHAREHOLDER and his agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this AGREEMENT. 5.0 REPRESENTATIONS AND WARRANTIES OF COMPANY 5.1 This AGREEMENT constitutes the legal, valid, and binding obligation of COMPANY, enforceable against COMPANY in accordance with its terms. COMPANY has the full power and authority to execute and deliver this AGREEMENT and to perform its obligations hereunder unless otherwise stated in this AGREEMENT. 5.3 Neither the execution nor the delivery of this AGREEMENT, nor the compliance with and fulfillment of its terms and provisions: (a) will violate any provisions of the Bylaws or Articles of Incorporation, as amended of the COMPANY as of the execution date of this AGREEMENT; (b) is prohibited by or requires any notification, consent, authorization, or any judgment, order, writ, injunction, or decree which is binding upon COMPANY, except for such approvals or other action or inaction as may be required under the securities or corporate laws of the various states or other jurisdictions. 5.4 COMPANY and its agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this AGREEMENT. 6.0 COVENANTS 6.1 The PARTIES agree as follows with respect to the period from and after the execution of this AGREEMENT: (a) Each of the PARTIES will use its reasonable best efforts to take all action and to do all things necessary in order to consummate and make effective the transactions contemplated by this AGREEMENT. 6.2 From and after the date of this AGREEMENT to and including the CLOSING DATE, COMPANY will: (a) cause all necessary and advisable filings and documents to be prepared and properly filed pursuant to the requirements of the Securities Act of 1933 and all other applicable stated and federal law; and (b) give any notices to third parties and obtain any third party consents that COMPANY may request in connection with this AGREEMENT. 6.3 From and after the date of this AGREEMENT to and including the CLOSING DATE, SHAREHOLDER will not sell, convey, or grant security interest to any third parties for at least Two Million Five Hundred Ten Thousand (2,510,000) of the common stock currently owned by SHAREHOLDER. 3 4 7.0 CONDITIONS PRECEDENT TO COMPANY'S OBLIGATION TO CLOSE 7.1 The obligation of COMPANY to effect the stock redemption and offering to SELECTED INVESTORS contemplated by this AGREEMENT shall be subject to performance and compliance by SHAREHOLDER of each and every covenant and agreement of SHAREHOLDER contained in this AGREEMENT and to the satisfaction of each and all of the following conditions precedent: (a) The representations and warranties contained in this AGREEMENT shall be true and correct on and as of the CLOSING DATE, with the same force and effect as if made on and as of the CLOSING DATE; (b) SHAREHOLDER shall have performed and complied with all of his covenants stated in this AGREEMENT in all material respects through the CLOSING DATE; and (c) There shall not be any judgment, order, decree, stipulation, injunction, or charge in effect preventing consummation of any of the transactions contemplated by this AGREEMENT. 8.0 CONDITIONS PRECEDENT TO SHAREHOLDER'S OBLIGATION TO CLOSE 8.1 The obligation of SHAREHOLDER to effect the stock redemption as contemplated by this AGREEMENT shall be subject to performance and compliance by the COMPANY of each and every covenant and agreement of COMPANY contained in this AGREEMENT and to the satisfaction of each and all of the following conditions precedent: (a) The representations and warranties contained in this AGREEMENT shall be true and correct on and as of the CLOSING DATE, with the same force and effect as if made on and as of the CLOSING DATE. (b) The COMPANY shall have performed and complied with all of their covenants stated in this AGREEMENT in all material respects through the CLOSING DATE. (c) There shall not be any judgment, order, decree, stipulation, injunction, or charge in effect preventing consummation of any of the transactions contemplated by this AGREEMENT. 9.0 TERMINATION 9.1 This AGREEMENT may, by written notice given prior to or at the CLOSING, be terminated as follows: (a) by either COMPANY or SHAREHOLDER if a material breach of any provision of this AGREEMENT has been committed by the other party and such breach has not been waived; or (b) by mutual written consent of COMPANY and SHAREHOLDER. 4 5 9.2 Each Party's right of termination is in addition to any other rights it may have under this AGREEMENT or otherwise, and the exercise of a right of termination will not be an election of remedies; provided, however, that if this AGREEMENT is terminated by a party because of a breach of the AGREEMENT by the other party or because one or more of the conditions to the terminating party's obligations under this AGREEMENT is not satisfied as a result of the other party's failure to comply with its obligations under this AGREEMENT, the terminating party's right to pursue all legal remedies will survive such termination unimpaired. 10.0 INDEMNIFICATION 10.1 All representations, warranties, covenants, and obligations in this AGREEMENT, and any other certificate or document delivered pursuant to this AGREEMENT, will survive the CLOSING. The right to indemnification, payment of damages or other remedy based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this AGREEMENT or the CLOSING DATE, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of damages, or other remedy based on such representations, warranties, covenants, and obligations. 10.2 SHAREHOLDER and COMPANY mutually agree to indemnify and hold each other harmless along with their respective representatives, stockholders, controlling persons, and affiliates (collectively, the "Indemnified Persons") for, and will pay to the Indemnified Persons the amount of, any loss, liability, claim, damage (including incidental and consequential damages), expense (including costs of investigation and defense and reasonable attorneys' fees), or diminution of value, whether or not involving a third-party claim, arising, directly or indirectly, from or in connection with any breach of any representation, warrant, covenant or obligation made by the other Party in this AGREEMENT. 11.0 NOTICES 11.1 Any party may give any notice, request, demand, claim, instruction, or other document under this section using any other means but no such notice, request, demand, claim, instruction, or other document shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended at the address stated below. Any party may change its address for any purpose by giving notice of the change of address to the other party in the manner provided in this section. If to SHAREHOLDER: C. Richard Kearns 765 Harmony Street Lebanon, OR 97355 If to COMPANY: With a copy to: Country Maid Financial, Inc. Jones Law Group, PLLC P.O. Box 942 2300 130th Avenue N.E., Suite A-103 Lebanon, OR 97355 Bellevue, WA 98005 5 6 12.0 GENERAL PROVISIONS 12.1 The COMPANY will bear the expenses incurred in connection with the preparation, execution, and performance of this AGREEMENT and its terms and conditions, including all fees and expenses of agents, representatives, counsel, and accountants. 12.2 The Parties agree to furnish upon request to each other such further information, and to execute and deliver to each other such other documents, and to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this AGREEMENT and the documents referred to in this AGREEMENT. 12.3 The rights and remedies of the parties to this AGREEMENT are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this AGREEMENT or the documents referred to in this AGREEMENT will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law: (a) no claim or right arising out of this AGREEMENT or the documents referred to in this AGREEMENT can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this AGREEMENT or the documents referred to in this AGREEMENT. 12.4 This AGREEMENT supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to and incorporated in this AGREEMENT) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This AGREEMENT may not be amended except by a written agreement executed by the party to be charged with the amendment. 12.5 Neither party may assign any of its rights under this AGREEMENT without the prior consent of the other parties, except that COMPANY may assign any of its rights under this AGREEMENT to any subsidiary of COMPANY. This AGREEMENT will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this AGREEMENT will be construed to give any PERSON other than the parties to this AGREEMENT any legal or equitable right, remedy, or claim under or with respect to this AGREEMENT or any provision of this AGREEMENT. This AGREEMENT and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this AGREEMENT and their successors and assigns. 6 7 12.6 If any provision of this AGREEMENT is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this AGREEMENT will remain in full force and effect. Any provision of this AGREEMENT held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 12.7 The headings in this AGREEMENT are provided for convenience only and will not affect its construction or interpretation. 12.8 With regard to all dates and time periods set forth or referred to in this AGREEMENT, time is of the essence. 12.9 This AGREEMENT will be governed by the laws of the State of Oregon without regard to conflicts of laws principles. Exclusive venue for any dispute in connection with this AGREEMENT shall be in the Circuit Court, Linn County, Oregon. 12.10 This AGREEMENT may be signed in as many counterparts is as necessary and all signatures so executed shall constitute one AGREEMENT, binding on all PARTIES as if each was a signatory on the original. 13.0 SIGNATURES 13.1 IN WITNESS WHEREOF, the parties have executed and delivered this AGREEMENT as of the date first written above. COMPANY: COUNTRY MAID FINANCIAL, INC. a Washington corporation - ----------------------------------- -------------------------- Ellis Stutzman, Its President Date SHAREHOLDER: - ----------------------------------- -------------------------- C. Richard Kearns Date 7 EX-10.8 13 LEASE AGREEMENT WITH OPTION TO PURCHASE 1 EXHIBIT 10.8 LEASE AGREEMENT WITH OPTION TO PURCHASE THIS LEASE AGREEMENT is entered into as of this 28th day of June, 1999, by and between Southfork, Inc., an Iowa corporation, as landlord ("Landlord"), and Territorial Inns Management, Inc., a Nevada corporation, as tenant ("Tenant"). RECITALS A. Landlord owns fee simple title to the Leased Property; and B. Landlord wishes to lease the Leased Property to Tenant and Tenant wishes to lease the Leased Property from Landlord, upon the terms and conditions stated in this Agreement; C. In consideration of the mutual covenants herein contained and other good and valuable consideration, Landlord and Tenant agree as follows: ARTICLE 1 DEFINITIONS For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, (i) the terms defined in this Article shall have the meanings assigned to them in this Article and include the plural as well as the singular, (ii) all accounting terms not otherwise defined herein shall have the meanings assigned to them in accordance with generally accepted accounting principles, and (iii) all references in this Agreement to designated "Articles," "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this Agreement. 1.1 "Affiliated Person" shall mean, with respect to any Person, (a) in the case of any such Person which is a partnership, any partner in such partnership, (b) in the case of any such Person which is a limited liability company, any member of such company, (c) any other Person which is a Parent, a Subsidiary, or a Subsidiary of a Parent with respect to such Person or to one or more of the Persons referred to in the preceding clauses (a) and (b), (d) any other Person who is an officer, director, trustee or employee of, or partner in or member of, such Person or any Person referred to in the preceding clauses (a), (b) and (c), and (e) any other Person who is a member of the immediate family of such Person or of any Person referred to in the preceding clauses (a) through (d). 1.2 "Agreement" shall mean this Lease Agreement, including all Exhibits attached and schedules, as it and they may be amended from time to time as herein provided. 1.3 "Applicable Laws" shall mean all applicable laws, statutes, regulations, rules, ordinances, codes, licenses, permits and orders, from time to time in existence, of all courts of competent jurisdiction and Government Agencies, and all applicable judicial and administrative and regulatory decrees, judgments and orders, including common law rulings and determinations. 1.4 "Award" shall mean all compensation, sums or other value awarded, paid or received by virtue of a total or partial Condemnation of the Leased Property. 1 2 1.5 "Business Day" shall mean any day other than Saturday, Sunday, or any other holiday observed by the banking institutions in State(s) in which the Leased Property are located. 1.6 "Capital Addition" shall mean any renovation, repair or improvement to the Leased Property (or portion thereof), the cost of which constitutes an expenditure treated as capital in nature in accordance with GAAP. 1.7 "Claim(s)" shall have the meaning given such term in Article 8. 1.8 "CMFI" shall mean Country Maid Financial, Inc., a Nevada corporation. 1.9 "Code" shall mean the Internal Revenue Code of 1986 and, to the extent applicable, the Treasury Regulations promulgated thereunder, each as from time to time amended. 1.10 "Commencement Date" shall mean the date of this Agreement. 1.11 "Condemnation" shall mean (a) the exercise of any governmental power with respect to the Leased Property, whether by legal proceedings or otherwise, by a Condemnor of its power of condemnation, (b) a voluntary sale or transfer of the Leased Property by Landlord to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending, or (c) a taking or voluntary conveyance of all or part of the Leased Property, or any interest therein, or right accruing thereto or use thereof, as the result or in settlement of any Condemnation or other eminent domain proceeding affecting the Leased Property, whether or not the same shall have actually been commenced. 1.12 "Condemnor" shall mean any public or quasi-public authority or private corporation or Person having the power of Condemnation. 1.13 "Default" shall mean any event or condition, which, with the giving of Notice and/or lapse of time, may ripen into an Event of Default. 1.14 "Encumbrance" shall have the meaning given such term in Section 20.1. 1.15 "Entity" shall mean any corporation, general or limited partnership, limited liability company, association, joint venture, bank, trust company, cooperative, any government or agency. 1.16 "Environment" shall mean soil, surface waters, ground waters, land, stream, sediments, surface or subsurface strata and ambient air. 1.17 "Environmental Obligation" shall have the meaning given such term in Section 4.3.1. 1.18 "Environmental Notice" shall have the meaning given such term in Section 4.3.1. 1.19 "Event of Default" shall have the meaning given such term in Section 12.1. 1.20 "Extended Terms" shall have the meaning given such term in Section 2.4. 1.21 "Fiscal Year" shall mean the calendar year. 2 3 1.22 "Fixed Term" shall have the meaning given such term in Section 2.3. 1.23 "Fixtures" shall have the meaning given such term in Section 2.1(d). 1.24 "GAAP" shall mean generally accepted accounting principles consistently applied. 1.25 "Government Agencies" shall mean any court, agency, authority, board, commission, department, office of any governmental or quasi-governmental unit of the United States or the State or any county, whether now or hereafter in existence, having jurisdiction over Tenant or the Leased Property or the Motel and Hospitality Facility operated thereon. 1.26 "Hazardous Substances" shall mean any substance: (a) the presence of which requires notification, investigation or remediation under any federal, state or local statute, regulation, rule, ordinance, order, action or policy; or (b) which is or becomes defined as a "hazardous waste", "hazardous material" or "hazardous substance" or "pollutant" or "contaminant" under any federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. et seq.) and the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et seq.), Material Waste Tracking Act of 1988, as amended, and the regulations promulgated thereunder; or (c) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, any state of the United States, or any political subdivision thereof; or (d) the presence of which on the Leased Property causes or materially threatens to cause an unlawful nuisance upon the Leased Property or to adjacent properties or poses or materially threatens to pose a hazard to the Leased Property or to the health or safety of persons on or about the Leased Property. 1.27 "Indebtedness" shall mean all obligations, contingent or otherwise, which in accordance with GAAP should be reflected on the obligor's balance sheet as liabilities. 1.28 "Insurance Requirements" shall mean all terms of any insurance policy required by this Agreement and all requirements of the issuer of any such policy and all orders, rules and regulations and any other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) binding upon Landlord, Tenant or the Leased Property. 1.29 "Landlord" shall have the meaning given such term in the Recital to this Agreement and shall also include its permitted successors and assigns. 1.30 "Landlord Liens" shall mean liens on or against the Leased Property or any payment of Rent (a) which result from any act of, or any claim against, Landlord or any owner of a direct or indirect interest in the Leased Property, or which result from any violation by Landlord of any terms of this Agreement or the Purchase Agreement, or (b) which result from liens in favor of any taxing authority by reason of any tax owed by Landlord or any fee owner of a direct or indirect interest in the Leased 3 4 Property; provided, however, that "Landlord Lien" shall not include any lien resulting from any tax for which Tenant is obligated to pay. 1.31 "Leased Improvements" shall have the meaning given such term in Section 2.1(b). 1.32 "Leased Intangible Property" shall mean all Motel and Hospitality Facility licensing agreements and other service contracts, equipment leases, booking agreements and other arrangements or agreements affecting the ownership, repair, maintenance, management, leasing or operation of the Leased Property; all books, records and files relating to the leasing, maintenance, management or operation of the Leased Property; all transferable or assignable permits, certificates of occupancy, operating permits, sign permits, development rights and approvals, certificates, licenses, warranties and guarantees, rights to deposits, trade names, service marks, telephone exchange numbers identified with the Leased Property, and all other transferable intangible property, miscellaneous rights, benefits and privileges of any kind or character with respect to the Leased Property. 1.33 "Leased Personal Property" shall have the meaning as stated in Section 2.1(e). 1.34 "Leased Property" shall have the meaning as stated in Section 2.1. 1.35 "Leasehold Mortgage" shall mean a mortgage, a deed to secure debt, or other security instrument by which the leasehold estate or any other rights of Tenant (including, without limitation, rights created by this Agreement) is mortgaged, conveyed, assigned, or otherwise transferred by Tenant, to secure a loan or loans obtained, or obligations incurred or guaranteed, by Tenant to a Lending Institution. 1.36 "Leasehold Mortgagee" shall mean the holder of any Leasehold Mortgage. 1.37 "Legal Requirements" shall mean all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Leased Property or the maintenance, construction, alteration or operation thereof, whether now or hereafter enacted or in existence, including, without limitation, (a) all permits, licenses, authorizations, certificates and regulations necessary to operate the Leased Property for its Permitted Use, and (b) all covenants, agreements, restrictions and encumbrances contained in any instruments at any time in force affecting the Leased Property. 1.38 "Lending Institution" shall mean any United States insurance company, banking corporation, federally insured commercial or savings bank, national banking association, United States savings and loan association, employees' welfare, pension or retirement fund or system, corporate profit sharing or pension trust, college or university, or real estate investment trust. 1.39 "Lien" shall mean any mortgage, security interest, pledge, collateral assignment, or other encumbrance, lien or charge of any kind, or any transfer of property or assets for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of its general creditors. 1.40 "Motel and Hospitality Facility" shall mean the motel and hospitality facility being operated on the Leased Property. 1.41 "Motel and Hospitality Facility Mortgage" shall mean any Encumbrance placed upon the Leased Property in accordance with Article 20. 4 5 1.42 "Motel and Hospitality Facility Mortgagee" shall mean the holder of any Motel and Hospitality Facility Mortgage. 1.43 "Notice" shall mean a notice given in accordance with Section 21.8. 1.44 "Officer's Certificate" shall mean a certificate signed by an officer of the certifying Entity duly authorized by the board of directors of the certifying Entity. 1.45 "Other Leases" shall mean, any other lease agreements between Landlord and Tenant. 1.46 "Parent" shall mean, with respect to any Person, any Person which owns directly, or indirectly through one or more Subsidiaries or Affiliated Persons, five percent (5%) or more of the voting or beneficial interest in, or otherwise has the right or power (whether by contract, through ownership of securities or otherwise) to control, such Person. 1.47 "Overdue Rate" shall mean, on any date, a per annum rate of interest equal to the lesser of five percent (5%) and the maximum rate then permitted under applicable law. 1.48 "Permitted Encumbrances" shall mean all rights, restrictions, and easements of record set forth on Schedule A. 1.49 "Permitted Use" shall mean any use of the Leased Property permitted pursuant to Section 4.1.1. 1.50 "Person" shall mean any individual or Entity, and the heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so admits. 1.51 "Rent" shall have the meaning given such term in Article 3. 1.52 "SEC" shall mean the Securities and Exchange Commission. 1.53 "State" shall mean the state or commonwealth or district in which the Leased Property is located. 1.54 "Subsidiary" shall mean, with respect to any Person, any Entity (a) in which such Person owns directly, or indirectly through one or more Subsidiaries, forty-nine percent (49%) or more of the voting or beneficial interest or (b) which such Person otherwise has the right or power to control (whether by contract, through ownership of securities or otherwise). 1.55 "Tenant" shall have the meaning given such term in the preambles to this Agreement and shall also include its permitted successors and assigns. 1.56 "Tenant's Personal Property" shall mean all vehicles and consumable inventory and supplies, furnishings, movable walls and partitions, equipment and machinery and all other tangible personal property of Tenant, if any, acquired by Tenant on and after the date hereof and located at the Leased Property or used in Tenant's business at the Leased Property and all modifications, replacements, alterations and additions to such personal property installed at the expense of Tenant, other than any items included within the definition of Fixtures or Leased Personal Property. 5 6 1.57 "Term" shall mean, collectively, the Fixed Term and the Extended Terms, to the extent properly exercised pursuant to this Agreement. 1.58 "TIM" shall mean Territorial Inns Management, Inc., a Nevada corporation, a wholly-owned subsidiary of Country Maid Financial, Inc. 1.59 "Unsuitable for Its Permitted Use" shall mean a state or condition of the Motel and Hospitality Facility such that (a) following any damage or destruction involving the Motel and Hospitality Facility, the Motel and Hospitality Facility cannot be operated in the good faith judgment of Tenant on a commercially practicable basis for its Permitted Use and it cannot reasonably be expected to be restored to substantially the same condition as existed immediately before such damage or destruction, and as otherwise required by Section 10.2.3, within six (6) months following such damage or destruction or such shorter period of time as to which business interruption insurance is available to cover Rent and other costs related to the Leased Property following such damage or destruction, or (b) as the result of a partial taking by Condemnation, the Motel and Hospitality Facility cannot be operated, in the good faith judgment of Tenant on a commercially practicable basis for its Permitted Use. ARTICLE 2 LEASED PROPERTY AND TERM 2.1 Leased Property. Upon and subject to the terms and conditions hereinafter set forth, Landlord leases to Tenant and Tenant leases from Landlord all of Landlord's right, title and interest in and to all of the following: (a) those certain tracts, pieces and parcels of land ("Land"), as more particularly described in Exhibit A, attached hereto and made a part hereof; (b) all buildings, structures and other improvements of every kind including, but not limited to, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and off-site), parking areas and roadways appurtenant to such buildings and structures presently situated upon the Land (collectively, the "Leased Improvements"); (c) all easements, rights and appurtenances relating to the Land and the Leased Improvements; (d) all equipment, machinery, fixtures, and other items of property, now or hereafter permanently affixed to or incorporated into the Leased Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, all of which, to the maximum extent permitted by law, are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto, but specifically excluding all items included within the category of Tenant's Personal Property (collectively, the "Fixtures"); (e) all machinery, equipment, furniture, furnishings, moveable walls or partitions, computers or trade fixtures or other personal property of any kind or description used or useful in Tenant's business on or in the Leased Improvements, and located on or in the Leased Improvements, and all modifications, replacements, alterations and additions to such personal 6 7 property, except items, if any, included within the category of Fixtures, but specifically excluding all items included within the category of Tenant's Personal Property (collectively, the "Leased Personal Property"); (f) all of the Leased Intangible Property; and (g) any and all leases of space, including any security deposits held by Tenant pursuant, in the Leased Improvements to tenants. 2.2 Reserved Property. Attached as Exhibit B hereto and acknowledged received by Tenant is an itemized list of personal property contained in or on the Lease Property which Landlord reserves to itself and which shall not become a part of the property leased herein or subject to the purchased option or right of first refusal hereinabove stated. 2.3 Condition of Leased Property. Tenant acknowledges receipt and delivery of possession of the Leased Property with the rights of parties in possession, the existing state of title, including all covenants, conditions, restrictions, reservations, mineral leases, easements and other matters of record or that are visible or apparent on the Leased Property and such other matters which would be disclosed by an inspection of the Leased Property and the record title thereto or by an accurate survey thereof. To the maximum extent permitted by law. Landlord hereby assigns to Tenant all of Landlord's rights to proceed against any predecessor in title for breaches of warranties or representations or for latent defects in the Leased Property. Landlord shall fully cooperate with Tenant in the prosecution of any such claims, in the name of the Landlord or Tenant. 2.4 Fixed Term. The initial term of this Agreement (the "Fixed Term") shall commence on the Commencement Date of July 1, 1999 and shall continue for five (5) years until the expiration date of July 1, 2004. 2.5 Extended Term. Unless otherwise notified by Tenant, the term of this Agreement shall be automatically renewed for up to three (3) consecutive renewal terms of five (5) years each (collectively, the "Extended Terms"). Tenant shall give Landlord Notice not later than three (3) months prior to the scheduled expiration of the then current Term of this Agreement (Fixed or Extended, as the case may be) that Tenant elects not to exercise the automatic renewal term of this Agreement. Time shall be of the essence with respect to the giving of such Notice. Each Extended Term shall commence on the day succeeding the expiration of the Fixed Term or the preceding Extended Term, as the case may be. All of the terms, covenants and provisions of this Agreement shall apply to each such Extended Term, except that Tenant shall have no right to extend the Term beyond the expiration of the Extended Terms. 7 8 ARTICLE 3 RENT 3.1 Rent. Tenant shall pay Rent, in lawful money of the United States of America, as follows: 3.1.1 Percentage Rent. The Tenant shall pay to Landlord an amount equal to twenty-five percent (25%) of the monthly gross revenue of the Leased Property, including any rent received from the Guzman-Wick Sublease as referenced in Section 21.13, no later than the fifth business day of the following month. Tenant is not obligated to pay minimum rent to Landlord regardless of the amount of gross revenue, if any, received by Tenant. 3.1.2 Costs and Expenses. In addition to the Rent payable hereunder, Tenant shall pay for all operating costs and expenses (collectively, "Costs and Expenses"), including: (a) Utility Charges. Tenant shall pay or cause to be paid all charges for electricity, power, gas, oil, water and other utilities used in connection with the Leased Property; (b) Insurance Premiums. Tenant shall pay or cause to be paid all premiums for the insurance coverage required to be maintained pursuant to Article 9. (c) Salaries for Employees. Tenant shall pay or cause to be paid all salaries of employees at the Leased Property. (d) Other Charges. Tenant shall pay or cause to be paid all other amounts, liabilities and obligations, and expenses of operating the Leased Property. (e) Real Estate Taxes. Landlord shall pay any and all unpaid real estate taxes on the above-described leased premises prorated to the commencement date of this Agreement; and Landlord shall pay any unpaid taxes thereon payable in prior years. Tenant shall pay all subsequent real estate taxes before the same become delinquent; and Tenant shall also pay special assessments hereafter assessed against said leased property. All real estate taxes shall be payable to the Davis County Treasurer, Davis County Courthouse, Bloomfield, Iowa 52537. 3.2 Late Payment of Rent If any installment of Rent shall not be paid within five (5) days after its due date, Tenant shall pay a late charge of eighteen (18) percent (annual percentage rate) on the amount of the delinquency from the due date until paid. 3.3 Net Lease. The Rent shall be absolutely net to Landlord so that this Agreement shall yield to Landlord the full amount of the installments or amounts of the Rent throughout the Term, subject to any other provisions of this Agreement which expressly provide otherwise, including those provisions for adjustment or abatement of such Rent. 8 9 ARTICLE 4 USE OF THE LEASED PROPERTY 4.1 Permitted Use. 4.1.1 Permitted Use. (a) Tenant shall, at all times during the Term and at any other time that Tenant shall be in possession of the Leased Property, continuously use and operate the Leased Property as a Motel and Hospitality Facility and any uses incidental thereto. (b) In the event that, in the reasonable determination of Tenant, it shall no longer be economically practical to operate the Leased Property as a Motel and Hospitality Facility, Tenant shall give Landlord Notice thereof, which Notice shall set forth in reasonable detail the reasons therefor. Thereafter, Landlord and Tenant shall negotiate in good faith to agree on an alternative use for the Leased Property. 4.1.2 Necessary Approvals. Tenant shall proceed with all due diligence and exercise best efforts to obtain and maintain all approvals necessary to use and operate, for its Permitted Use, the Leased Property and the Motel and Hospitality Facility located thereon under applicable law. 4.1.3 Lawful Use. Tenant shall not use or permit the use of the Leased Property or Tenant's Personal Property, if any, for any unlawful purpose. Tenant shall not cause nor permit the Leased Property, or any portion thereof, to be used in such a manner as (i) might reasonably impair Landlord's title thereto or to any portion thereof, or (ii) may reasonably allow a claim or claims for adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof. 4.2 Compliance with Legal/Insurance Requirements. Subject to the provisions of Article 8, Tenant, at its sole expense, shall (i) comply with all material Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair, alteration and restoration of the Leased Property and (ii) procure, maintain and comply with all appropriate licenses, and other authorizations and agreements required for any use of the Leased Property and Tenant's Personal Property, if any, then being made, and for the proper development, installation, operation and maintenance of the Leased Property. 4.3 Environmental Matters. 4.3.1 Restriction on Use During the Term and any other time that Tenant shall be in possession of the Leased Property, Tenant shall not store, spill upon, dispose of or transfer to or from the Leased Property any Hazardous Substance, except in compliance with all Applicable Laws. During the Term and any other time that Tenant shall be in possession of the Leased Property, Tenant shall maintain the Leased Property at all times free of any Hazardous Substance, except in compliance with all Applicable Laws. Tenant shall promptly: (a) upon receipt of Notice or knowledge, notify Landlord in writing of any material change in the nature or extent of Hazardous Substances at the Leased Property, (b) transmit to 9 10 Landlord a copy of any Community Right to Know report which is required to be filed by Tenant with respect to the Leased Property pursuant to SARA Title III or any other Applicable Law, (c) transmit to Landlord copies of any citations, orders, notices or other governmental communications received by Tenant or their respective agents or representatives with respect thereto (collectively, "Environmental Notice"), which Environmental Notice requires a written response or any action to be taken and/or if such Environmental Notice gives notice of and/or presents a material risk of any material violation of any Applicable Law and/or presents a material risk of any material cost, expense, loss or damage (an "Environmental Obligation"), and (d) observe and comply with all Applicable Laws relating to the use, maintenance and disposal of Hazardous Substances and all orders or directives from any official, court or agency of competent jurisdiction relating to the use or maintenance or requiring the removal, treatment, containment or other disposition. If, at any time prior to the termination of this Agreement, Hazardous Substances (other than those maintained in accordance with Applicable Laws) are discovered on the Leased Property, subject to Tenant's right to contest the same in accordance with Article 8, Tenant and Landlord shall cooperate to take all actions as are required by any Government Agency and by applicable Law, (i) to clean up and remove from and about the Leased Property all Hazardous Substances thereon, (ii) to contain and prevent any further release or threat of release of Hazardous Substances on or about the Leased Property and (iii) to use good faith efforts to eliminate any further release or threat of release of Hazardous Substances on or about the Leased Property. If the Hazardous Substance is found to be related to activities of the Landlord, Landlord shall indemnify and reimburse Tenant for all costs incurred. 4.3.2 Survival. The provisions of this Section 4.3 shall survive the expiration or sooner termination of this Agreement. ARTICLE 5 MAINTENANCE AND REPAIRS 5.1 Tenant's General Obligations. Tenant shall, at its sole cost and expense, keep the Leased Property and all private roadways, sidewalks and curbs appurtenant, and Tenant's Personal Property in good order and repair, reasonable wear and tear excepted, and shall promptly make all reasonably necessary and appropriate repairs and replacements arising by reason of Tenant's actions. All repairs shall be made in a good, workmanlike manner, consistent with the industry standards for like motels and hospitality facilities in like locales, in accordance with all applicable federal, state and local statutes, ordinances, by-laws, codes, rules and regulations relating to any such work. Tenant shall not take or omit to take any action, the taking or omission of which would materially and adversely impair the value or the usefulness of the Leased Property or any part thereof for its Permitted Use. Tenant's obligations under this Section shall be limited in the event of any casualty or Condemnation as set forth in Articles 10 and 11. 5.2 Tenant's Personal Property. Tenant shall provide and maintain throughout the Term all such Tenant's Personal Property as shall be necessary in order to operate in compliance with applicable Legal Requirements and Insurance Requirements and otherwise in accordance with customary practice in the industry for the Permitted Use. 5.3 Yield Up. Upon the expiration or sooner termination of this Agreement, Tenant shall vacate and surrender the Leased Property to Landlord in substantially the same condition in which the Leased Property was in on the Commencement Date, except as repaired, altered or added to as permitted or required by the provisions of this Agreement, except reasonable wear and tear, (and casualty damage 10 11 and Condemnation, in the event that this Agreement is terminated following a casualty or total Condemnation in accordance with Article 10 or Article 11). ARTICLE 6 IMPROVEMENTS 6.1 Improvements to the Leased Property. Tenant may not make, construct or install any Capital Additions, make certain routine repairs and maintenance to the Motel and Hospitality Facility building which are normally capitalized under GAAP such as exterior and interior repainting, resurface building walls, floors, roofs and parking areas, and replace folding walls and the like, without, in each instance, obtaining Landlord's prior written consent. 6.2 Tenant's Obligation to Remodel. Tenant shall 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." 6.3 Salvage. All materials which are scrapped or removed in connection with the making of either Capital Additions or non-Capital Additions or repairs required by Article 5 shall become the property of the Tenant. ARTICLE 7 LIENS 7.1 Liens. Subject to Article 8, Tenant shall not, directly or indirectly, create or allow to remain, any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property or any attachment, levy, claim or encumbrance in respect of the Rent, other than (a) Permitted Encumbrances, (b) restrictions, liens and other encumbrances which are consented to in writing by Landlord, (c) liens for those taxes of Landlord which Tenant is not required to pay hereunder, (d) subleases permitted by Article 16, (e) liens of mechanics, laborers, materialmen, suppliers or vendors incurred in the ordinary course of business that are not yet due and payable or are for sums that are being contested in accordance with Article 8, (f) any Motel and Hospitality Facility Mortgages or other liens which are the responsibility of Landlord pursuant to this Agreement, (g) Landlord Liens and any other voluntary liens created by Landlord, and (h) Leasehold Mortgages. ARTICLE 8 PERMITTED CONTESTS 8.1 Tenant shall have the right to contest the amount or validity of any imposition, Legal Requirement, Insurance Requirement, Environmental Obligation, lien, attachment, levy, encumbrance, charge or claim (collectively, "Claims") as to the Leased Property, by appropriate legal proceedings, conducted in good faith and with due diligence. 11 12 ARTICLE 9 INSURANCE AND INDEMNIFICATION 9.1 General Insurance Requirements. Tenant shall, at all times during the Term and at any other time Tenant shall be in possession of the Leased Property, keep in force insurance, premiums thereof to be prepaid by Tenant (without notice or demand) against loss by fire, tornado and other hazards, casualties and contingencies as Landlord may reasonably require on all buildings and improvements, now or hereafter placed on said premises and any personal property which may be subject to this Lease, in an amount of coverage which will pay for the replacement costs of said building, improvements, and personal property, at the time of the damage or loss thereto; and not merely pay the value of said real and personal property at the time of said loss. Also, Tenant shall secure insurance for that amount necessary to pay the costs of cleaning up the refuse, debris or preventing against hazards resulting from the damage or destruction of real estate, improvements, or personal property from the casualties of and risks insured against. All of the aforesaid insurance shall be payable to Landlord and Tenant as their interests appear. Tenant shall promptly deposit such policy or policies with proper riders with Landlord for the further security for the payment for the sums herein mentioned. In the event of any such casualty loss, insurance proceeds may be used under the supervision of Landlord to replace or repair the loss and the proceeds of said policies shall stand as security for the payment of the obligations herein. 9.2 Indemnity and Liability Insurance. Except for negligence of Landlord, Tenant will protect, defend and indemnify Landlord from any and all loss, costs, damages and expenses occasioned by, or arising out of, any accident or other occurrence causing or inflicting injury or damage to any person or property, happening or done in, upon or about the premises, or due directly or indirectly to the tenancy, use or occupancy thereof, or any part thereof by Tenant or any person claiming through or under Tenant. Tenant will procure and maintain liability insurance in the amounts of not less than $500,000.00 for any person injured, $1,000,000.00 for any one accident, and with limits of $100,000.00 for property damage, which names Landlord is insured; and the policy or policies for said indemnity and liability insurance will be deposited with Landlord and said insurance proceeds shall stand as security for the Term of Lease, all as stated in the preceding paragraph 9.1 above. 9.3 Blanket Policy. Notwithstanding anything to the contrary contained in this Article 9, Tenant's obligation to maintain the insurance herein required may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Tenant, provided, that (a) the coverage thereby afforded will not be reduced or diminished from that which would exist under a separate policy meeting all other requirements of this Agreement. Without limiting the foregoing, the amounts of insurance that are required to be maintained pursuant to Sections 9.1 and 9.2 shall be on a Motel and Hospitality Facility by Motel and Hospitality Facility basis. ARTICLE 10 CASUALTY 10.1 Insurance Proceeds. Except as provided in the last clause of this sentence, all proceeds payable by reason of any loss or damage to the Leased Property as incurred by Landlord, or any portion thereof, and insured under any policy of insurance required by Article 9 (other than the proceeds of any business interruption insurance) shall be paid directly to Landlord (subject to the provisions of Section 10.2) and all loss adjustments with respect to losses payable to Landlord shall require the prior written consent of Landlord; provided, however, that, so long as no Event of Default shall have occurred and be continuing, all such proceeds less than or equal to Seven Hundred Fifty Thousand Dollars ($750,000) 12 13 shall be paid directly to Tenant and such losses may be adjusted without Landlord's consent. Notwithstanding, if Tenant is required to reconstruct or repair the Leased Property, such proceeds payable to the Landlord shall be paid to Tenant. Provided no Default or Event of Default has occurred and is continuing, any excess proceeds of insurance remaining after the completion of the restoration shall be paid to Tenant. All salvage resulting from any risk covered by insurance shall belong to the party who had possession and duty to maintain the property, provided, any rights to the same have been waived by the insurer. 10.2 Total Destruction of Business Use. In the event of the destruction or damage of the Leased Properties, including the parking area, so that Tenant is not able to conduct its business on the premises, for the then current legal use for which the premises are being used and which are damages that cannot be repaired within 60 days, this Lease may be terminated at the option of either Landlord or Tenant. Such termination in such event shall be affected by written notice of one party to the other party, within twenty (20) days after such destruction. Tenant shall render possession within ten (10) days after such notice issues; and, each party shall be released from all future obligations hereunder, subject to the provision that in the event Tenant is able to use a portion of the premises, Tenant shall pay prorated rental after destruction of a portion of said leased premises. In the event of such termination of this Lease, Landlord, at its option, may rebuild or not, according to its own wishes and needs. 10.3 Loss of Income Insurance. Tenant shall, upon the execution of this Agreement, deliver to Landlord proof of coverage for loss of income insurance; which insurance shall be kept and maintained by Tenant for the first 365 days of this lease term in the same amount of coverage as is presently kept and maintained by Landlord. Thereafter, Tenant shall keep and maintain that same amount of coverage as stated herein for loss of income insurance during the remainder of the lease term, including any extensions and renewals thereof. ARTICLE 11 CONDEMNATION 11.1 Total Condemnation. If either (i) the whole of the Leased Property shall be taken by Condemnation or (ii) a Condemnation of less than the whole of the Leased Property renders the Leased Property Unsuitable for Its Permitted Use, this Agreement shall terminate, Tenant and Landlord shall seek the Award for their interests in the Leased Property as provided in Section 11.3 and Tenant shall thereafter have no obligation to pay Rent for periods arising after the effective date of termination. 11.2 Temporary Condemnation. In the event of any Temporary Condemnation of the Leased Property, this Agreement and Tenant's obligations to make all payments of Rent and to pay all other charges as required under this Agreement shall be abated during the time of the Temporary Condemnation. 11.3 Allocation of Award. The total Award from the above referenced Condemnation of the Leased Property shall be distributed proportionally according to the total amount of loss suffered by Landlord and Tenant. Any portion of the Award made for the taking of Tenant's leasehold interest in the Leased Property, loss of business during the remainder of the Term, the taking of Tenant's Personal Property, or Tenant's removal and relocation expenses shall be the sole property of and payable to Tenant. In any Condemnation proceedings, Landlord and Tenant shall each seek its own Award at its own expense. 13 14 11.4 Effect on Other Leases. Any termination of this Agreement pursuant to this Article 11 shall not terminate or otherwise affect Other Leases or Tenant's ability to extend Other Leases. ARTICLE 12 DEFAULTS AND REMEDIES 12.1 Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default": (a) should Tenant fail to maintain the casualty insurance required under Article 9, Paragraph 9, this Lease shall be terminated by Landlord if Tenant fails to secure said casualty insurance within three (3) days after receipt of certified mail (or personal delivery to a managing employee on the leased premises) of notice of said default to Tenant;" (b) should Tenant or Landlord default in the due observance or performance of any of the terms, covenants or agreements contained herein to be performed or observed by it (other than as specified in (a) immediately preceding this subparagraph) and such default shall continue for a period of 30 Business Days after notice thereof from the non-defaulting party; provided, however, that if such default is susceptible of cure but such cure cannot be accomplished with due diligence within such period of time, and if, in addition, the defaulting party commences to cure such default within 5 Business Days after notice thereof from the non-defaulting party; and thereafter prosecutes the curing of such default with all due diligence, such period of time shall be extended, but not to exceed 10 days in the aggregate to cure such default; (c) should an event of default by Landlord or Tenant occur and be continuing beyond the expiration of any applicable cure period under any of any Other Leases; or (d) should there occur a final unappealable determination by applicable state authorities of the revocation or limitation of any material license, permit, certification or approval required for the lawful operation of the Motel and Hospitality Facility in accordance with its Permitted Use or the loss or material limitation of any material license, permit, certification or approval under any other circumstances under which Tenant is required to cease its operation of the Motel and Hospitality Facility in accordance with its Permitted Use at the time of such loss or limitation; or (e) should any material representation or warranty made by Tenant or Landlord under or in connection with this Agreement, any Other Leases, or in any document, certificate or agreement delivered in connection herewith or therewith prove to have been false or misleading in any material respect on the date when made or deemed made and the same shall continue for five (5) Business Days after Notice thereof from Landlord or Tenant; or (f) should any petition be filed by or against Tenant or Landlord under the Federal bankruptcy laws, or should any other proceeding be instituted by or against Tenant or Landlord seeking liquidation, reorganization, arrangement, adjustment or composition of Tenant's or Landlord's debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for Tenant or Landlord or for any substantial part of the property of Tenant or Landlord, and such proceeding is not dismissed within ninety (90) days after institution. 14 15 12.2 Upon the occurrence of any event described in Section 12.1, Landlord or Tenant, in addition to all other remedies available to it, may terminate this Agreement by giving Notice thereof to the other party and upon the expiration of the time, if any, fixed in such Notice, this Agreement shall terminate and all rights of the other parties under this Agreement shall cease. The non-breaching party shall have and may exercise all rights and remedies available at law and in equity as a result of the other party's breach of this Agreement. ARTICLE 13 HOLDING OVER 13.1 In the event Tenant holds over after the expiration or earlier termination of this Agreement, such holding over shall be on the terms and conditions set forth in this Agreement, to the extent applicable. Tenant shall pay to Landlord all Rent due Landlord based upon the terms of this Agreement. Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the expiration or earlier termination of this Agreement. ARTICLE 14 LANDLORD'S NOTICE OBLIGATIONS; LANDLORD DEFAULT 14.1 Landlord Notice Obligation. Landlord shall give prompt Notice to Tenant of any matters affecting the Leased Property of which Landlord receives written Notice or actual knowledge and, to the extent Tenant otherwise has no Notice or actual knowledge, Landlord shall be liable and indemnify Tenant for any liabilities arising from the failure to deliver such Notice to Tenant. 14.2 Landlord's Default. If Landlord shall default in the performance or observance of any of its covenants or obligations set forth in this Agreement or any obligation of Landlord, if any, under any agreement affecting the Leased Property, the performance of which is not Tenant's obligation pursuant to this Agreement, and any such default shall continue for a period of thirty (30) days after Notice thereof with respect to monetary defaults and sixty (60) days after Notice thereof with respect to non-monetary defaults from Tenant to Landlord and any applicable Motel and Hospitality Facility Mortgagee, or such additional period as may be reasonably required to correct the same, Tenant may declare the occurrence of a "Landlord Default" by a second Notice to Landlord and to such Motel and Hospitality Facility Mortgagee. Thereafter, Tenant may forthwith cure the same and, subject to the provisions of the following paragraph, invoice Landlord for costs and expenses incurred by Tenant in curing the same, together with interest thereon (to the extent permitted by law) from the date Landlord receives Tenant's First Notice, at the Overdue Rate. Tenant may at its election terminate this Agreement for any default by Landlord hereunder and offset or counterclaim against any Rent or other charges due hereunder to Landlord. 15 16 ARTICLE 15 PURCHASE RIGHTS 15.1 Option to Purchase. Tenant shall have an option to purchase the Leased Property upon the following terms and conditions: (a) Option to Purchase. Landlord herein grants Tenant an option to purchase the Leased Property for the total purchase price of $650,000. As consideration for the option, Tenant's parent company, Country Maid Financial, Inc., a Washington corporation ("Country Maid"), shall issue to Landlord 650 shares of its Class C Preferred Stock ("Preferred Stock") which shall be convertible, twelve (12) months after the issuance of the Preferred Stock, into common stock of Country Maid with a value of $130,000 at the time of conversion as stated in the Certificate of Designation of Country Maid, a copy of which is hereby acknowledged received by Landlord. The option is exercisable only during the last sixty (60) days of the fourth five-year term of the Lease. If Tenant elects not to lease the premises for the full twenty-year period, this option to purchase shall become null and void. 15.2 First Refusal Option to Purchase. In the event the Tenant does not exercise its option to purchase the Leased Property as provided in Section 15.1, Tenant shall have a first refusal option to purchase the Leased Property upon the same price, terms and conditions as Landlord shall propose to sell the Leased Property, or upon the same price, terms and conditions of any offer from a third party to purchase the Leased Property which Landlord intends to accept (or has accepted subject to Tenant's right of first refusal herein provided); provided, however, that, if the proposed purchase price is for other than cash, Tenant shall have the right to purchase the Leased Property on cash equivalent terms determined by the agreement of the parties or, if they cannot agree within twenty (20) Business Days, by arbitration by the American Arbitration Association then in effect. If, during the Term, Landlord reaches such agreement with a third party or proposes to offer the Leased Property for sale, Landlord shall promptly give written notice to Tenant of the purchase price and all other material terms and conditions of such agreement or proposed sale and Tenant shall have sixty (60) days thereafter to exercise Tenant's option to purchase by written notice to Landlord thereof. Failure of Tenant to respond within such 60-day period shall be deemed a waiver of Tenant's right to purchase the Leased Property with respect to such offer. 15.3 If Tenant exercises its option under Section 15.2, the sale to Tenant shall be consummated upon the same terms and conditions as contained in such agreement or Landlord's notice of the proposed sale. If Tenant shall not exercise its option to purchase within the time period and in the manner above provided, Landlord shall be free to sell the Leased Property to such third party at the price and upon terms substantially similar to those offered to Tenant; provided however that the purchaser assumes the landlord's obligations of this Lease. The provisions of Sections 15.1 and 15.2 shall inure to the benefit of Tenant and any permitted successors and assigns of Tenant pursuant to this Agreement. This First Refusal Option to Purchase is exercisable during the terms of the Lease, as renewed if elected by Tenant pursuant to Article 2 of this Lease, and within sixty (60) days after the termination of said Lease. ARTICLE 16 SUBLETTING AND ASSIGNMENT 16.1 Subletting and Assignment. Except as provided in Section 16.4 and Article 19, Tenant shall not, without Landlord's prior written consent, which consent shall not unreasonably be withheld, assign, mortgage, pledge, encumber or otherwise transfer this Agreement. An assignment of this 16 17 Agreement shall not include any direct or indirect transfer of any interest in Tenant such that Tenant shall cease to be a wholly owned direct or partial sublease or any indirect Subsidiary of TIM or CMFI or any transaction pursuant to which Tenant is merged or consolidated with another Entity or pursuant to which all or substantially all of Tenant's assets are transferred to any other Entity, as if such change in control or transaction were an assignment of this Agreement, and the foregoing shall not be construed to prohibit collateral assignments or pledges of the capital stock of Tenant to Lending Institutions otherwise permitted by this Agreement. 16.2 If the Leased Property or any part thereof are sublet all Rent and payments from the sublessee shall be paid to the Tenant. Tenant shall remain responsible for the full payment of Rent as provided in Article 3. 16.3 No subletting or assignment shall in any way impair the continuing primary liability of Tenant hereunder (unless Landlord and Tenant expressly otherwise agree that Tenant shall be released from all obligations hereunder). No assignment, subletting or occupancy shall affect any Permitted Use. 16.4 Permitted Sublease. Tenant may, in each instance after Notice to Landlord, sublease space at the Leased Property for newsstand, gift shop, parking garage, health club, restaurant, bar or commissary purposes or similar concessions in furtherance of the Permitted Use, so long as such subleases do not demise, in the aggregate, in excess of 50% of the square footage of the Leased Property, will not violate or affect any Legal Requirement or Insurance Requirement, and Tenant shall provide such additional insurance coverage applicable to the activities to be conducted in such subleased space as Landlord and any Motel and Hospitality Facility Mortgagee may reasonably require. ARTICLE 17 ESTOPPEL CERTIFICATES 17.1 Estoppel Certificates. At any time and from time to time, upon not less than ten (10) Business Days prior Notice by either party, the party receiving such Notice shall furnish to the other an Officer's Certificate certifying that this Agreement is unmodified and in full force and effect (or that this Agreement is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, that no Default or an Event of Default has occurred and is continuing or, if a Default or an Event of Default shall exist, specifying in reasonable detail the nature thereof, and the steps being taken to remedy the same, and such additional information as the requesting party may reasonably request. Any such certificate furnished pursuant to this Section may be relied upon by the requesting party, its lenders and any prospective purchaser or mortgagee of the Leased Property or the leasehold estate. ARTICLE 18 LANDLORD'S RIGHT TO INSPECT 18.1 Tenant shall permit Landlord and its authorized representatives to inspect the Leased Property during usual business hours without notice for the purposes of checking the maintenance and repair of the premises as Tenant is permitted or required to make pursuant to the terms of this Lease and also for the purpose of checking and determining the gross receipts of the Leased Property upon which the percentage rent payable to Landlord pursuant to Article 3 is determined, provided that any inspection 17 18 of the premises or Tenant's financial records by Landlord or its representatives will not unreasonably interfere with Tenant's use and operation of the Leased Property and further provided that in the event of an emergency, Landlord and its representatives shall have the right to inspect at times other than during usual business hours, and, without notice. Tenant will keep upon the leased premises a record of its daily receipts and revenues from the operation of the motel and hospitality facility which shall be at all times made available to Landlord or its representatives to determine the accuracy of said receipts and the percentage rent payable by Tenant to Landlord. 18.2 Daily Income. Tenant shall each day deliver or fax to Landlord a copy of its daily written report of income which is sent from the leased premises to Tenant's principal office. In the event Tenant does not hereafter send a written report of daily revenue or income to its office or to another person, firm, or corporation, Tenant shall each day fax or deliver to Landlord a written statement verified by the manager or assistant manager of said leased premises accurately showing said daily results. ARTICLE 19 LEASEHOLD MORTGAGES 19.1 Leasehold Mortgages Authorized. Notwithstanding anything to the contrary contained herein, on one or more occasions, without Landlord's prior consent, Tenant may grant one or more Leasehold Mortgages or security interest on its leasehold in the Leased Property to one or more Lending Institutions to secure Indebtedness. 19.2 Notices to Landlord. Promptly upon the granting of any Leasehold Mortgage, Tenant or the applicable Leasehold Mortgagee shall give Notice to Landlord, such Notice to identify the name and address of the Leasehold Mortgagee and to be accompanied by a copy of the applicable Leasehold Mortgage, as recorded. In the event of a change of address of a Leasehold Mortgagee or of any amendment to or assignment of a Leasehold Mortgage, Tenant or the applicable Leasehold Mortgagee shall promptly provide Notice of such new address, amendment or assignment to Landlord, together with a copy of each such amendment or assignment. 19.3 Cure by Leasehold Mortgagee. Any Leasehold Mortgagee shall have the right, at any time during the Term hereof, while this Agreement is in full force and effect, to do any act required by Tenant hereunder, and all such acts done or performed shall be effective as to prevent a forfeiture of Tenant's rights hereunder as if the same had been done or performed by Tenant. ARTICLE 20 MOTEL AND HOSPITALITY FACILITY MORTGAGES 20.1 Landlord's Responsibilities. Landlord is solely responsible to pay any and all Motel and Hospitality Facility Mortgages and Liens encumbering the Leased Property at the commencement of the Lease ("Encumbrances"). Without the written consent of the Tenant, Landlord will not further encumber the Leased Property. 20.2 Subordination of Lease. Any and all rights of Tenant under this Agreement are and shall be subject and subordinate to any ground or master lease, and all renewals and extensions thereof, and to all mortgages and deeds of trust, which were in effect at the commencement of the Lease. 18 19 ARTICLE 21 MISCELLANEOUS 21.1 No Waiver. No failure by Landlord or Tenant to insist upon the strict performance of any term contained in this Agreement or to exercise any right, power or remedy consequent upon a breach, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. To the maximum extent permitted by law, no waiver of any breach shall affect or alter this Agreement, which shall continue in full force and effect with respect to any other then existing or subsequent breach. 21.2 Remedies Cumulative. To the maximum extent permitted by law, each legal, equitable or contractual right, power and remedy of Landlord or Tenant, now or hereafter provided either in this Agreement or by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Landlord or Tenant (as applicable) of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by such party of any or all of such other rights, powers and remedies. 21.3 Severability. Any clause, sentence, paragraph, section or provision of this Agreement held by a court of competent jurisdiction to be invalid, illegal or ineffective shall not impair, invalidate or nullify the remainder of this Agreement, but rather the effect thereof shall be confined to the clause, sentence, paragraph, section or provision so held to be invalid, illegal or ineffective, and this Agreement shall be construed as if such invalid, illegal or ineffective provisions had never been contained therein. 21.4 No Merger of Title. It is expressly acknowledged and agreed that it is the intent of the parties that there shall be no merger of this Agreement or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly this Agreement or the leasehold estate created hereby and the fee estate or ground landlord's interest in the Leased Property. 21.5 Conveyance by Landlord. If Landlord or any successor owner of all or any portion of the Leased Property shall convey all or any portion of the Leased Property in accordance with the terms hereof other than as security for a debt, and the grantee or transferee of such of the Leased Property shall expressly assume all obligations of Landlord hereunder arising or accruing from and after the date of such conveyance or transfer. 21.6 Quiet Enjoyment. Provided that no Event of Default shall have occurred and be continuing, Tenant shall peaceably and quietly have, hold and enjoy the Leased Property for the Term, free of hindrance or intrusion by Landlord or any agent or representative of the Landlord. 21.7 Memorandum of Lease. Landlord and Tenant shall promptly, upon the request of the other, execute and record a short form memorandum of this Agreement, in form suitable for recording under the laws of the State in which reference to this Agreement, and all options contained herein, shall be made. The parties requesting the execution and recording shall bare equally all costs and expenses of recording such memorandum. 21.8 Notices. (a) Any and all Notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if 19 20 in writing and the same shall be delivered either in hand, by telecopier with written acknowledgment of receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the Notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier). (b) All Notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of acknowledged receipt, in the case of a Notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a Notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day. (c) All such Notices shall be addressed as follows: If to Landlord: With a copy to: Linda Grant, President Vern Ball P.O. Box 195 Lynch Law Office Bloomfield, Iowa 52537 207 South Washington P.O. Box 129 Bloomfield, Iowa 52537 If to Tenant: With a copy to: Territorial Inns Management, Inc. Jones Law Group, P.L.L.C. P.O. Box 942 2300 130th Ave. N.E., Suite A-103 Lebanon, OR 97355 Bellevue, WA 98005 (d) By Notice given as herein provided, the parties hereto and their respective successor and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such Notice. 21.9 Construction. Anything contained in this Agreement to the contrary notwithstanding, all claims against, and liabilities of, Tenant or Landlord arising prior to any date of termination or expiration of this Agreement with respect to the Leased Property shall survive such termination or expiration. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the party to be charged. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Each term or provision of this Agreement to be performed shall be construed as an independent covenant and condition. Time is of the essence with respect to the provisions of this Agreement. Except as otherwise set forth in this Agreement, any obligations of Tenant (including without limitation, any monetary, repair and indemnification obligations) and Landlord shall survive the expiration or sooner termination of this Agreement. 21.10 Counterparts; Headings. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but which, when taken together, shall constitute but one instrument and shall become effective as of the date hereof when copies hereof, which, when taken together, bear the signatures of each of the parties hereto shall have been signed. The headings are for 20 21 purposes of reference only and shall not limit or affect the meaning of the terms contained in this Agreement. 21.11 Right to Make Agreement. Each party warrants, with respect to itself, that neither the execution of this Agreement, nor the consummation of any transaction contemplated hereby, shall violate any provision of any law, or any judgment, writ, injunction, order or decree of any court or governmental authority having jurisdiction over it; nor result in or constitute a breach or default under any indenture, contract, other commitment or restriction to which it is a party or by which it is bound; nor require any consent, vote or approval which has not been given or taken, or at the time of the transaction involved shall not have been given or taken. Each party covenants that it has and will continue to have throughout the term of this Agreement and any extensions thereof, the full right to enter into this Agreement and perform its obligations hereunder. 21.12 Confidentiality. Except to prospective lenders and purchasers or as may be required by law, the SEC or any securities and exchange commission, Landlord shall not disclose any of Tenant's confidential or proprietary information to any Person. 21.13 Acknowledgment and Performance of Sub-Lease. Lessee acknowledges receipt of a copy of Landlord's Lease to Guzman-Wick, Inc. to the restaurant and bar area, including the kitchen, storage rooms, restrooms, hallways, parking lots, east to storage bins and south to tree, including the heating, air conditioning, electrical systems, plumbing and sewer therein or appurtenant thereto which sublease has been referred to in Paragraph 3.1.1 of Article 3 above. Tenant executes this Lease with Option to Purchase subject to the provisions of said Guzman-Wick, Inc. lease. Further, Tenant agrees that it will, as a part of this agreement, perform all of the duties of Landlord in said Guzman-Wick, Inc. lease, the same as if it were the named Landlord in the said Lease. Tenant agrees to pay to Landlord 25% of the amount of rent received from the Guzman-Wick Sublease; the current amount of rent paid by Guzman-Wick, Inc. is One Thousand Two Hundred Dollars ($1,200). 21.14 Landlord shall be allowed daily access to the Leased Property to receive from Tenant reports of revenue and to inspect the care, maintenance, and operation of the leased premises. IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument as of the date above first written. LANDLORD: TENANT: SOUTHFORK, INC. TERRITORIAL INNS MANAGEMENT, INC. an Iowa corporation a Nevada corporation - --------------------------- -------------------------- By: Linda Grant, President By: C. Richard Kearns, CEO 21 22 GUARANTY In consideration of the aforesaid Lease Agreement with Option to Purchase (Lease), Country Maid financial, Inc., a Washington corporation ("Country Maid"), guarantees payment and performance thereof as required by Tenant therein. It is understood that this guaranty shall be a continuing and irrevocable guaranty and indemnity by Country Maid, for such indebtedness and performance of Tenant according to the terms of said lease. Country Maid, does hereby notice of default by Landlord if notice has been sent to Tenant. Also, Country Maid financial, Inc., does consent to the modification, amendment, or renewal of said Lease by Tenant and Landlord in accordance with the terms of this Lease. Date: COUNTRY MAID FINANCIAL, INC., a Washington corporation ----------------------------- By: ------------------------- C. Richard Kearns, CEO 22 23 EXHIBIT A [Description of Leased Property or Collective Leased Properties] A tract of land in the Southeast Quarter of the Southeast Quarter of Section Twenty-five (25), Township Sixty-nine (69) North, Range Fourteen (14) West of the 5th P.M., located in the City of Bloomfield, Iowa, more particularly described as beginning at the Southeast corner of said Section 25-69-14, thence due West along the South line of the SE 1/4 SE 1/4 of said Section 25-69-14 a distance of 665.56 feet to a point, thence North 00 degrees 27 minutes 00 seconds West along the West line of the E 1/2 SE 1/4 SE 1/4 of said Section 25-69-14, a distance of 39.1 feet to an Iowa Highway Commissioner R.O.W. marker, said R.O.W. Marker being the true point of beginning, thence North 00 degrees 27 minutes 00 seconds West along the West line of the W 1/2 SE 1/4 SE 1/4 of said Section 25-69-14, said West line also being the East R.O.W. line of U.S. Highway No. 63, a distance of 300 feet to an iron pin, thence South 89 degrees 56 minutes 30 seconds East, a distance of 606.26 feet to an iron pin, said iron pin, being on the West R.O.W. line of East Street, thence South 00 degrees 34 minutes 30 seconds East along the West R.O.W. line of East Street, a distance of 300.29 feet to an iron pin, said iron pin being on the North R.O.W. line of Iowa Highway No. 2 thence North 89 degrees 54 minutes 30 seconds West along the North R.O.W. line of Iowa Highway No. 2, a distance of 607.06 feet to a true point of beginning, subject to all recorded easements. AND 23 24 INVENTORY
New inventory on shelf Queen Flat 57 Queen Fitted 56 King Flat 9 King Fitted 8 Washcloths 72 Pillowcases 50 King Mattress Pads 1 Mattress plastic liners King 3 Mattress plastic liners Queen 3 Mattress plastic liners regular 6 Toilet paper 148 Kleenex 60 boxes Soap 2/3 box Pine cleaner 2 3/4gal Bleach 2 1/2gal Laundry soap 4 gal Garbage bags 1 3/4 (black) Small waste can liners 1 1/8 boxes Cups 550 Paper towels 1/2 case Toilet bowl cleaner 8 qts.
24 25 FRONT DESK AND HALLWAYS First aid kit 5 fire alarm systems 2 emergency lighting 8 hall lights 5 ceiling lights 6 exit lights 2 ringer bells on hall walls Fire extinguishers Wrought iron door and frame Hallway furnace and air conditioner system Carpeting 3 phones Check-in desk Key holder (board) Credit card machine and printer Auto voice switch box 5' desk and work area 6' L-shaped work area 14' L-shaped work area Fax machine Copy machine 2532 Turbo Toshiba Paper cutter 8' wall shelf Ozone clean air filter machine Tape player Typewriter Security camera clock (clock does not work) Calculator Cash drawer Shelving (form motel supplies to sell) 25 26 LOBBY Manitowoc 200 ice machine and motel style ice bin Flower planter 4 brass table lamps 1 console TV Couch, love seat and chair Nagahide 2 end tables and coffee table 3 occasional chairs 1 chair 6' x 6' painted mural by Debbie Baughman Plants Coffee pot and stand Curtains and rods and liners Ceiling fan with 3/lights Carpet 26 27 BACKROOM INVENTORY Equipment Maytag washer Maytag Neptune washer Commercial dryer Laundry table Mangle Folder Portable hot tub Little ironing board and iron 3 baby beds 3 single beds Laundry basket on wheels 2 housekeeping carts 2 linen carts full 2 wire baskets on wheels Double sink and faucet Electric hot water heater Gas hot water heater Heat and air conditioner 2 wheel utility cart Stepladder Paint sprayer 2 Hoover commercial sweeper 5 shelf chemical holders and containers 27 28 BATHROOMS Wastebasket Towel Rack Bath towels 2 Hand towels 2 Washcloths 2 Soaps 2 Glasses 2 Ice bucket 4' x 36" Mirror Vanity light Built-in Kleenex dispenser Vanity for sink Sink and faucet Bottle cap opener Handicap stool Stool Toilet paper dispenser built-in Towel hook Bathtub/shower Shower/tub faucet Scald proof 2 handicap rails Soap holder built-in Shower curtain Shower rod Ceramic tile around tub or once piece tub/shower Rubber bathmat Bathmat Heat light and timer 28 29 ROOM 101 Mirror framed Clothing Rack Luggage rack Smoke detector Desk and chair Night wall light Phone Murphy bed Queen headboard and frame Queen mattress and box springs Mattress pad Fitted sheet Flat Sheet 2 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet 3 single bed chairs 2 large banquet tables 3 small tables Folding chairs Wet bar 2 single light brass wall-mounted fixture Zone line air conditioner/heater Occasional chairs Waste basket 19" color TV with remote RCW or Zenith (mounted on wall) Extra blanket 29 30 ROOM 103 Couch Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Desk lamp Night wall light Phone 2 wall-mounted bed stands King Headboard and frame King mattress and box springs Mattress pad Flat sheet 3 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet Double light brass wall mounted fixture 2 Single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Hanging plant Waste basket 19" color TV with remote RCW or Zenith Credenza Extra blanket 30 31 ROOM 105 Recliner Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Desk lamp Night wall light Phone 2 wall-mounted bed stands King headboard and frame King mattress and box springs Mattress pad Fitted sheet Flat sheet 3 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet Double light brass wall mounted fixture 2 Single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Hanging plant Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 31 32 ROOM 106 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Desk lamp Phone Ceiling Light Bed stand Queen headboard and frame Queen mattress and box springs Mattress pad Fitted sheet Flat sheet 2 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet Picture 2 occasional chairs Hanging plant Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 32 33 ROOM 107 Recliner Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Desk lamp Night wall light Phone 2 wall-mounted bed stands King headboard and frame King mattress and box springs Mattress pad Fitted sheet Flat sheet 3 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Hanging plant Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 33 34 ROOM 108 Couch Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Bed stand (free standing) King headboard and frame King mattress and box springs Mattress pad Fitted sheet Flat sheet 3 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Hanging plant Wastebasket 19" color TV with remote RCW or Zenith TV armoire, three drawer Extra blanket 34 35 ROOM 109 Couch Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Desk lamp Night wall light Phone Bed stand (free standing) King headboard and frame King mattress and box springs Mattress pad Fitted sheet Flat sheet 3 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Hanging plant Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 35 36 ROOM 110 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Desk lamp Night wall light Phone Bed stand (free standing) 2 Queen headboards and frames King headboard and frame 2 Queen mattresses and box springs King mattress and box springs 2 Mattress pads 2 Fitted sheets 2 Flat sheets 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Hanging plant Wastebasket 19" color TV with remote RCW or Zenith TV armoire, three drawer Extra blanket 36 37 ROOM 111 Couch Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Desk lamp Night wall light Phone 2 wall-mounted bed stands King headboard and frame King mattress and box springs Mattress pad Fitted sheet Flat sheet 3 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Hanging plant Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 37 38 ROOM 112 Couch Recliner Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone Bed stand (free standing) King headboard and frame King mattress and box springs Mattress pad Fitted sheet Flat sheet 3 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Hanging plant Wastebasket 19" color TV with remote RCW or Zenith TV Armoire, three drawer Extra blanket 38 39 ROOM 114 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Desk lamp Night wall light Phone Bed stand (free standing) 2 Queen headboards and frames 2 Queen mattresses and box springs 2 Mattress pads 2 Fitted sheets 2 Flat sheets 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Hanging plant Wastebasket 19" color TV with remote RCW or Zenith TV armoire, three drawer Extra blanket 39 40 ROOM 115 Couch Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone Queen headboard and frame Queen mattress and box springs Mattress pad Fitted sheet Flat sheet 2 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Hanging plant Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 40 41 ROOM 116 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Queen headboard and frame Queen mattress and box springs Mattress pad Fitted sheet Flat sheet 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 41 42 ROOM 117 Couch Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Queen headboard and frame Queen mattress and box springs Mattress pad Fitted sheet Flat sheet 3 pillows with pillow protectors and cases Bedspread with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Wastebasket 19" color TV with remote RCW or Zenith Extra blanket 42 43 ROOM 118 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Queen headboard and frame Queen mattress and box springs 2 mattress pads 2 fitted sheets 2 flat sheets 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table 19" color TV with remote RCW or Zenith Credenza Extra blanket 43 44 ROOM 119 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Queen headboard and frame Queen mattress and box springs 2 mattress pads 2 fitted sheets 2 flat sheets 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 44 45 ROOM 120 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Queen headboard and frame Queen mattress and box springs 2 mattress pads 2 fitted sheets 2 flat sheets 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 45 46 ROOM 121 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Queen headboard and frame Queen mattress and box springs 2 mattress pads 2 fitted sheets 2 flat sheets 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 46 47 ROOM 122 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Queen headboard and frame Queen mattress and box springs 2 mattress pads 2 fitted sheets 2 flat sheets 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 47 48 ROOM 123 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Queen headboard and frame Queen mattress and box springs 2 mattress pads 2 fitted sheets 2 flat sheets 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 48 49 ROOM 124 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Queen headboard and frame Queen mattress and box springs 2 mattress pads 2 fitted sheets 2 flat sheets 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 49 50 ROOM 125 Mirror framed Luggage rack Clothing rack Smoke detector Desk and chair Night wall light Phone 2 wall-mounted bed stands Queen headboard and frame Queen mattress and box springs 2 mattress pads 2 fitted sheets 2 flat sheets 4 pillows with pillow protectors and cases 2 bedspreads with matching curtains and rods Carpet Double light brass wall mounted fixture 2 single light brass wall mounted fixtures 2 pictures Zone line air conditioner/heater 2 occasional chairs Table Wastebasket 19" color TV with remote RCW or Zenith Credenza Extra blanket 50 51 EXHIBIT B EXEMPT LIST Sauna All furniture in apartment and appliance except for Zenith TV in bedroom Cigar store Indian in lobby Computers Office (everything except metal filing cabinet) Tractor Brush cutter Lawn mower Tools in back room (personal) Pictures, small corner shelves and what-not shelves personal in office Papers and receipt and business papers personal Cuckoo clock Ironing board All plants (if decide to get starts or take) Mint machine Hand and power tools and ladders All equipment in walk-in cooler building located on NE property (which is restaurants) Safe in office 51 52 Schedule A Liens, Easements, and Encumbrances on Leased Property Lessee acknowledges receipt of a copy of Landlord's Lease to Guzman-Wick, Inc. to the restaurant and bar area, including the kitchen, storage rooms, restrooms, hallways, parking lots, east to storage bins and south to tree, including the heating, air conditioning, electrical systems, plumbing and sewer therein or appurtenant thereto which sublease has been referred to in Paragraph 3.1.1 of Article 3 above. Tenant executes this Lease with Option to Purchase subject to the provisions of said Guzman-Wick, Inc. lease. Further, Tenant agrees that it will, as a part of this agreement, perform all of the duties of Landlord in said Guzman-Wick, Inc. lease, the same as if it were the named Landlord in the said Lease. LEASE THIS AGREEMENT, made and entered into this 30th day of April, 1999, by and between Southfork, Inc. ("Landlord"), whose address, for the purpose of this lease is Junction 2 & 63 South, Bloomfield, IA 52537 and Guzman-Wick, Inc. ("Tenant"), whose address for the purpose of this least is Bloomfield, IA 52537 The parties agree as follows: 1. PREMISES AND TERM. Landlord leases to Tenant the following real estate, situated in Davis County, Iowa: The restaurant and bar areas, including the kitchen, storage rooms, restrooms, hallways, parking lots (east to storage bins and south to tree), located at "Southfork," Junction 2 & 63, Bloomfield, Iowa, including the heating, air conditioning, electrical systems, plumbing and sewer therein or appurtenant thereto herewith; Together with all improvements thereon, and all rights, easements and appurtenances thereto belonging, for a term beginning on the 1st day of May, 1999, and continuing perpetually, upon the condition that Tenant performs as provided in this lease and as provided in the purchase agreement executed by Landlord and Tenant wherein Tenant is purchasing the furniture, fixtures, equipment and other personal property contained within said restaurant and bar. 2. RENT. Tenant agrees to pay Landlord as rent $1,200.00 per month, in advance commencing on the 1st day of May, 1999 and on the 1st day of each month thereafter, during the term of this lease. Rent for any partial month shall be prorated as additional rent. Tenant shall also pay: Cost of living increase determined from the United States Bureau of Labor Statistics, Consumer Price Index (CPI); said increase commencing on the anniversary date of this lease and not to exceed three (3) percent in a given one (1) year period. All sums shall be paid at the address of Landlord, or at such other place as Landlord may designate in writing. Delinquent payments shall draw interest at 10% per annum. 52 53 3. POSSESSION. Tenant shall be entitled to possession on the first day of the lease term, and yield possession to Landlord at the termination of this lease. SHOULD LANDLORD BE UNABLE TO GIVE POSSESSION ON SAID DATE, TENANT'S ONLY DAMAGES SHALL BE A PRO RATA ABATEMENT OF RENT. 4. USE. Tenant shall use the premises only for restaurant and bar. 5. CARE AND MAINTENANCE. (a) Tenant takes the premises as is, except as herein provided; (b) Landlord shall keep the following in good repair: (roof) (exterior walls) (foundation) (sewer*) (plumbing) (heating) (wiring) (air conditioning) (plate glass) (windows and window glass) unless broken from within, which Tenant will replace. *Landlord shall pay one-half cost of reconstruction, repair and maintenance of sewer line from second manhole, being the most easterly manhole, to the westerly manhole that hooks on to city sewer, except when the same area occasioned by the misuse or negligence of Tenant, its agents, employees or invitees. Landlord shall not be liable for failure to make any repairs or replacements unless Landlord fails to do so within a reasonable time after written notice from Tenant; Tenant shall maintain the premises in a reasonable safe, serviceable, clean and presentable condition, and except for the repairs and replacements provided to be made by Landlord in subparagraph (b) above, shall make all repairs, replacements and improvements to the premises, INCLUDING ALL CHANGES, ALTERATION, OR ADDITIONS ORDERED BY ANY LAWFULLY CONSTITUTED GOVERNMENT AUTHORITY DIRECTLY RELATED TO TENANT'S USE OF THE PREMISES. Tenant shall make no structural changes or alterations without the prior written consent of Landlord; **Unless otherwise provided, and if the premises include the ground floor, Tenant agrees to remove all snow and ice and other obstructions from the sidewalk on or abutting the premises **until Tenant, as purchaser, has paid for the personal property and the security interest thereon released by Landlord. 6. UTILITIES AND SERVICES. Tenant shall pay for all utilities and services which may be used on the premises, except the following to be furnished by Landlord: None, whereas all utilities and services for motel are metered and billed separately. Landlord shall not be liable for damages for failure to perform as herein provided, or for any stoppage for needed repairs or for improvements or arising from causes beyond the control of Landlord, provided Landlord uses reasonable diligence to resume such services. 7. SURRENDER. Subject to the provisions of paragraph 17 hereafter, upon the termination of this lease, Tenant will surrender the premises to Landlord in good and clean condition, except for ordinary wear and tear or damage without fault or liability of Tenant. Continued possession, beyond the term of this Lease and the acceptance of rent by Landlord shall constitute a month-to-month extension of this lease. 8. ASSIGNMENT AND SUBLETTING. Until the personal property has been paid for and the security interest thereon released by Landlord, no assignment or subletting, either voluntary or by operation of law, shall be effective without the prior written consent of Landlord, which consent shall not unreasonably be withheld. 9. PROPERTY INSURANCE. (a) Tenant will not do or omit the doing of any act which would invalidate any insurance, or increase the insurance rates in force on the premises. (b) To the extent of all insurance collectible for damage to property, and to the extent permitted by their respective 53 54 policies of fire and extended coverage insurance, each party hereby waives rights of subrogation against the other, regardless of fault. 10. INDEMNITY AND LIABILITY INSURANCE. Except for any negligence of Landlord, Tenant will protect, defend, and indemnify Landlord from and against any and all loss, costs, damage and expenses occasioned by, or arising out of, any accident or other occurrence causing or inflicting injury or damage to any person or property, happening or done in, upon or about the premises, or due directly or indirectly to the tenancy, use or occupancy thereof, or any part thereof by Tenant or any person claiming through or under Tenant, Tenant will procure and maintain liability insurance in amounts not less than $500,000 for any person injured, $1,000,000 for any one accident, and with limit of $500,000 for property damage, which names Landlord as an insured. 11. DAMAGE. In the event of damage to the premises, so that Tenant is unable to conduct business on the premises, this lease may be terminated at the option of either party. Such termination shall be effected by notice of one party to the other within twenty days after such notice; and both parties shall thereafter be released from all future obligations hereunder. 12. MECHANICS' LIENS. Neither Tenant, nor anyone claiming by, through, or under Tenant, shall have the right to file any mechanic's lien against the premises. Tenant shall give notice in advance to all contractors and subcontractors who may furnish, or agree to furnish, any material, service or labor of any improvement on the premises. 13. TERMINATION UPON DEFAULT OF TENANT. Upon default in payment of rent, abandonment of the premises, or upon any other default by Tenant of the terms of this lease, this lease may, at the option of Landlord, and without prejudice to any other rights or remedies afforded Landlord by law, be cancelled and forfeited; PROVIDED, HOWEVER, before any such Cancellation and forfeiture, Landlord shall give Tenant notice specifying the default, or defaults, and stating that this Lease will be cancelled and forfeited ten days after notice, unless such default or defaults are remedied within such period. [Section 14 omitted] 15. NOTICES AND DEMANDS. All notices shall be give to the parties hereto at the addresses designated unless either party notifies the other, in writing, of a different address. Without prejudice to any other method of notifying a party in writing or making a demand or other communication, such notice shall be considered given under the terms of this lease when it is deposited in the U.S. Mail, registered or certified, properly addressed, return receipt requested, and postage prepaid. 16. PROVISIONS BINDING. Each and every covenant and agreement herein contained shall extend to and be binding upon the respective successors, heirs, administrators, executors and assigns of the parties hereto. 17. ADDITIONAL PROVISIONS. Tenant shall: (A) Pay for garbage/trash dumpster which Landlord may use for motel in return for Tenant's use of Landlord's copy and fax machines. (B) Use and maintain the parking lots on the north and west (to the tree) sides of restaurant and bar. (C) Maintain, repair and replace (if necessary) and electrical system (from meter), plumbing (from City shut-off valve), sewer (to second manhole, including cover thereof), heating, venting, air conditioning and telephone systems throughout restaurant and bar premises. (D) Repair and maintain all interior fixtures, floors, walls, ceilings, exterior doors, sidewalk 54 55 (adjacent to restaurant and bar), parking lots (used by Tenant) and graveled shrub/flower bed adjacent thereto. (E) Pay for one-half maintenance cost of graveled driveway from Highway 63 southerly to north side of blacktop and easterly to dumpsters. (F) Have the restaurant open for breakfast and evening (dinner) meal, and have be open during reasonable hours. (G) Not assign or transfer its interest in this lease, except to another corporation or entity principally owned by Guzman Wick, Inc., or Diane L. Guzman or Steve D. Wick, without first giving Landlord written notice of the price and other terms of the consideration of its proposed transfer assignment, after which Landlord will have thirty (30) days to purchase Tenant's interest. If Landlord refuses, Tenant must thereafter give ten (10) days written notice of any change of price or terms before selling, assignment or transferring to a third party; and Landlord will thereafter repeatedly have 10 days notice of prior right to purchase Tenant's ownership and interest in said restaurant and bar. LANDLORD SHALL: (H) Mow and maintain yard, trees and shrubbery except that next to restaurant and bar. SOUTHFORK, INC. GUZMAN-WICK, INC. By: By: --------------------------------- ----------------------------------- LANDLORD Linda Grant (President) TENANT Diane L. Guzman (President) By: By: --------------------------------- ----------------------------------- Foster Grant, II (Secretary) Steve D. Wick (Secretary) 55 EX-21.1 14 LIST OF COMPANY SUBSIDIARIES 1 EXHIBIT 21.1 COMPANY SUBSIDIARIES Territorial Inns Management, Inc., a Nevada corporation 1 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's audited statement of operations and balance sheets for the fiscal years ended December 31, 1998 and December 31, 1999, and is qualified in its entirety by reference to such financial statements: YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998 0 0 0 0 81,378 68,180 0 0 0 0 81,378 68,180 0 0 0 0 81,378 61,180 362,683 116,644 0 0 0 0 0 0 2,769,252 2,739,639 0 0 81,378 68,180 0 0 1,943,345 37,515 0 0 1,372,132 0 0 0 0 0 0 0 (121,454) (48,464) 0 0 (121,454) (48,464) 0 568,957 0 0 0 0 (121,454) 520,943 (0.05) 0.08 0 0
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