<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended JUNE 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________
Commission File Number 1-11111
THE TESSERACT GROUP, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1581297
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3800 West 80th Street
Suite 1400
Minneapolis, Minnesota 55431
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(Address of principal (Zip code)
executive offices)
Registrant's telephone number,
including area code (612) 837-8700
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock,
par value $.01 per share
-------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
<PAGE>
The aggregate market value of Common Stock, par value $.01 per share, held by
non-affiliates of the registrant as of September 15, 1998, was $19,248,000,
based on the closing sale price of such stock as reported by The NASDAQ Stock
Market. Calculation of the number of shares held by non-affiliates is based on
the assumption that the affiliates of the Company include only directors,
executive officers, and shareholders filing Schedules 13D or 13G with the
Company.
As of September 15, 1998, there were issued and outstanding 9,579,106 shares of
Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held November 12, 1998 (the "Proxy Statement"), and to be
filed within 120 days after the registrant's fiscal year ended June 30, 1998,
are incorporated herein by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
The TesseracT Group, Inc. (the "Company") is an integrated education
management organization which provides proprietary educational services from
preschool through post-secondary education. Formed in 1986 as a Minnesota
corporation, the Company now operates 40 schools in six states serving over
6,000 preschool to post-secondary students. The Company consists of three
components:
- THE TESSERACT SCHOOLS. The TesseracT Schools operate both private and
public charter schools serving preschool through grade 12. Currently, there
are seven TesseracT Schools in operation in three states.
- SUNRISE EDUCATIONAL SERVICES, INC. ("SUNRISE"). Sunrise, acquired by
the Company in December 1997, operates 32 preschools in four states with the
majority of operations concentrated in Arizona. In addition, Sunrise
currently serves in excess of 700 public charter school students in Arizona.
- ACADEMY OF BUSINESS, INC. ("ABC"). ABC, acquired by the Company in
January 1998, is a two-year college accredited by the North Central
Association of Colleges and Schools. In addition to offering traditional
business and paralegal training, ABC provides various Microsoft
certifications and Novell training.
The strategy of the Company is to integrate all of these capabilities in
specific high growth markets and deliver these services wherever possible
from one single educational facility that is conveniently located in the
neighborhoods of the user under the banner of a TesseracT Family Learning
Center. The Company's objective is to leverage its investment through high
asset utilization and scaleable economies into significant profitable growth.
The Company's mission is to provide a proprietary alternative of high quality
educational services from preschool through post-secondary education. To
achieve its objective, the Company plans to build on its experience and
expertise in both private and public education. The Company has a three-part
strategy to take advantage of the significant growth opportunities in the
education market. First, the Company plans to continue to leverage its more
than ten years of experience in the private school sector by opening private
preschool, elementary and secondary schools utilizing the Company's TesseracT
educational system in select geographic markets. Second, the Company plans to
actively pursue opportunities to operate public charter schools, which the
Company believes offer students and parents an excellent alternative within
the public system. Finally, the Company plans to grow through strategic
acquisitions of education providers, which offer the Company opportunities to
leverage its full spectrum of educational services.
PAST ACTIVITIES
After initially focusing on the development of a network of private preschool
and elementary schools, the Company in 1989 temporarily shifted its strategic
focus to contract management of public schools, and in 1990 began providing
educational services to one public school in Dade County, Florida.
In 1992, the Company entered into five-year agreements with Baltimore City
Public Schools (the "Baltimore District") under which the Company ultimately
assumed management responsibility for the operation of twelve schools. Those
agreements could be terminated by the Baltimore District for any reason upon
ninety days' notice to the Company. During the summer of 1995, the Baltimore
District proposed to pay the Company an amount significantly less than the
contracted amount to operate the twelve schools for the 1995-1996 school
year, citing budgetary issues. When the Company refused to accept this
proposal, the Baltimore Board of School Commissioners voted to cancel the
agreements with the Company.
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In 1994, the Company entered into a five-year contract with the Board of
Education of the city of Hartford, Connecticut, under which the Company
provided comprehensive educational and management operating services to the
32-school public school system of the City of Hartford. The Hartford Board of
Education had the right to terminate the contract for any reason upon ninety
days' notice to the Company. Through 1995, the Company invested approximately
$12 million to repair school facilities, purchase technology and make other
school improvements. When Hartford officials refused to reimburse the Company
for all of such expenditures, the Company notified the Board of Education and
the City of Hartford that it would stop all services unless payment was
received promptly in accordance with the contractual terms. In 1996, the
Hartford Board of Education voted to seek an amicable dissolution of the
contract, citing an impasse in negotiations with the Company on amounts owed
to the Company for its management services.
CURRENT OPERATIONS
Following the Company's experiences with contract management of public
schools along with the related restrictions and problems and the rapidly
evolving acceptance of a "private" alternative, the Company made the
strategic decision to focus its attention and resources on becoming an
integrated education management organization. Execution of this strategy has
focused on expansion of the Company's private school business, entrance into
the growing public charter school market and vertical integration of the
range of services provided by the Company through the acquisitions of Sunrise
and ABC.
THE TESSERACT SCHOOLS. The Company was originally organized to design,
develop, market and operate a network of for-profit, private preschool and
elementary schools utilizing the TesseracT teaching philosophy. In September
1987, the Company began operation of its first school in Eagan, Minnesota,
and a year later, opened its second school in Paradise Valley, Arizona. These
two preschool and elementary schools, which are still in operation today,
provide the foundation for the TesseracT Schools component of the Company's
current operations. Through its affiliation with the TesseracT Schools, the
Company has developed a number of teacher training materials for schools
utilizing the TesseracT educational system and other materials for overall
school improvement. The TesseracT Schools will continue to be used by the
Company to further develop and refine these materials. The Company's
TesseracT system is an educational program developed to meet children's
individual needs by redesigning the classroom environment, changing the role
of the teacher and increasing the use of technology in the classroom.
In the fall of 1997, the Company entered the private high school market with
the opening of college preparatory high schools in Mays Landing, New Jersey,
and South Bend, Indiana. Subsequent to the end of the year, the Company made
the strategic decision to close the college preparatory school in South Bend
due to the low level of enrollments at the school in 1998 as well as the lack
of a significant increase in enrollments projected for 1999.
During school year 1999, the Company will open three additional TesseracT
private schools. A private preschool and elementary school will open in
Northfield, New Jersey, and will serve as a feeder school to the college
preparatory school in Mays Landing. In addition, private preschool through
eighth grade schools will open in the Phoenix suburbs of Ahwatukee and North
Scottsdale in September 1998. For school year 1999, the TesseracT private
schools will serve approximately 1,400 students. The Company believes that
its TesseracT educational system can be implemented in other preschool,
elementary and secondary schools throughout the United States.
Competition in the private school market can be limited due to the higher
capital required to open a new private school. In addition, non-profit and
religious organizations will typically offer private education at a lower
tuition level than that offered by the Company.
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In addition to the significant capital requirements of acquiring a
satisfactory school facility and providing all necessary improvements,
fixtures, equipment and furniture, there will likely be a long lead time
required to establish a new private school's reputation and attract a
sufficient number of students willing to pay the private school tuition.
Accordingly, the Company anticipates that its new private schools will
generally take two to three years to operate profitably.
CHARTER SCHOOLS. Both The TesseracT Schools and Sunrise are utilizing public
charter schools in the implementation of the Company's strategy.
Public charter schools are generally autonomous entities authorized by the
state or locality to conduct operations independent from the surrounding
public school district. Laws vary by state but generally charters are granted
by state boards of education, either directly or in conjunction with local
school districts or public universities, which can also revoke a charter if
the school fails to meet its obligations under the charter.
Although charter operators are required to meet certain educational
standards, they often will be free from various state and local regulations.
Therefore, in many states, charter schools can hire their own teachers and
other staff, use their own curriculum and manage their operations independent
from public school district bureaucracy.
Whereas traditional public schools often hold near monopolies on education,
charters must attract students based on their educational approach and
program offerings. Charters compete for students, with a per-pupil allocation
of funds generally comparable, although sometimes less than that available
to, other public schools. Charters can only succeed if they deliver an
education of sufficiently high quality to attract students, while keeping
costs at a level that generates a reasonable return to the operator.
Presently, 33 states plus the District of Columbia have enacted some form of
charter legislation. The charter school application and approval process is
highly competitive, with many individuals, non-profit organizations, and
private and for-profit companies all pursuing a limited number of available
charters. In addition, traditional public schools and the teachers' unions
have provided strong opposition to the charter movement in many states.
During 1997, the Company received a charter from the state of Arizona to open
and operate 12 charter schools. The first such charter school opened in
September 1998 in Paradise Valley, Arizona, serving approximately 200
students. In addition, Sunrise has entered into a contract to manage the
charter operations of Preschool Services, Inc. ("PSI"), a non-profit
organization (see "Certain Relationships and Related Transactions"). The PSI
charter schools are located in many of the Phoenix area Sunrise preschools.
During fiscal 1999, the Company anticipates submitting additional
applications to operate charter schools in various states. However, there can
be no assurance that the Company will be successful in obtaining all or a
portion of the charters requested. In addition, the Company believes that in
selected high growth communities, it may be able to partner with real estate
developers who will subsidize a portion of the Company's capital costs in
return for the Company's agreement to operate a public charter school in a
new housing development. The Company believes that funding levels in various
charter states will allow the Company to open and operate elementary and
secondary public charter schools that will be successful, both educationally
and financially. Public charter schools offer a more immediate opportunity
for financial return than private schools since no tuition is required for
attendance and therefore, they generally open at or near capacity.
SUNRISE. Sunrise operates high quality private preschools, many of which also
include kindergarten through third grade public charter schools. Sunrise's
private preschools offer comprehensive educational child care services for
children beginning at age six weeks. Sunrise's services also include programs
designed and available for school age children up to twelve years of age.
Sunrise currently operates 25 preschools in Arizona and Colorado and manages
an additional seven preschools under a contract with PSI in Arizona, Hawaii,
and Wisconsin. Sunrise preschools currently serve over 4,000 students.
Sunrise offers both full and half-day programs, before and after school
programs for older students, as well as extended hours at several of its
preschools.
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Sunrise differentiates itself from most preschools by offering a
comprehensive education-based curriculum that incorporates innovative
teaching techniques and programs, and by offering its parents and children
modern facilities and equipment. Sunrise's education-based programs
emphasize, among other things, the use of learning centers to enhance a
child's development. The programs are designed to appeal to parents who
consider education and development, rather than custodial care, as being most
important in choosing a child care facility. In addition to the regular
learning programs, all of the Sunrise child care centers offer computer-based
learning programs using state-of-the-art software and a number of
extra-curricular programs.
In June 1997, Sunrise was selected to manage the charter school operations of
PSI. These charter schools, operating as Sunray Charter Schools, opened in
September 1997 providing kindergarten through third grade classes at many of
Sunrise's Arizona facilities. In consideration for the management of the
charter program and for the use of certain of Sunrise's preschool facilities
and personnel, Sunrise earns a management fee and is reimbursed for the
facility costs and lease expense of the occupied space. In addition, Sunrise
benefits from having the preschoolers of new families attracted to Sunray
Charter Schools along with the retention of the kindergarten and
elementary-age children for the Company's before and after school programs.
ABC. ABC is a two-year college offering courses primarily in business and
paralegal training, with its main campus in Phoenix, Arizona. In addition to
offering traditional business courses, ABC offers comprehensive training to
students preparing for various Microsoft certifications, including Systems
Engineer, Solutions Provider and Office User certifications. ABC also
provides Novell training. ABC is aggressively expanding its Microsoft
certification and training programs in order to benefit from the high demand
in the workplace for systems engineers and other trained technicians as well
as for ongoing training for such personnel. ABC currently serves over 350
students.
ABC is focused on providing post-secondary education to working adults and it
strives to meet the unique needs of these individuals by providing services
that meet the following criteria. First, ABC provides convenient access to
the educational environment through both location and user friendly delivery
of the curriculum. This criteria will be further enhanced as the Company
develops single educational facilities in conjunction with its TesseracT
Schools and Sunrise facilities that will allow adult students to participate
in ABC programs at neighborhood facilities with on-site child care. Second,
ABC programs provide knowledge and skills with immediate practical value in
the workplace and can be completed in a reasonable amount of time. Third, ABC
programs are instructed by faculty with practical experience in fields
related to those they instruct and the classroom environment is characterized
by a low student-to-faculty ratio. Finally, ABC's educational programs and
administrative services are designed to accommodate the working adult's
schedule.
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ABC is accredited by the North Central Association of Colleges and Schools, a
regional accrediting association recognized by the United States Department
of Education ("DOE"). Accreditation provides the basis for the recognition
and acceptance by employers, other post-secondary education institutions and
governmental entities of the degrees and credits earned by students, and the
ability to participate in Federal Financial Aid programs under Title IV.
COMPETITION
Competition in the Company's markets is highly fragmented. In these markets,
the Company faces competition from non-profit private entities and from the
public school system and public colleges. Many of the Company's competitors
in both the private and public sector have greater financial and other
resources than the Company. In addition, the Company anticipates integration
of new services by certain of its competitors that will provide additional
competition for the Company. This includes the addition of before and after
school programs by public school systems and the entrance in to the private
school market by large for-profit child care companies. There is no assurance
that the Company will be able to compete effectively in any of the markets in
which it operates.
For preschool age children, the Company competes with other curriculum-based
preschools. Also seeking enrollments of preschool age children are large
for-profit child care companies, as well as other child care providers
(including in-home individual child care providers and corporations that
provide child care for their employees). However, the Company believes that
persons in its target market - parents seeking curriculum-based programs for
their children - seek services not provided by these child care providers.
For school age children, the Company competes with other for-profit private
schools, with non-profit schools and, more importantly, with the public
school system. The Company is not aware of any secular competitor which
currently competes beyond a regional level. However, the Company anticipates
that, given the perceived potential of the education market, well-financed
competition may emerge, including possible competition from the large
for-profit child care companies. The Company believes that the structure of
these larger companies may make it difficult for them to implement and
develop programs which are based upon curriculum-intensive goals, which would
require significant cultural changes.
The post-secondary education market is highly fragmented with no private or
public institution enjoying a significant market share. The Company competes
for students with two-year and four-year degree granting institutions, which
include nonprofit public and private colleges and proprietary institutions.
Competition among educational institutions is believed to be based on the
quality of the educational program, perceived reputation of the institution,
cost of the program, and employability of the graduates.
While price is an important factor in competition, the Company believes that
other important factors include offering professionally developed educational
programs, well-equipped facilities, trained teachers, and other related
services. Particularly in the preschool market, many of these services are
not offered by the Company's competition.
REGULATION
Schools and preschools are subject to a variety of state and local
regulations and licensing requirements. These regulations and licensing
requirements vary greatly from jurisdiction to jurisdiction. Generally, the
governmental agencies review the safety, fitness and adequacy of the
buildings and equipment, the ratio of staff personnel to enrolled children,
the dietary program, the daily curriculum, compliance with health standards
and the qualifications of the Company's personnel. In most jurisdictions,
these agencies conduct scheduled and unscheduled inspections of the schools
and preschools, and licenses must be renewed periodically. Repeated failures
by a school or preschool to comply with applicable regulations can subject it
to sanctions that might include probation, suspension, or revocation of the
license to operate. The Company believes that each of its schools and
preschools is in substantial compliance with such requirements.
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The Company's post-secondary operations are subject to the Higher Education
Act of 1986, as amended (the "HEA"), in order for students to participate in
Federal Financial Aid programs under Title IV of the HEA. The Company's
post-secondary operations are also subject to the general oversight of the
DOE and are required to be accredited by an association recognized by the
DOE. The DOE reviews all institutions participating in Title IV for
compliance with applicable HEA standards and regulations. Under the HEA,
accrediting associations are required to include the monitoring of certain
aspects of Title IV compliance as part of their accreditation evaluations.
The Company is also subject to regulation promulgated by applicable state
higher education regulatory bodies.
The Company's participation in the U.S. Department of Education's Title IV
programs, through its wholly-owned subsidiary ABC, is subject to audit by
independent auditors annually and to program reviews by the Department of
Education and other federal, state, or accrediting agencies. Instances of
noncompliance, should they exist and be discovered through the audit process,
could result in refunds of financial assistance and imposition of fines and
penalties.
The Department of Education has regulations that contain objective
measurement criteria to determine the financial capabilities of educational
institutions participating in student financial assistance programs. The
regulations apply only to those institutions offering post-secondary courses
and training. The criteria, which are applied on the subsidiary level,
include among other things having cash and receivables from unrelated parties
equal to or greater than current liabilities, maintaining a positive tangible
net worth, and restrictions on the amount of operating losses incurred within
a two-year period.
Due to operating losses incurred by ABC prior to the acquisition by the
Company, the financial capability tests have not been met at June 30, 1998.
As a result, the Company may be required to post a letter of credit for at
least one-half of the Title IV funds received by ABC during 1998, which
amounted to $1,300,000.
Any changes in or new interpretations of applicable laws, rules or
regulations could have a material adverse effect on the Company by limiting
its authorizations to operate or permissible activities, or by increasing the
costs of doing business in the Company's markets. The failure to maintain any
required licenses, approvals, authorizations, or accreditations could also
have a material adverse effect on the Company.
INSURANCE
The Company currently maintains comprehensive general liability insurance,
workers compensation, automobile liability, property, excess umbrella
liability and student accident insurance. The policies provide for a variety
of coverage and are subject to various limits. Companies involved in the
education and care of children, however, may not be able to obtain insurance
for the total risks inherent in their operations. In particular, general
liability coverage can have reduced limits per claim for child abuse. The
Company carries fire and other casualty insurance on its facilities and
liability insurance in amounts which management feels are adequate for its
operations in the foreseeable future.
SEASONALITY
The Company historically has lower operating revenues in the summer due to
lower summer enrollment at the TesseracT Schools and Sunrise facilities. The
Company seeks to improve summer results through camps and other programs.
EMPLOYEES
At September 15, 1998, the Company had approximately 980 employees, of which
280 were teachers or administrators at the TesseracT Schools, 625 (including
140 part-time employees) were employed by Sunrise and 60 were employed by
ABC. The Company is not subject to any collective bargaining agreement and
believes that its employee relations are good.
ITEM 2. PROPERTIES
At September 15, 1998, the Company operated 40 schools, including 32 Sunrise
preschool centers, seven TesseracT private and charter schools, and the ABC
campus. Of the 32 Sunrise facilities, seven are managed through an agreement
with PSI. All of the facilities are leased, with the exception of three
TesseracT Schools, which are owned by the Company. The leases generally
include option renewal periods of five to 25 years, at the Company's
discretion. Each of the leases contain provisions for lease payment increases
based on the Consumer Price Index or other similar formulas. The Company is
generally responsible for taxes, insurance, maintenance, and other expenses
related to the operation of the leased facilities.
The Company has a commitment to sell and leaseback two of the owned
facilities upon completion of their construction, anticipated to occur by
September 30, 1998.
The Company leases 5,800 square feet of space for its corporate offices in
Minneapolis, Minnesota.
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ITEM 3. LEGAL PROCEEDINGS
At June 30, 1998, the Company is not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by the Company during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock trades on The NASDAQ Stock Market under the symbol
TSST. For common stock price information, see Note 18 to the consolidated
financial statements contained in Item 14 herein. As of June 30, 1998, the
Company's common stock was held by approximately 3,000 shareholders of record
or through nominee or street name accounts with brokers.
ITEM 6. SELECTED FINANCIAL DATA
The table below shows selected financial data for the periods indicated. This
information should be read in conjunction with the Consolidated Financial
Statements and related notes contained in Item 14 herein and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Item 7 herein.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended June 30,
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 15,294 $ 4,835 $115,090 $ 213,582 $ 34,403
School operating profit (loss) (129) 1,082 (2,672) (3,745) 3,876
Net earnings (loss) (3,437) 566 (9,507) (7,443) 2,534
Net earnings (loss) per
common share (diluted) $ (.40) $ .08 $ (1.27) $ (1.09) $ .33
Weighted average shares
outstanding 8,574 7,501 7,477 6,822 7,785
</TABLE>
<TABLE>
<CAPTION>
June 30,
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $ 3,269 $ 20,054 $ 12,927 $ (6,986) $ 1,402
Long-term marketable securities - - 7,322 28,972 26,262
Total assets 49,263 29,057 29,684 43,481 34,899
Long-term debt 8,578 - 309 636 253
Shareholders' equity $ 32,749 $ 24,880 $ 24,312 $ 29,825 $29,397
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The accompanying consolidated financial statements for the fiscal year ended
June 30, 1998, reflect the results of operations of the Company and its
wholly owned subsidiaries, Sunrise Educational Services, Inc. ("Sunrise") and
Academy of Business, Inc. ("ABC"). The Company acquired Sunrise, a
Scottsdale, Arizona-based operator of 32 preschool centers, primarily in
Arizona, in December 1997. Sunrise has also expanded into the operation of
private schools and has a contract to manage public charter schools in many
of its Arizona sites. The acquisition of ABC, a Phoenix, Arizona-based
post-secondary career college, occurred in January 1998. In addition to
offering traditional business courses, ABC offers comprehensive training to
students preparing for various Microsoft certifications. The consolidated
results of operations include the operating results of these subsidiaries
subsequent to their acquisition.
Operating results for the year ended June 30, 1997, reflect the operations of
the two private schools owned and operated by the Company during 1997. In
addition to the operations of the two private schools, operating results for
the year ended June 30, 1996, include the results of operations of the
Company's public school management and consulting contracts with the
Baltimore and Hartford public school districts. These public school contracts
were terminated prior to the end of fiscal 1996.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED JUNE 30, 1998 AND 1997. Total revenue in 1998
was $15,294,000 compared to $4,835,000 in 1997. The increase is the result of
the acquisitions of Sunrise and ABC and an increase in the number of private
schools open during 1998. Revenue recorded on the operations of Sunrise and
ABC subsequent to their acquisition was $8,027,000 and $1,464,000,
respectively.
In September 1997, the Company opened new college preparatory high schools in
Mays Landing, New Jersey, and South Bend, Indiana. These two schools, along
with the original two TesseracT private schools in Eagan, Minnesota, and
Paradise Valley, Arizona, brought to four the number of private TesseracT
schools owned and operated by the Company.
Private school and other costs, representing costs directly associated with
the school operations, were $15,423,000 in 1998 compared to $3,753,000 in
1997. The increase primarily relates to costs associated with the operations
of Sunrise and ABC subsequent to their acquisition. In addition, the current
year includes start-up costs relating to the September 1997 opening of the
Mays Landing and South Bend private schools and the expansion of the Company's
private school in Eagan, Minnesota.
The Company has made the decision to close the South Bend college preparatory
high school. This decision was primarily due to the low level of enrollments
at the school in 1998 as well as the lack of a significant increase in
enrollments projected for 1999. The majority of computers and furniture at
the school has been transferred to other TesseracT schools. Total costs
anticipated to be incurred related to the closing of the school have been
included in the 1998 financial statements.
New school development costs represent costs incurred in the current year for
schools set to open in the subsequent year. During 1998, costs totaling
$646,000 were incurred associated with the September 1998 opening of three
new TesseracT private schools. These costs relate to personnel, advertising,
student recruitment, and facility set-up. In 1997, costs totaling $363,000
were incurred related to the opening of the two college preparatory schools
in September 1997.
Selling, general, and administrative expenses in 1998 were $3,931,000
compared to $3,421,000 in 1997. The increase reflects added personnel, travel
and other costs associated with the integration of the acquisitions of
Sunrise and ABC and costs associated with other acquisition opportunities
pursued by the Company during 1998.
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Other income in 1998 was $1,269,000 compared to $3,268,000 in 1997. Other
income for both 1998 and 1997 includes settlement proceeds of $650,000
related to the final settlement of issues regarding amounts owed to the
Company under the Hartford management contract. Settlement income for 1997
also includes $1,250,000 received from the Company's investment management
firm to resolve all issues relating to the firm's management of the Company's
investment portfolio. The reduction in investment income in 1998 compared to
1997 is due to lower investment levels in the current year.
Interest expense in 1998 was $125,000 compared to $17,000 in 1997. Interest
expense totaling $68,000 was incurred on equipment financing debt at Sunrise.
The remaining interest expense in 1998 relates to the financing transactions
entered into by the Company on three school properties during 1998.
For 1998, the Company recorded a net loss of $3,437,000 or $.40 per share
compared to net earnings of $566,000 or $.08 per share in 1997. The change is
primarily due to the new school start-up and development costs, costs
associated with the integration of the two acquisitions during the year and
the settlement income recorded in the prior year.
COMPARISON OF THE YEARS ENDED JUNE 30, 1997 AND 1996. Total revenue in 1997
was $4,835,000 compared to $115,090,000 in 1996. The decrease is the result
of the cancellation of the Company's public school management contracts in
Baltimore and Hartford in the third quarter of fiscal 1996. Private school
tuition and other revenue consists of revenue from the Company's private
schools in Eagan, Minnesota, and Paradise Valley, Arizona, and consulting
revenue on the Company's private school consulting contracts.
Public school management costs in fiscal 1996 relate to costs incurred on the
Baltimore and Hartford school management contracts. These expenses include
charges of $4,255,000 related to costs incurred under the Hartford contract
but not yet reimbursed by the Hartford Board of Education and a charge of
$2,000,000 to cover estimated write-offs and shutdown costs associated with
the cancellation of the Baltimore and Hartford contracts. In June 1996, the
Company reached partial settlement with the city of Hartford and Hartford
Board of Education officials on amounts owed the Company under its school
management contract. The Company received $3,073,000 for the computers
installed in and the capital improvements made to the Hartford schools. This
amount was included in school management expenses as a recovery against
amounts previously written-off under the contract.
Private school and other costs represent costs incurred in the operation of
the TesseracT private schools.
New school development costs represent costs incurred in 1997 for schools to
open in 1998. During 1997, costs totaling $363,000 were incurred associated
with the two college preparatory private schools that opened in September
1997. These costs relate to personnel, advertising, student recruitment, and
facility set-up.
Selling, general, and administrative expenses in 1997 were $3,784,000
compared to $5,061,000 in 1996, a decrease of $1,277,000. This decrease
reflects a reduction in personnel due to the cancellation of the public
school contracts during the third quarter of fiscal 1996. In addition,
marketing and legal costs were below prior year levels as the Company focused
its resources on public charter schools and expanding its private school
business.
Other income in 1997 was $3,268,000 compared to a net expense of $1,774,000
in fiscal 1996. Other income in 1997 includes settlement income of $1,250,000
received from the Company's investment management firm to resolve all
remaining issues relating to the firm's management of the Company's
investment portfolio and $650,000 related to the final settlement of issues
regarding amounts owed to the Company under the Hartford contract.
9
<PAGE>
Investment income in 1996 included a charge of $3,400,000 to reflect what the
Company believed was a permanent impairment in the value of its investment
portfolio and its related decision to liquidate these investments in fiscal
1997. This write-down to market value had previously been reported as a
direct charge to shareholders' equity. Interest income in 1997 totaled
$1,336,000 compared to $1,885,000 in 1996. This decrease is due to lower
investment levels and yields in 1997.
The decrease in interest expense from $249,000 in 1996 to $17,000 in 1997
reflects the retirement of short-term borrowings used to finance the purchase
of the TesseracT private schools and capital leases related to the Baltimore
Contract.
For 1997, the Company recorded net earnings of $566,000 or $.08 per share
compared to a net loss of $9,507,000 or $1.27 per share in 1996. The change
is primarily due to the charges recorded in the prior year on the Baltimore
and Hartford public school management contracts along with the settlement
income recorded in fiscal 1997.
CAPITAL RESOURCES AND LIQUIDITY
During 1998, the Company satisfied its working capital needs principally from
cash on hand at the beginning of the year and cash received from the
refinancing of two of its school properties during the year. Total cash and
cash equivalents decreased from $23,246,000 at June 30, 1997, to $5,543,000
at June 30, 1998. This decrease in cash is primarily comprised of the
following:
/ / Net cash used in operating activities totaled $5,689,000, primarily due to
the net loss incurred in 1998 along with changes in current assets and
liabilities.
/ / Net cash used in investing activities totaled $18,928,000. Total cash paid
for the acquisitions of Sunrise and ABC was $7,106,000. In addition, the
Company invested $11,822,000 in capital assets, including approximately
$4,800,000 in land acquisition and facility construction costs at two new
private school facilities in the Phoenix metropolitan area. Upon completion
of construction, the Company expects to recover the cash invested in these
two schools through a refinancing of the facilities. Completion of
construction is anticipated to occur in the first quarter of school year
1999. The remaining capital additions relate to land and facility additions
at the South Bend and Eagan TesseracT schools, leasehold improvements at the
Mays Landing facility and computer equipment and furniture additions at
various schools.
/ / Cash generated from financing activities totaled $6,914,000 during 1998.
During the year, the Company refinanced its private school properties in
Eagan, Minnesota, and Paradise Valley, Arizona. Total proceeds from the
refinancing of these two schools, representing appraised real estate value,
were $6,550,000. In addition to these proceeds, the Company received
proceeds from the exercise of stock options totaling $590,000 during the
year.
In addition to the financing transactions completed during the year ended
June 30, 1998, the Company has a financing commitment on the two private
school properties currently under construction. At June 30, 1998, the Company
has construction commitments of approximately $7,600,000 remaining on the two
projects. Upon completion of the projects, anticipated to occur in the first
quarter of school year 1999, the Company expects to finalize the refinancing
of the facilities and receive proceeds of approximately $12,000,000.
As discussed in Note 5 to the consolidated financial statements contained in
Item 14 herein, during fiscal 1997, the Company reached final agreement with
Hartford officials on the remaining amounts owed to the Company. Under the
agreement, the Company will receive annual installments of $650,000 on each
of July 10, 1998, 1999, 2000, and 2001.
10
<PAGE>
As discussed in Note 16 to the consolidated financial statements contained in
Item 14 herein, due to operating losses incurred by ABC prior to the
acquisition by the Company, the financial capability tests mandated by the
Department of Education have not been met at June 30, 1998. As a result, the
Company may be required to post a letter of credit for at least one-half of
the Title IV funds received by ABC during 1998, which amounted to $1,300,000.
During the four years ended June 30, 1998, the Company has incurred cumulative
net losses totaling $19,821,000. As a result of these losses and investments the
Company has made in acquisitions and for the purchase of capital assets, the
Company has used cash of $25,940,000. After refinancing two owned school
facilities, generating proceeds of $6,550,000, the Company has a cash balance of
$5,543,000 at June 30, 1998.
During 1999, the Company anticipates investing in excess of $2,000,000 to outfit
new schools and upgrade technology at existing schools. The Company anticipates
financing a significant portion of these capital asset purchases through
equipment financing leases. Some of this financing may require the Company to
post a letter of credit as collateral. If the Company is unable to secure
financing on terms acceptable to the Company, the capital asset purchases will
have to be made from cash reserves.
Management currently believes that it has sufficient cash on hand, including the
proceeds from financing transactions anticipated to be finalized in the first
quarter of 1999, to ensure uninterrupted performance of its operating
obligations as currently structured and anticipated. In part, this is a result
of projected improvement in operating results for 1999. If the Company does not
achieve its projected operating results and/or is unable to secure adequate
equipment financing, management believes that it has options available to obtain
necessary capital, including the issuance of subordinated debt or private
placement equity financing. There can be no assurance, however, that these
sources would be available to the Company on acceptable terms.
YEAR 2000 ISSUE
Based on an internal analysis, the Company does not believe that the Year 2000
issue will materially affect its information technology systems. The Company is
in the process of integrating its current multiple financial systems into a
consolidated system that will be Year 2000 compliant. The Company anticipates
incurring costs approximating $200,000 over the next twelve months to replace
its current financial systems and replace or upgrade related hardware.
The Company does not believe that the Year 2000 compliance of its suppliers or
customers will effect the Company's operations. The products purchased from the
Company's suppliers are available from numerous sources and are not fundamental
to the Company's operations as a service provider. In addition, the Company's
customers consist primarily of individuals who make tuition payments to the
Company on behalf of themselves or their children in exchange for educational
services. The ability of these customers to make tuition payments is not
expected to be affected by the Year 2000 issue.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS No. 131"), will be effective for
the Company's fiscal year ending June 30, 1999. SFAS No. 131 requires
disclosures of business and geographic segments in the consolidated financial
statements of the Company. The Company is currently analyzing the impact it will
have on the disclosures in its financial statements.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements involve risks and uncertainties, and actual
results may be materially different. These forward-looking statements include,
but are not limited to, statements herein regarding the opening of additional
private schools, the application for and receipt of additional public charter
school contracts and the opening of new charter schools, the completion of
future strategic acquisitions, the integration of services into single education
facilities, the profitability of existing and new private and public charter
schools, the development of partnerships with
11
<PAGE>
real estate developers in high growth communities, the ability to secure
financing on acceptable terms, and the ability of the Company to compete in
the education industry.
Factors that could cause actual results to differ from those expected include,
but are not limited to, general economic conditions such as inflation and
interest rates, both nationally and in Arizona where the Company's operations
are concentrated; competitive conditions within the Company's markets, including
the acceptance of the education services offered by the Company; unanticipated
expenses; the ability of the Company to successfully integrate all of its
services into single education facilities; the ability of the Company to obtain
public charter school contracts; changes in government regulation of the
education industry or in state charter school statutes; the availability of
equipment financing at acceptable terms; and future claims for accidents at the
Company's education facilities and the extent of insurance coverage for such
claims.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes and schedule are
included in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to the
information set forth under the captions "Proposal Number One: Election of
Directors" and "Executive Officers and Compensation" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the information set forth under the caption "Executive Officers and
Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
information set forth under the captions "Certain Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider Participation"
in the Proxy Statement.
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its
subsidiaries begin on page 20 in the Appendix. The Report of
Independent Public Accountants on the Company's consolidated
financial statements is presented on page 19 in the Appendix.
(2) FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements and Schedules on
page 18 in the Appendix. The financial statement schedule should
be read in conjunction with the consolidated financial statements.
All other supplemental schedules are omitted because of the
absence on conditions under which they are required.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of the year ended June 30, 1998.
(C) EXHIBITS
The following exhibits are filed as part of this Annual Report on Form
10-K for the year ended June 30, 1998.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.1 Restated Articles of Incorporation of the Company, as
amended.
3.2 By-Laws of the Company. (1)
4.1 Specimen Certificate of Common Stock.
4.2 Share Rights Plan dated September 8, 1993. (2)
10.1* Employment Agreement between the Company and Philip E. Geiger
dated August 10, 1993. (3)
10.2* 1988 The TesseracT Group, Inc. Stock Option Plan, as
amended. (4)
10.3* Employment Agreement between the Company and John T. Golle
dated January 1, 1991. (5)
10.4* Amendment to Employment Agreement between the Company and
John T. Golle dated September 8, 1993. (6)
10.5* 1992 The TesseracT Group, Inc. Long-Term Executive Stock
Option Plan, as amended. (7)
13
<PAGE>
10.6* Amendment to Employment Agreement between the Company and
John T. Golle dated March 20, 1992. (8)
10.7 Lease dated June 9, 1998, between EduCorp Properties, Inc.
as lessor and The TesseracT Group, Inc. as lessee.
10.8 Amended and Restated Lease dated June 9, 1998, between
EduCorp Properties, Inc. as lessor and The TesseracT Group,
Inc. as lessee.
10.9* Employment Agreement dated November 3, 1997, between the
Company and Todd K. Severson. (9)
10.10* Employment Agreement dated February 16, 1998, between the
Company and Tony L. Verbeten. (10)
10.11 Lease Agreement dated January 31, 1983, between Earl H.
Jones and Venture Educational Programs, Inc. (11)
10.12 Lease Agreement dated April 1, 1984, between McClintock
Associates Limited Partnership, an Arizona Limited
Partnership, and Venture Educational Programs, Inc. (11)
10.13 Lease Agreement dated October 24, 1986, between Peoria
Investment Company, Inc., an Arizona corporation, and
Sunrise Educational Services, Inc., an Arizona
corporation. (11)
10.14 Lease Agreement dated October 16, 1986, between Sun School
I Limited Partnership, an Arizona limited partnership, and
Sunrise Educational Services, Inc., an Arizona
corporation. (11)
10.15 Lease Agreement dated April 1, 1986, between Sunrise
Partners, an Arizona corporation, and Sunrise Educational
Services, Inc., an Arizona corporation. (11)
10.16 Lease Agreement dated February 5, 1987 between Sun School II
Limited Partnership, an Arizona limited partnership, and
Sunrise Educational Services, Inc., an Arizona corporation.
(11)
10.17 Lease Agreement dated June 26, 1987, between Huber Farm
Service of Phoenix, Inc., an Arizona corporation and Sunrise
Educational Services, Inc., an Arizona corporation. (11)
10.18 Lease Agreement, dated July 29, 1988, between Sunrise
Educational Services, Inc. and Investad, Inc. (12)
10.19 Lease Agreement, dated July 25, 1988, between Sunrise
Educational Services, Inc., and LV Properties, an Arizona
general partnership. (12)
10.20 Lease Agreement, dated May 12, 1988, between Sunrise
Educational Services, Inc. and Jaymark Komer and Eugene
Victor Komer and Ruth Lena Komer, as Trustees of the Komer
Family Trust dated December 30, 1980. (12)
10.21 Lease Agreement, dated July 29, 1988, between Sunrise
Educational Services, Inc. and Kailua Beach Center, Inc. (12)
10.22 Lease Agreement, dated January 11, 1988, between Sunrise
Educational Services, Inc. and Mercado Developers. (13)
14
<PAGE>
10.23 Amendment of Lease Agreement dated March 8, 1990, between
Sunrise Educational Services, Inc. and Jaymark Komer and
Komer Family Trust dated May 12, 1988. (14)
10.24 Purchase Agreement and Registration Rights Agreement dated
April 6, 1990, between Sunrise Educational Services, Inc.
and Lepercq Capital Management, Inc. (15)
10.25 Lease Agreement, dated July 1, 1991, between Sunrise
Educational Services, Inc. and Maruni Arizona, Inc. (16)
10.26 Purchase Agreement, dated November 18, 1991, between Sunrise
Educational Services, Inc., LN Investment Capital Limited
Partnership, Lepercq Investment Limited Partnership II and LN
Investment Capital Limited Partnership II. (17)
10.27 Amendment of Lease Agreement dated July 22, 1998, between
Sunrise Educational Services, Inc. and Jaymark Komer and
Komer Family Trust. (18)
10.28 Management Agreement, dated November 14, 1993, between United
Church of Christ and Sunrise Educational Services, Inc. (19)
10.29 Term Sheet Agreement, dated December 7, 1992, between Joy of
Christ Lutheran Church and Sunrise Educational Services, Inc.
(20)
10.30 Agreement between Lutheran Church of Honolulu and Sunrise
Educational Services, Inc., dated May 19, 1993. (20)
10.31 Administrative Services Agreement, License, and Equipment
Lease, dated February 1, 1994, between Sunrise Educational
Services, Inc., and Preschool Services, Inc. (19)
10.32 Asset Purchase Agreement between Children's Choice Learning
Center, Inc. and Sunrise Preschool, Inc. dated June 26, 1996,
with one amendment dated June 28, 1996. (21)
10.33 Form of Credit and Security Agreement between Imperial Bank
and Sunrise Educational Services, Inc. dated April 24, 1997.
(22)
11 Statement re Computation of Per Share Earnings (Loss).
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule (EDGAR version only).
- -------------------
* Management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to Exhibit 3.3 to the Company's
Form S-18 Registration Statement (Registration Number 33-39481-C).
(2) Incorporated herein by reference to the same numbered Exhibit to
the Company's Annual Report on Form 10-K for the year ended June
30, 1993.
(3) Incorporated herein by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended December 31, 1994.
15
<PAGE>
(4) Incorporated herein by reference to the same numbered Exhibit to
the Company's Annual Report on Form 10-K for the year ended June
30, 1996.
(5) Incorporated herein by reference to Exhibit 10.17 to the Company's
Amendment No. 1 to Form S-18 Registration Statement (Registration
Number 33-39481-C).
(6) Incorporated herein by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993.
(7) Incorporated herein by reference to Exhibit Number 10.26 to the
Company's Annual Report on Form 10-K for the year ended June 30,
1993.
(8) Incorporated herein by reference to Exhibit 10.24 to Amendment No.
2 to the Company's Form S-1 Registration Statement (Registration
Number 33-46791).
(9) Incorporated herein by reference to Exhibit 10 to the Company's
Form 10-Q for the quarter ended December 31, 1997.
(10) Incorporated herein by reference to Exhibit 10 to the Company's
Form 10-Q for the quarter ended March 31, 1998.
(11) Incorporated herein by reference to exhibits to Sunrise Educational
Services, Inc, Commission File Number 0-16425 ("Sunrise") Form S-1
filed July 10, 1987.
(12) Incorporated herein by reference to exhibits to Sunrise Form 10-K
filed on or about October 31, 1988.
(13) Incorporated herein by reference to exhibits to Sunrise Form 10-K
filed on or about October 30, 1989.
(14) Incorporated herein by reference to exhibits to Sunrise Form 10-Q
filed on or about January 31, 1990.
(15) Incorporated herein by reference to exhibits to Sunrise Form 8-K
filed on or about April 20, 1990.
(16) Incorporated herein by reference to exhibits to Sunrise Form 10-K
filed on or about October 28, 1991.
(17) Incorporated herein by reference to exhibits to Sunrise Form 10-Q
filed on or about December 16, 1991.
(18) Incorporated herein by reference to exhibits to Sunrise Form 10-K
filed on or about October 21, 1992.
(19) Incorporated herein by reference to exhibits to Sunrise Form
10-KSB for the year ended July 31, 1994.
(20) Incorporated herein by reference to exhibits to Sunrise Form 10-KSB
filed on or about October 8, 1993.
(21) Incorporated herein by reference to exhibits to Sunrise Form 8-K
filed on or about September 9, 1996.
(22) Incorporated herein by reference to exhibits to Sunrise Form 10-QSB
filed on March 11, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE TESSERACT GROUP, INC.
By /s/ Tony L. Verbeten
-----------------------------------
Tony L. Verbeten
Chief Financial Officer
Date: September 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ John T. Golle September 25, 1998
- ----------------------------------
John T. Golle
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ Robert I. Karon September 25, 1998
- ----------------------------------
Robert I. Karon
Director
/s/ Gale R. Mellum September 25, 1998
- ----------------------------------
Gale R. Mellum
Director
/s/ Benjamin Nazarian September 25, 1998
- ----------------------------------
Benjamin Nazarian
Director
/s/ Martha Taylor Thomas September 25, 1998
- ----------------------------------
Martha Taylor Thomas
Director
/s/ Tony L. Verbeten September 25, 1998
- ----------------------------------
Tony L. Verbeten
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<PAGE>
APPENDIX
THE TESSERACT GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................... 19
Consolidated Statements of Operations...................................... 20
Consolidated Balance Sheets................................................ 21
Consolidated Statements of Shareholders' Equity............................ 22
Consolidated Statements of Cash Flows...................................... 23
Notes to Consolidated Financial Statements................................. 24
Schedule II--Valuation and Qualifying Accounts
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The TesseracT Group, Inc.
We have audited the accompanying consolidated balance sheets of The TesseracT
Group, Inc. (a Minnesota corporation) and subsidiaries as of June 30, 1998
and 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended June 30, 1998. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The TesseracT Group, Inc.
and subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
the index to consolidated financial statements and schedules is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not a required part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
September 3, 1998
19
<PAGE>
THE TESSERACT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE
Public school management $ - $ - $ 110,695
Private school tuition and other 15,294 4,835 4,395
------------ ------------ ------------
15,294 4,835 115,090
------------ ------------ ------------
OPERATING EXPENSES
Public school management costs - - 114,297
Private school and other costs:
Personnel costs 7,349 2,487 2,320
Site operating costs 4,061 749 660
Insurance, taxes, rent, and other 2,895 299 283
Depreciation and amortization 1,118 218 202
------------ ------------ ------------
15,423 3,753 117,762
------------ ------------ ------------
SCHOOL OPERATING PROFIT (LOSS) (129) 1,082 (2,672)
------------ ------------ ------------
NEW SCHOOL DEVELOPMENT COSTS 646 363 -
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,931 3,421 5,061
------------ ------------ ------------
OPERATING LOSS (4,706) (2,702) (7,733)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Settlement income 650 1,900 -
Investment income (loss) 744 1,385 (1,525)
Interest expense (125) (17) (249)
------------ ------------ ------------
1,269 3,268 (1,774)
------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (3,437) 566 (9,507)
INCOME TAX EXPENSE - - -
------------ ------------ ------------
NET EARNINGS (LOSS) $ (3,437) 566 $ (9,507)
------------ ------------ ------------
------------ ------------ ------------
NET EARNINGS (LOSS) PER COMMON
SHARE (BASIC AND DILUTED) $ (.40) .08 $ (1.27)
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (BASIC AND DILUTED) 8,574 7,501 7,477
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
20
<PAGE>
THE TESSERACT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,543 $ 23,246
Settlement receivable 650 650
Accounts receivable, net of allowance
(1998 - $248; 1997 - $30) 2,370 20
Prepaid rent 834 -
Other current assets 1,093 315
------------ ------------
Total current assets 10,490 24,231
INTANGIBLE ASSETS 18,984 -
PROPERTY AND EQUIPMENT, NET 19,479 4,826
DEPOSITS AND OTHER ASSETS 310 -
------------ ------------
$ 49,263 $ 29,057
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 470 $ -
Accounts payable 984 571
Other current liabilities 5,767 3,606
------------ ------------
Total current liabilities 7,221 4,177
LONG-TERM OBLIGATIONS 8,578 -
OTHER 715 -
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 11, 16, and 17)
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value,
5,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value,
25,000,000 shares authorized;
issued and outstanding
1998 - 9,570,803 shares; 1997 - 7,489,637 shares 96 75
Additional paid-in capital 57,673 46,388
Accumulated deficit (25,020) (21,583)
------------ ------------
Total shareholders' equity 32,749 24,880
------------ ------------
$ 49,263 29,057
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
21
<PAGE>
THE TESSERACT GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Unrealized
----------------------- Additional Losses on
Number of Paid-In Marketable Accumulated
Shares Amount Capital Securities Deficit
----------- --------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 7,352 $ 74 $ 46,080 $ (3,687) $ (12,642)
Net loss - - - - (9,507)
Issuance of common stock upon
exercise of stock options
and warrants 137 1 306 - -
Change in net unrealizedholding
losses on marketable securities - - - 3,687 -
----------- --------- ------------ ------------- --------------
BALANCE, JUNE 30, 1996 7,489 75 46,386 - (22,149)
Net earnings - - - - 566
Issuance of common stock upon
exercise of stock options 1 - 2 - -
----------- --------- ------------ ------------- --------------
BALANCE, JUNE 30, 1997 7,490 75 46,388 - (21,583)
Net loss - - - - (3,437)
Issuance of common stock upon
exercise of stock options 133 1 589 - -
Common stock issued for
acquisitions 1,948 20 9,604 - -
Fair value of Sunrise
Educational Services,
Inc. options and warrants
at acquisition date - - 1,092 - -
----------- --------- ------------ ------------- --------------
BALANCE, JUNE 30, 1998 9,571 $ 96 $ 57,673 $ - $ (25,020)
----------- --------- ------------ ------------- --------------
----------- --------- ------------ ------------- --------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
22
<PAGE>
THE TESSERACT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (3,437) $ 566 $ (9,507)
Adjustments to reconcile net earnings
(loss) to net cash used in operating
activities:
Depreciation and amortization 1,264 316 1,197
Provision for doubtful accounts 87 10 4
(Gains)/losses on marketable securities - (49) 3,410
Changes in operating assets and liabilities:
Accounts receivable (1,265) (14) 164
Other current assets (1,211) (603) 155
Accounts payable (101) 101 (1,321)
Other current liabilities (1,026) (524) 1,640
------------ ------------ ------------
Net cash used in operating activities (5,689) (197) (4,258)
------------ ------------ ------------
INVESTING ACTIVITIES
Payment for acquisitions, net of cash acquired (7,106) - -
Additions to property and equipment (11,822) (896) (2,261)
Proceeds from sales and maturities of marketable
securities - 9,592 22,763
------------ ------------ ------------
Net cash provided by (used in) investing
activities (18,928) 8,696 20,502
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from financing transactions 6,550 - -
Proceeds from exercise of stock options and warrants 590 2 307
Repayment of short-term borrowings and long-term debt (226) (646) (3,609)
------------ ------------ ------------
Net cash provided by (used in) financing
activities 6,914 (644) (3,302)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,703) 7,855 12,942
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23,246 15,391 2,449
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,543 $ 23,246 15,391
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
23
<PAGE>
THE TESSERACT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
The TesseracT Group, Inc. (the "Company"), formerly known as Education
Alternatives, Inc., is an integrated education management company, serving
private preschool students, private and public charter elementary, middle, and
high school students, and post-secondary career college students in six states.
During the four years ended June 30, 1998, the Company has incurred cumulative
net losses totaling $19,821,000. As a result of these losses and investments the
Company has made in acquisitions and for the purchase of capital assets, the
Company has used cash of $25,940,000. After refinancing two owned school
facilities, generating proceeds of $6,550,000, the Company has a cash balance of
$5,543,000 at June 30, 1998.
During 1999, the Company anticipates investing in excess of $2,000,000 to outfit
new schools and upgrade technology at existing schools. The Company anticipates
financing a significant portion of these capital asset purchases through
equipment financing leases. Some of this financing may require the Company to
post a letter of credit as collateral. If the Company is unable to secure
financing on terms acceptable to the Company, the capital asset purchases will
have to be made from cash reserves.
Management currently believes that it has sufficient cash on hand, including the
proceeds from financing transactions anticipated to be finalized in the first
quarter of 1999, to ensure uninterrupted performance of its operating
obligations as currently structured and anticipated. In part, this is a result
of projected improvement in operating results for 1999. If the Company does not
achieve its projected operating results and/or is unable to secure adequate
equipment financing, management believes that it has options available to obtain
necessary capital, including the issuance of subordinated debt or private
placement equity financing. There can be no assurance, however, that these
sources would be available to the Company on acceptable terms.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES: Cash and cash equivalents,
consisting of highly liquid investments with a maturity of three months or less
when purchased, are stated at cost which approximates market.
INTANGIBLE ASSETS: Intangible assets resulting from business acquisitions,
comprising costs in excess of net assets acquired, non-compete agreements, and
customer base, are being amortized on a straight-line basis over various periods
up to 25 years. Amortization expense for the year ended June 30, 1998, was
$426,000. The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of cash flows as well as other
factors, such as business trends and prospects and other market conditions.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and
depreciated on the straight-line method over their estimated useful lives,
ranging from three to thirty years. The Company uses accelerated methods of
depreciation for income tax purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash
equivalents, receivables, other current assets, accounts payable, and amounts
included in other current liabilities meeting the
24
<PAGE>
definition of financial instruments approximate fair value because of the
short-term maturity of these instruments.
The carrying amount of long-term obligations, including the current portion of
long-term debt, approximates fair value based on quoted market prices for
similar issues or on the current rates offered to the Company for debt of the
same maturity.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF: The
Company follows the provisions of Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of ("SFAS No. 121"). SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are recorded at the lower of the carrying amount or net realizable
value (fair value less costs to sell).
EARNINGS (LOSS) PER COMMON SHARE: The Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128") in the second
quarter of fiscal 1998 and has restated previously reported amounts. Basic
earnings per share ("EPS") and diluted EPS replace primary EPS and fully diluted
EPS. Basic EPS is calculated by dividing net earnings (loss) by the weighted
average number of common shares outstanding for the period. Diluted EPS is
calculated by dividing net earnings (loss) by the weighted average number of
common shares and dilutive potential common shares outstanding for the period.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and contingency disclosures
included in the financial statements. Ultimate results could differ from these
estimates.
FINANCIAL STATEMENT RECLASSIFICATIONS: Certain 1996 and 1997 amounts have been
reclassified to conform to the 1998 presentation. These reclassifications had no
effect on the previously reported results of operations or shareholders' equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131"), will be effective for the Company's fiscal year
ending June 30, 1999. SFAS No. 131 requires disclosures of business and
geographic segments in the consolidated financial statements of the Company. The
Company is currently analyzing the impact it will have on the disclosures in its
financial statements.
NOTE 3 - ACQUISITIONS
In January 1998, the Company acquired all of the outstanding stock of Academy of
Business, Inc. ("ABC"), a Phoenix, Arizona-based post-secondary career college,
for cash of approximately $1,600,000. ABC is accredited by the North Central
Association of Colleges and Schools, and is an Authorized Academic Training
Provider for Microsoft. In addition to offering traditional business courses,
ABC offers comprehensive training to students preparing for various Microsoft
certifications. This acquisition has been accounted for as a purchase, with
goodwill recorded on the transaction being amortized on the straight-line method
over a period of 25 years.
25
<PAGE>
In December 1997, the Company acquired Sunrise Educational Services, Inc.
("Sunrise"), a Scottsdale, Arizona-based operator of approximately 30
preschool centers, primarily in Arizona. Sunrise has expanded into the
operation of private schools and has a contract to manage public charter
schools in many of its Arizona centers. This acquisition has been accounted
for as a purchase. The purchase price was approximately $13,800,000 and was
made up of $4,200,000 in cash and 1,950,000 shares of the Company's common
stock. In addition, transaction costs approximating $3,300,000 were incurred
in the consummation of this acquisition. Goodwill recorded on the transaction
is being amortized on the straight-line method over a period of 25 years. In
accordance with the terms of the merger agreement, the Company granted stock
options and warrants to purchase 553,724 shares of common stock at exercise
prices ranging from $1.27 to $6.04 per share to Sunrise employees and
directors as replacement options and warrants for previously issued Sunrise
options and warrants.
Summarized below are the unaudited pro forma combined results of operations of
the Company for the years ended June 30, 1998 and 1997, assuming the Sunrise
acquisition was consummated as of July 1, 1996. Excluded from the pro forma
results of operations for the years ended June 30, 1998 and 1997, are charges of
$1,114,000 or $.12 per share and $602,000 or $.06 per share, respectively, which
provided for impaired assets and rental commitments in connection with Sunrise's
management of seven centers with a non-profit organization (see Note 4). The pro
forma results are not necessarily indicative of the operating results that would
have been achieved had the acquisition occurred on the date indicated, nor are
they indicative of future operating results.
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997
--------------- --------------
<S> <C> <C>
Revenue $ 22,997 $ 19,251
Net loss (5,249) (204)
Net loss per common share $ (.55) $ (.02)
</TABLE>
NOTE 4 - PRESCHOOL SERVICES, INC.
Prior to its acquisition by the Company in December 1997, Sunrise had
transferred a portion of its operations to Preschool Services, Inc. ("PSI").
PSI is a Hawaii non-profit corporation and is governed by a seven member
board of directors, three members of which are employees of the Company. PSI
has certain contracts with the state of Hawaii to provide child care
services, one of which is subject to annual renewal. Sunrise provides PSI
with management, administration, and educational programs for PSI's child
care centers and leases substantially all of the equipment and other property
necessary for the operation of the related child care centers to PSI under an
Administrative Services Agreement, License and Equipment Lease (the "PSI
Agreement"). The PSI Agreement stipulates that Sunrise is to receive an
administrative services fee equal to 9% of revenue for providing the services
described above. Prior to its acquisition by the Company, Sunrise had written
off amounts due from PSI due to the inability of PSI to generate sufficient
cash flow to make the lease and other payments due to Sunrise. As of June 30,
1998, such cumulative amounts written off by Sunrise related to the PSI
Agreement approximated $1,800,000.
During 1997, Sunrise entered into an additional agreement with PSI to provide
management, administration and educational programs to the public charter
schools operated by PSI. In return for providing these services, Sunrise
receives an administrative fee equal to 12.5% of total charter school revenue
received by PSI. In addition, PSI operates these charter schools in certain
of the Sunrise preschool centers, for which Sunrise is reimbursed for the
facility costs and lease expense of the occupied space.
26
<PAGE>
NOTE 5 - PUBLIC SCHOOL CONTRACTS
BALTIMORE: During 1996, the Company provided services under the terms of school
management contracts with Baltimore City Public Schools (the "Baltimore
District"). These contracts (the "Baltimore Contracts") allowed the Baltimore
District to cancel the agreements for any reason upon ninety days' notice to the
Company and in November 1995, the Baltimore Board of School Commissioners voted
to cancel the Baltimore Contracts, citing budgetary issues. The Company provided
services to the contracted schools through March 4, 1996, the effective date of
termination.
HARTFORD: During 1996, the Company also provided services under the terms of a
school management contract with the Board of Education and the city of Hartford,
Connecticut. The Hartford Board of Education had the right to terminate the
contract for any reason upon ninety days' notice to the Company. In January
1996, the Hartford Board of Education voted to seek an amicable dissolution of
the contract, citing an impasse in negotiations with the Company on amounts owed
to the Company for its management services.
In June 1996, the Company reached partial settlement with the city of Hartford
and Hartford Board of Education officials on amounts owed the Company under its
school management contract. The Company received $3,073,000 for the computers
installed in and the capital improvements made to the Hartford schools. This
amount was included in fiscal 1996 school management expenses as a recovery
against amounts previously written-off under the contract.
During 1997, the Company reached a final agreement with Hartford officials on
the remaining amounts owed to the Company. Under the final settlement, the
Company will receive $3,250,000, payable in five annual installments of $650,000
beginning in July, 1997. These annual payments are being recorded in income as
they are received. In addition, both parties released each other from any
further claims under the management contract.
NOTE 6 - MARKETABLE SECURITIES
During 1996, the Company recorded a charge of $3,400,000 to reflect what the
Company believed was a permanent impairment in the value of its investment
portfolio and its related decision to liquidate these investments in fiscal
1997. This write-down to market value had been previously reported as a direct
charge to shareholders' equity. At June 30, 1996, the fair value of the
Company's marketable securities portfolio was equal to its cost.
During 1995, the Company and the firm hired to manage the Company's investment
portfolio became involved in a dispute over the purchase and management of
certain securities included in the Company's investment portfolio. The Company
and its investment management firm entered into a preliminary settlement
agreement on June 30, 1995, whereby the investment management firm agreed to
reimburse the Company $3,000,000 for losses on the Company's portfolio. During
fiscal 1997, the Company and its investment management firm entered into a final
settlement agreement whereby the investment management firm agreed to pay the
Company an additional $1,250,000 in fiscal 1997 to resolve all remaining
disputes relating to the firm's management of the Company's investment
portfolio.
During 1997 and 1996, the Company received proceeds of $9,592,000 and
$22,653,000, respectively, on the sale and maturity of marketable securities.
The Company realized gains of $49,000 during 1997 and realized losses of $10,000
during 1996 on the sale of marketable securities. For purposes of calculating
realized gains and losses on sales of marketable securities, the amortized cost
of each security sold was used.
27
<PAGE>
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment at June 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Land $ 6,928,000 $ 1,733,000
Buildings 6,062,000 2,400,000
Leasehold improvements 1,621,000 -
Furniture and equipment 3,222,000 1,096,000
Vehicles 711,000 -
Construction in progress 2,385,000 367,000
Less accumulated depreciation and
amortization (1,450,000) (770,000)
--------------- --------------
$ 19,479,000 $ 4,826,000
--------------- --------------
--------------- --------------
</TABLE>
NOTE 8 - LINE OF CREDIT
The Company has available a $500,000 working capital line of credit, bearing
interest at prime (8.50% at June 30, 1998) plus 1.5%. Total borrowings
outstanding at June 30, 1998, were $470,000. Interest is due monthly on
outstanding borrowings, with all unpaid principal due on September 24, 1998. The
line of credit contains covenants regarding the maintenance of certain cash and
working capital balances and meeting certain net worth, debt, and cash flow
ratios. These covenants were met at June 30, 1998.
NOTE 9 - OTHER CURRENT LIABILITIES
Other current liabilities at June 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Deferred revenue and prepaid tuition $ 2,279,000 $ 960,000
Reserve for contract and other
contingencies 1,254,000 1,512,000
Amount due on Sunrise acquisition 722,000 -
Accrued payroll and related costs 597,000 405,000
Current portion of long-term debt 270,000 -
Accrued expenses - managed schools - 573,000
Other 645,000 156,000
--------------- --------------
$ 5,767,000 $3,606,000
--------------- --------------
--------------- --------------
</TABLE>
NOTE 10 - LONG -TERM OBLIGATIONS
Long-term obligations at June 30, 1998, consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Financing obligation $7,917,000
Long-term debt 931,000
Less current maturities (270,000)
-------------
$8,578,000
-------------
-------------
</TABLE>
FINANCING OBLIGATION
During 1998, the Company refinanced two of its private school facilities. In
addition, the Company purchased a school facility that was simultaneously
refinanced. Total proceeds from the refinancings were $7,917,000, representing
the appraised real estate value of the facilities. Under the terms of the
agreements, title to these properties has been transferred to the lender and the
lender has been granted a security interest in certain other assets of the
Company. Interest payments on the financings, amounting to approximately
$800,000 on an annual basis, are subject to annual increases based upon changes
in the Consumer Price Index.
28
<PAGE>
The refinancing obligations are structured as leases, having an initial term
of 15 years, with the Company having two 10-year renewal options. The terms
of the leases require that the Company prepay, on September 1 of each year,
the next 12-months rent and estimated property taxes and insurance premiums
into an escrow account, jointly controlled by the Company and the lender.
Each month, funds are transferred from the escrow account to pay for rent and
property taxes and/or insurance premiums, if applicable. Interest on funds
remaining in the escrow account are credited to the Company. The leases
require the Company to pay all applicable real estate taxes, utility
expenses, and insurance costs. In addition, the leases prohibit the Company
from buying back any shares of corporate stock, declaring a dividend to
shareholders, or repaying any indebtedness to affiliates of the Company if,
as a result of such transaction, certain financial ratios are not met.
LONG-TERM DEBT
Long-term debt consists of installment notes with a bank, payable monthly,
with interest rates of prime plus 1.75% to 10.42%. Certain of the Company's
accounts receivable and equipment secure these notes, which mature at various
times through August 2003. The installment notes contain covenants regarding
the maintenance of certain cash and working capital balances and meeting
certain net worth, debt, and cash flow ratios. These covenants were met at
June 30, 1998.
The aggregate maturities for long-term debt for the five years after June 30,
1998, are $269,800, $308,600, $259,600, $40,400, and $21,400, respectively.
Total interest paid in the years ended June 30, 1998, 1997 and 1996 was
$125,000, $17,000 and $249,000,respectively.
NOTE 11 - OPERATING LEASES
In addition to the financing obligations described in Note 10, the Company
leases certain school facilities, office space, vehicles, and equipment under
various operating lease agreements, the last of which expires in 2013. At June
30, 1998, future minimum lease payments under noncancelable operating leases
were as follows:
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
1999 $ 3,998,000
2000 3,556,000
2001 3,391,000
2002 3,018,000
2003 2,359,000
2004 and thereafter 11,589,000
---------------
$ 27,911,000
---------------
---------------
</TABLE>
Total rent expense for the years ended June 30, 1998, 1997, and 1996 was
$2,065,000, $313,000, and $1,436,000, respectively. Rent expense of
$1,201,000 in the year ended June 30, 1996, related to school management
contracts and is included in public school management costs in the
accompanying consolidated statements of operations.
The facility leases require the Company to pay all applicable real estate
taxes, utility expenses, and insurance costs. In addition, certain of the
agreements provide for the escalation of future rents based on the Consumer
Price Index or other formulas. Renewal of the facility lease agreements is
for periods of five to 25 years. For those leases that require fixed rental
escalations during their lease terms, rent expense is recognized on a
straight-line basis, resulting in deferred rent of approximately $368,000 at
June 30, 1998. This liability will be satisfied through future rental
payments.
29
<PAGE>
NOTE 12 - INVESTMENT INCOME (LOSS)
Investment income (loss) for the year ended June 30 consists of the following
(see Note 6):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------- ---------------
<S> <C> <C> <C>
Interest income $ 744,000 $ 1,336,000 $ 1,885,000
Gain (loss) on marketable securities, net - 49,000 (3,410,000)
---------- ------------- ---------------
$ 744,000 $ 1,385,000 $(1,525,000)
---------- ------------- ---------------
---------- ------------- ---------------
</TABLE>
NOTE 13 - SHAREHOLDERS' EQUITY
STOCK OPTIONS: Under the terms of the Company's 1988 Stock Option Plan, as
Amended and Restated, 1,900,000 shares of common stock have been reserved for
issuance to directors, officers, employees or other individuals or entities who
are not employees but who provide services to the Company, upon the exercise of
stock options. The stock options are exercisable over periods of up to ten years
from the date of grant and may be issued as incentive or nonqualified stock
options.
Under the terms of the Company's 1992 Long-Term Executive Stock Option Plan,
1,100,000 shares of common stock have been reserved for issuance to key
employees of the Company, upon the exercise of stock options. The stock options
issuable under the 1992 Plan are nonqualified and are exercisable over periods
of up to ten years from the date of grant.
At June 30, 1998, options to purchase 778,000 shares of common stock are
currently exercisable and 941,000 shares are available for grant under the
two option plans. Stock option activity was as follows:
<TABLE>
<CAPTION>
Options Option
Outstanding Price Per Share
----------- ---------------
<S> <C> <C>
Balance at June 30, 1995 1,326,209 $3.38 - $40.50
Granted 1,674,388 4.00 - 13.25
Canceled (1,589,624) 4.75 - 40.50
Exercised (43,568) 3.38 - 13.75
------------ ---------------
Balance at June 30, 1996 1,367,405 3.38 - 13.75
Granted 267,200 2.94 - 4.38
Canceled (277,171) 2.94 - 13.75
Exercised (667) 2.94
------------ ---------------
Balance at June 30, 1997 1,356,767 2.94 - 11.75
Granted 751,982 1.27 - 6.04
Canceled (231,705) 2.94 - 11.75
Exercised (132,654) 2.94 - 5.50
------------ ---------------
Balance at June 30, 1998 1,744,390 $1.27 - $ 9.00
------------ ---------------
------------ ---------------
</TABLE>
During the year ended June 30, 1996, the Company canceled 1,192,000 stock
options and reissued a like number at the current market price.
In accordance with the terms of the merger agreement between the Company and
Sunrise, the Company granted options to purchase 252,982 shares of common
stock at exercise prices ranging from $1.27 to $6.04 per share to Sunrise
employees and directors as replacement options for previously issued Sunrise
options. These grants are included in the 1998 grants above.
30
<PAGE>
In addition to options issued pursuant to the above plans, the Company
previously issued nonqualified stock options to key employees at $1.00 per
share, exercisable through March 1996. Options to purchase 59,700 shares were
exercised during the year ended June 30, 1996.
WARRANTS: In accordance with the terms of the merger agreement between the
Company and Sunrise, the Company issued warrants to purchase 300,742 shares of
common stock at exercise prices ranging from $3.10 to $5.87 per share as
replacement warrants for previously issued Sunrise warrants. All of these
warrants, which expire at various times through November 2001, were exercisable
at June 30, 1998.
SHARE RIGHTS PLAN: Under the terms of the Company's share rights plan, the
Company distributed as a dividend one right for each share of the Company's
common stock outstanding on October 1, 1993. Each right entitles its holder to
buy one one-hundredth of a share of a new series of junior participating
preferred stock at an exercise price of $175, subject to adjustment. The rights
will be exercisable only if a person or group acquires ownership of at least 20%
of the Company's outstanding common stock or announces a tender offer to acquire
20% or more of the common stock.
As permitted under the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), the Company
has elected to continue to account for stock option and warrant grants under APB
Opinion No. 25, under which no compensation cost has been recognized. Had the
Company accounted for its stock option and warrant grants and recorded
compensation cost in accordance with SFAS No. 123, the Company's pro forma net
earnings (loss) and net earnings (loss) per common share for the year ended June
30 would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net earnings (loss) - as reported $ (3,437,000) $ 566,000 $ (9,507,000)
Net loss - pro forma (4,267,000) (6,000) (9,757,000)
Net earnings (loss) per common share
- as reported (basic and diluted) $ (.40) $ .08 $ (1.27)
Net earnings (loss) per common share
- pro forma(basic and diluted) $ (.50) $ - $ (1.30)
</TABLE>
The fair value of each option and warrant grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------------ -------------- ---------------
<S> <C> <C> <C>
Risk free interest rate 5.5% - 6.2% 5.3% - 6.4% 5.6% - 5.9%
Expected life 3 to 7 years 7 years 3 to 7 years
Expected volatility 58.4% 58.5% 58.5%
</TABLE>
31
<PAGE>
NOTE 14 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) as of June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Federal net operating loss benefit, net of amount
to be credited to equity $ 7,240,000 5,621,000
Capital loss carryforward benefit 701,000 704,000
Accrued expenses 411,000 514,000
Other 444,000 (18,000)
----------- -----------
8,796,000 6,803,000
Valuation allowance (8,796,000) (6,803,000)
----------- -----------
Net deferred income taxes $ - -
----------- -----------
----------- -----------
</TABLE>
At June 30, 1998, the Company had net operating loss carryforwards of
$31,758,000 for federal tax purposes expiring from 2004 through 2013 and
capital loss carryforwards of $2,063,000, expiring through 2002. The Company
has determined that the realization of the loss carryforwards and the other
deferred tax assets does not meet the recognition criteria under SFAS No. 109
and, accordingly, a valuation allowance has been established for the tax
benefit of these items as of June 30, 1998 and 1997.
As a result of the acquisitions discussed in Note 3, the Company acquired net
operating loss carryforwards for federal tax purposes approximating $3,000,000,
which are available to offset future taxable income, if any, through 2013. Any
tax benefit realized from the use of the acquired operating loss carryforwards
will be applied to reduce goodwill.
NOTE 15 - RELATED PARTY TRANSACTIONS
In addition to the related-party transactions described elsewhere, certain
shareholders and directors provided legal and accounting services to the
Company. Total amounts incurred for these services for the years ended June 30,
1998, 1997, and 1996 were $490,000, $216,000 and $230,000 respectively.
In January 1998, the Company terminated a real estate development agreement
with Tesseract Development Company II ("TDC II"), a general partnership in
which the chairman and chief executive officer of the Company had a 25%
interest, for an aggregate payment of $240,000. This agreement granted TDC II
the opportunity to develop the next ten TesseracT schools, with an option to
develop the succeeding twenty TesseracT schools.
NOTE 16 - PARTICIPATION IN STUDENT FINANCIAL ASSISTANCE PROGRAMS
The Company's participation in the U.S. Department of Education's Title IV
programs, through its wholly-owned subsidiary ABC, is subject to audit by
independent auditors annually and to program reviews by the Department of
Education and other federal, state, or accrediting agencies. Instances of
noncompliance, should they exist and be discovered through the audit process,
could result in refunds of financial assistance and imposition of fines and
penalties.
The Department of Education has regulations that contain objective measurement
criteria to determine the financial capabilities of educational institutions
participating in student financial assistance programs. The regulations apply
only to those institutions offering post-secondary courses and training. The
criteria, which are applied on the subsidiary level, include among other things
having cash and receivables from
32
<PAGE>
unrelated parties equal to or greater than current liabilities, maintaining a
positive tangible net worth, and restrictions on the amount of operating
losses incurred within a two-year period.
Due to operating losses incurred by ABC prior to the acquisition by the
Company, the financial capability tests have not been met at June 30, 1998.
As a result, the Company may be required to post a letter of credit for at
least one-half of the Title IV funds received by ABC during 1998, which
amounted to $1,300,000.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with executive officers of the Company
which would require severance benefits to be paid if employment is terminated
for various reasons, including termination following a change of ownership or
control of the Company as defined by the agreements. The maximum contingent
liability for severance payments that the Company would be required to make
under the employment agreements is approximately $482,000 at June 30, 1998.
At June 30, 1998, the Company has construction commitments totaling
approximately $7,300,000 remaining on two new private school facilities being
constructed in the Phoenix metropolitan area. Upon completion of construction,
anticipated to be in September 1998, the Company will finalize the refinancing
of these facilities, realizing proceeds of approximately $12,000,000. In
addition, the Company anticipates investing in excess of $2,000,000 during 1999
in new furniture and technology for these new schools and for upgrades in
technology at existing schools.
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Net
G ross Earnings
Profit Net Earnings (Loss) Common Stock
Revenue (Loss) (Loss) Per Share Price
------------- ----------- ------------- ----------- ---------------------
High Low
------------- ----------- ------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1998:
First $ 777,000 $ (445,000) $ (1,059,000) $ (.14) $ 6.25 $ 4.13
Second 1,768,000 231,000 (646,000) (.08) 5.63 4.31
Third 6,206,000 231,000 (1,115,000) (.12) 6.63 4.06
Fourth 6,543,000 (146,000) (617,000) (.06) 6.31 4.81
------------- ----------- ------------- ----------- --------- --------
$15,294,000 $ (129,000) $ (3,437,000) $ (.40) --------- --------
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
1997:
First $ 747,000 $ 34,000 $ 148,000 $ .02 $ 4.00 $ 2.44
Second 1,512,000 489,000 277,000 .04 5.88 3.75
Third 1,459,000 408,000 117,000 .02 6.75 3.50
Fourth 1,117,000 151,000 24,000 - 5.50 3.66
------------- ----------- ------------- ----------- --------- --------
$ 4,835,000 $1,082,000 $ 566,000 $ .08 --------- --------
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
</TABLE>
During the first, second, and third quarters of 1997, the Company received
$625,000, $313,000, and $312,000, respectively, related to the final
settlement with its investment management firm (see Note 6). In addition,
during the fourth quarters of 1998 and 1997, the Company recorded settlement
income of $650,000 related to amounts received from the city of Hartford and
the Hartford Board of Education on the final settlement of issues surrounding
the Hartford Contract (see Note 5).
33
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
THE TESSERACT GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------- -------------- Additions --------------- ---------------
----------------------------
Balance at Charged to Charged Balance at
beginning of costs and to other end of
Description period expenses accounts Deductions period
- ------------------- -------------- -------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30,1998:
Allowance for uncollectible
accounts receivable $ 30,000 $ 117,000 $ 131,000 (1) $ - $ 248,000
YEAR ENDED JUNE 30,1997:
Allowance for uncollectible
accounts receivable $ 53,000 $ 10,000 $ - $ (33,000)(2) $ 30,000
YEAR ENDED JUNE 30,1996:
Allowance for uncollectible
accounts receivable $ 49,000 $ 4,000 $ - $ - $ 53,000
</TABLE>
- --------------------
(1) The addition is the result of the allowance for uncollectible accounts
receivable existing at the date of acquisition of Sunrise and ABC.
(2) The reduction in the allowance for uncollectible accounts receivable was
made to bring the allowance in line with the anticipated uncollectible
accounts receivable at June 30, 1997.
34
<PAGE>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
EDUCATION ALTERNATIVES, INC.
To form a Minnesota business corporation under the Minnesota Business
Corporation Act, the following articles of incorporation are adopted:
ARTICLE 1. NAME
The name of the corporation is Education Alternatives, Inc.
ARTICLE 2. REGISTERED OFFICE
The address of the registered office of the corporation is 1600 West
82nd Street, Minneapolis, Minnesota 55431.
ARTICLE 3. AUTHORIZED SHARES
The aggregate number of authorized shares of the corporation is 25,000,000
common shares, $.01 par value, and 5,000,000 preferred shares, $.01 par value,
undesignated as to series. The preferred shares shall be divisible into such
classes and series, have the designations, voting rights, and other rights and
preferences, and be subject to such restrictions, as the Board of Directors may
from time to time establish, fix, and determine, consistent with these Restated
Articles of Incorporation.
ARTICLE 4. NO CUMULATIVE VOTING
There shall be no cumulative voting by shareholders of the
corporation.
ARTICLE 5. WRITTEN ACTION BY DIRECTORS
An action required or permitted to be taken at a meeting of the board of
Directors of the corporation may be taken by a written action signed, or
counterparts of a written action signed in the aggregate, by all of the
directors unless the action need not be approved by shareholders of the
corporation, in which case the action may be taken by a written action signed,
or counterparts of a written action signed in the aggregate, by the number of
directors that would be required to take the same action at a meeting of the
Board of Directors of the corporation at which all of the directors were
present.
ARTICLE 6. DIRECTOR LIABILITY
To the fullest extent permitted by the Minnesota Business Corporation
Act, as the same exists or may hereafter be amended, a director of this
corporation shall not be liable
<PAGE>
to this corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director.
2
<PAGE>
ARTICLES OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
EDUCATION ALTERNATIVES, INC.
I, the undersigned, John R. Tomlinson III, the Secretary of Education
Alternatives, Inc., a Minnesota corporation, do hereby certify that the
following resolution as hereinafter set forth was adopted pursuant to
Section 302A.437 of the Minnesota Statutes by the affirmative vote of the
holders of a majority of the voting power of the shares present and entitled to
vote at said corporation's Special Meeting of Shareholders held on May 1, 1992.
RESOLVED, that the Restated Articles of Incorporation of
Education Alternatives, Inc., a Minnesota corporation, be and hereby
are amended to include a new Article 7 to read in its entirety as
follows:
"ARTICLE 7
No shareholder of the corporation shall have any preemptive
rights to subscribe for, purchase or acquire any shares of the
corporation of any class whether unissued or now or hereafter
authorized, or any obligations or other securities convertible into or
exchangeable for any such shares."
IN WITNESS WHEREOF, I have subscribed my name this 29th day of May,
1992.
/s/ John R. Tomlinson III
----------------------------------
John R. Tomlinson III, Secretary
<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES A JUNIOR PARTICIPATING PREFERRED SHARES
OF
EDUCATION ALTERNATIVES, INC.
I, Franklin L. Kuhar, the Secretary of Education Alternatives, Inc., a
corporation organized and existing under the Business Corporation Act of the
State of Minnesota, in accordance with the provisions of Section 302A.401
thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
by the Restated Articles of Incorporation of the corporation, the Board of
Directors on September 8, 1993, adopted the following resolution creating a
series of two hundred thousand (200,000) Preferred Shares of the par value of
$.01 per share designated as Series A Junior Participating Preferred Shares:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this corporation in accordance with the provisions of its
Restated Articles of Incorporation, a series of Preferred Shares of this
corporation be, and it hereby is, created, and that the designation and amount
thereof and the relative rights and preferences of the shares of such series,
are as follows:
1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Junior Participating Preferred Shares" (the "Series A
Preferred Shares"), and the number of shares constituting such series shall be
two hundred thousand (200,000). The number of shares constituting such series
may, unless prohibited by the Articles of Incorporation or by applicable law of
the State of Minnesota, be increased or decreased by resolution of the Board of
Directors; PROVIDED, that no decrease shall reduce the number of Series A
Preferred Shares to a number less than the number of shares then outstanding
plus the number of shares issuable upon the exercise of outstanding options,
rights or warrants or upon the conversion of any outstanding securities issued
by the corporation convertible into Series A Preferred Shares.
2. DIVIDENDS AND DISTRIBUTIONS.
(i) The holders of Series A Preferred Shares, in preference to
the holders of Common Shares and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of Directors out
of funds legally available for the purpose, quarterly dividends payable in
cash on the last day of July, October, January and April in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first
issuance of a Series APreferred Share, or fraction thereof, in an amount
per share (rounded to the nearest cent) equal to the greater of (a) $1.00
or (b) subject to the provision for adjustment hereinafter set forth, one
hundred (100) times the aggregate per share amount of all cash dividends,
and one hundred (100) times the aggregate per share
<PAGE>
amount (payable in kind) of all non-cash dividends or other distributions,
other than a dividend payable in Common Shares or a subdivision of the
outstanding Common Shares (by reclassification or otherwise), declared on
the Common Shares since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any Series A Preferred Share, or fraction
thereof. In the event the corporation shall at any time after October 1,
1993 declare or pay any dividend on Common Shares payable in Common Shares,
or effect a subdivision or combination or consolidation of the outstanding
Common Shares (by reclassification or otherwise) into a greater or lesser
number of Common Shares, then in each such case the amount to which holders
of Series A Preferred Shares were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of Common
Shares outstanding immediately after such event and the denominator of
which is the number of Common Shares that were outstanding immediately
prior to such event.
(ii) The corporation shall declare a dividend or distribution on
the Series A Preferred Shares as provided in subparagraph (i) of this
paragraph 2 simultaneously with its declaration of a dividend or
distribution on the Common Shares (other than a dividend payable in Common
Shares or a subdivision of the outstanding Common Shares); provided that,
in the event no dividend or distribution shall have been declared on the
Common Shares during the period between any Quarterly Dividend Payment Date
and the next subsequent Quarterly Dividend Payment Date, a dividend of
$1.00 per share on the Series A Preferred Shares shall nevertheless be
payable, out of funds legally available for such purpose, on such
subsequent Quarterly Dividend Payment Date.
(iii) Dividends shall begin to accrue and be cumulative on
outstanding Series A Preferred Shares from the Quarterly Dividend Payment
Date immediately preceding the date of issue of such Series A Preferred
Shares, unless the date of issue of such shares is prior to the record date
for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date
after the record date for the determination of holders of Series A
Preferred Shares entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the Series A Preferred Shares in an amount less than the
total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares outstanding at that time. The Board of Directors may fix a record
date for the determination of holders of Series A Preferred Shares entitled
to receive payment of a dividend or distribution declared thereon, which
record date shall be not more than sixty (60) days prior to the date fixed
for the payment thereof.
2
<PAGE>
3. VOTING RIGHTS. The holders of Series A Preferred Shares shall
have the following voting rights:
(i) Subject to the provision for adjustment hereinafter set
forth, each Series A Preferred Share shall entitle the holder thereof to
one hundred (100) votes on all matters submitted to a vote of the
shareholders of the corporation. In the event the corporation shall at any
time after October 1, 1993 declare or pay any dividend on Common Shares
payable in Common Shares, or effect a subdivision or combination or
consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a greater or lesser number of Common Shares, then in each
such case the number of votes per share to which holders of Series A
Preferred Shares were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which
is the number of Common Shares outstanding immediately after such event and
the denominator of which is the number of Common Shares that were
outstanding immediately prior to such event.
(ii) Except as otherwise provided herein, in any other
Certificate of Designation, Preferences and Rights creating a series of
Preferred Shares or by law, the holders of Series A Preferred Shares and
the holders of Common Shares and any other capital shares of the
corporation having general voting rights shall vote together as one class
on all matters submitted to a vote of the shareholders of the corporation.
(iii) Except as otherwise provided herein or by law, the holders
of Series A Preferred Shares shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Shares and any other capital stock of the
corporation having general voting rights as set forth herein) for taking
any corporate action.
4. CERTAIN RESTRICTIONS.
(i) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Shares as provided in
paragraph 2 hereof are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on Series A
Preferred Shares outstanding shall have been paid in full, the corporation
shall not:
(a) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preferred
Shares;
(b) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Shares, except dividends paid ratably on the Series A
Preferred Shares and all such parity stock
3
<PAGE>
on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled;
(c) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Shares, provided that the corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in
exchange for shares of stock of the corporation ranking junior (both
as to dividends and upon liquidation, dissolution or winding up) to
the Series A Preferred Shares; or
(d) redeem or purchase or otherwise acquire for consideration
any Series A Preferred Shares, or any shares of stock ranking on a
parity with the Series A Preferred Shares, except in accordance with
a purchase offer made in writing or by publication (as determined by
the Board of Directors) to all holders of such shares upon such terms
as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(ii) The corporation shall not permit any subsidiary of the
corporation to purchase or otherwise acquire for consideration any shares
of stock of the corporation unless the corporation could, under
subparagraph (i) of this paragraph 4, purchase or otherwise acquire such
shares at such time and in such manner.
5. REACQUIRED SHARES. Any Series A Preferred Shares purchased or
otherwise acquired by the corporation in any manner whatsoever shall constitute
authorized but unissued Preferred Shares and may be reissued as part of a new
series of Preferred Shares by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein, in the Articles of Incorporation, or in any other Certificate of
Designation, Preferences and Rights creating a series of Preferred Shares or as
otherwise required by law.
6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation,
dissolution or winding up of the corporation, no distribution shall be made (a)
to the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Shares unless,
prior thereto, the holders of Series A Preferred Shares shall have received the
greater of (i) $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, or (ii) an aggregate amount per share, subject to the provision
for adjustment hereinafter set forth, equal to one hundred (100) times the
aggregate amount to be distributed per share to holders of Common Shares, or (b)
to the holders of shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Preferred Shares,
except distributions made ratably on the Series A Preferred Shares and all other
such parity stock in proportion to the total amounts to which the holders of all
such shares
4
<PAGE>
are entitled upon such liquidation, dissolution or winding up. In the event the
corporation shall at any time after October 1, 1993 declare or pay any dividend
on the Common Shares payable in Common Shares, or effect a subdivision or
combination or consolidation of the outstanding Common Shares (by
reclassification or otherwise) into a greater or lesser number of Common Shares,
then in each such case the aggregate amount to which holders of Series A
Preferred Shares were entitled immediately prior to such event under clause
(a)(ii) of the preceding sentence shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of Common Shares outstanding
immediately after such event and the denominator of which is the number of
Common Shares that were outstanding immediately prior to such event.
7. CONSOLIDATION, MERGER, EXCHANGE, ETC. In case the corporation
shall enter into any consolidation, merger, combination, statutory share
exchange or other transaction in which the Common Shares are exchanged for or
changed into other stock or securities, money and/or any other property, then in
any such case the Series A Preferred Shares shall at the same time be similarly
exchanged or changed into an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to one hundred (100) times the aggregate
amount of stock, securities, money and/or any other property (payable in kind),
as the case may be, into which or for which each Common Share is changed or
exchanged. In the event the corporation shall at any time after October 1, 1993
declare or pay any dividend on Common Shares payable in Common Shares, or effect
a subdivision or combination or consolidation of the outstanding Common Shares
(by reclassification or otherwise) into a greater or lesser number of Common
Shares, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of Series A Preferred Shares shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of Common Shares outstanding immediately after such event and the
denominator of which is the number of Common Shares that were outstanding
immediately prior to such event.
8. NO REDEMPTION. The Series A Preferred Shares shall not be
redeemable.
9. RANK. The Series A Preferred Shares shall rank junior in terms
of dividend and liquidation, dissolution and winding up rights to all other
series of the corporation's Preferred Shares hereafter issued that specifically
provide that they shall rank senior to the Series A Preferred Shares.
10. FRACTIONAL SHARES. Series A Preferred Shares may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to receive dividends, participate in distributions
and to have the benefit of all other rights of holders of Series A Preferred
Shares.
5
<PAGE>
IN WITNESS WHEREOF, I have executed this Certificate of Designation,
Preferences and Rights this 21st day of September, 1993.
/s/ Franklin L. Kuhar
---------------------------------------------
Franklin L. Kuhar, Secretary
6
<PAGE>
ARTICLES OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
EDUCATION ALTERNATIVES, INC.
I, the undersigned, Franklin L. Kuhar, the Secretary of Education
Alternatives, Inc., a Minnesota corporation, do hereby certify that the
following resolution as hereinafter set forth was adopted pursuant to Section
302A.437 of the Minnesota Statutes by the affirmative vote of the holders of a
majority of the voting power of the shares present and entitled to vote at said
corporation's Annual Meeting of Shareholders held on November 17, 1993.
RESOLVED, that the Restated Articles of Incorporation of Education
Alternatives, Inc., a Minnesota corporation, be and hereby are amended to
include a new Article 8 to read in its entirety as follows:
"ARTICLE 8. CLASSIFICATION OF THE BOARD OF DIRECTORS;
NOMINATION AND NOTICE PROCEDURES
The business and affairs of the corporation shall be managed by or
under the direction of a Board of Directors consisting of not less than three
nor more than fifteen persons, who need not be shareholders. The number of
directors may be increased by the shareholders or Board of Directors or
decreased by the shareholders from the number of directors on the Board of
Directors immediately prior to the effective date of this Article 8, provided,
however, that any change in the number of directors on the Board of Directors
(including, without limitation, changes at regular meetings of shareholders)
shall be approved by the affirmative vote of not less than seventy-five percent
(75%) of the voting power of all then outstanding shares of the corporation
entitled to vote, voting together as a single class, unless such change shall
have been approved by a majority of the entire Board of Directors. If such
change shall not have been so approved, the number of directors shall remain the
same. The directors shall be divided into three classes, designated Class I,
Class II and Class III. Each class shall consist, as nearly as may be possible,
of one-third of the total number of directors constituting the entire Board of
Directors.
At the 1993 regular meeting of shareholders, Class I directors shall
be elected for a one-year term, Class II directors for a two-year term and Class
III directors for a three-year term. At each succeeding regular meeting of
shareholders beginning in 1994, successors to the class of directors whose term
expires at that regular meeting shall be elected for a three-year term. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional director of any class elected to
fill a vacancy resulting from an increase in such class shall hold office for a
term that shall coincide with the remaining term of that class. In no case will
a decrease in the number of directors shorten the term of any incumbent
director. A director shall hold office until the regular meeting at which the
director's
<PAGE>
term expires and until a successor shall be elected and qualify, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office. Removal of a director from office (including a director named by
the Board of Directors to fill a vacancy or newly created directorship), with or
without cause, shall require the affirmative vote of not less than seventy-five
percent (75%) of the voting power of all then outstanding shares of the
corporation entitled to vote, voting together as a single class. Any vacancy on
the Board of Directors that results from an increase in the number of directors
shall be filled by a majority of the Board of Directors then in office, and any
other vacancy occurring in the Board of Directors shall be filled by a majority
of the directors then in office, although less than a quorum, or by a sole
remaining director. Any director elected to fill a vacancy not resulting from
an increase in the number of directors shall have the same remaining term as
that of such director's predecessor.
Notwithstanding the foregoing, whenever the holders of any one or more
classes of preferred or preference stock issued by the corporation shall have
the right, voting separately by class or series, to elect directors at a regular
or special meeting of shareholders, the election, term of office, filling of
vacancies and other feature of such directorships shall be governed by or
pursuant to the applicable terms of the certificate of designation or other
instrument creating such class or series of preferred stock, and such directors
so elected shall not be divided into classes pursuant to this Article 8 unless
expressly provided by such terms.
Only such persons who are nominated in accordance with the procedures
set forth in this Article 8 shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of shareholders (a) by or at the direction of the Board
of Directors or (b) by any shareholder of the corporation entitled to vote for
the election of Directors at the meeting who complies with the notice procedures
set forth in this Article 8. Nominations by shareholders shall be made pursuant
to timely notice in writing to the Secretary of the corporation. To be timely,
a shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation not less than 50 days nor more
than 90 days prior to the meeting; provided, however, that in the event that
less than 60 days' notice or prior public disclosure of the date of the meeting
is given or made to shareholders, notice by the shareholder to be timely must be
so received not later than the close of business on the 10th day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. Such shareholder's notice shall set forth (a) as to each
person whom the shareholder proposes to nominate for election or re-election as
a Director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of Directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to being named
in the proxy statement as a nominee and to serving as a Director if elected);
and (b) as to the shareholder giving the notice, (i) the name and address of
such shareholder as they appear on the corporation's books, and (ii) the class
and number of shares of the corporation which are beneficially owned by such
shareholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a Director shall furnish to the Secretary
of the corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a Director of the corporation unless nominated in accordance
with the
2
<PAGE>
procedures set forth in this Article 8. The Chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed in this Article 8 and, if
the Chairman should so determine, the Chairman shall so declare to the meeting
and the defective nomination shall be disregarded.
At any regular or special meeting of the shareholders, only such
business shall be conducted as shall have been brought before the meeting (a) by
or at the direction of the Board of Directors or (b) by any shareholder of the
corporation who complies with the notice procedures set forth in this Article 8.
For business to be properly brought before any regular or special meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than 50 days nor (except for shareholder proposals subject
to Rule 14a-8(a)(3)(i) of the Securities Exchange Act of 1934, as amended) more
than 90 days prior to the meeting, provided, however, that in the event that
less than 60 days' notice or prior public disclosure of the date of the meeting
is given or made to the shareholders, notice by the shareholder to be timely
must be received not later than the close of business on the 10th day following
the day on which such notice of the date of the regular or special meeting was
mailed or such public disclosure was made. A shareholder's notice to the
Secretary shall set forth as to each matter the shareholder proposes to bring
before the regular or special meeting (a) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting, (b) the name and address, as they appear on the
corporation's books, of the shareholder proposing such business, (c) the class
and number of shares of the corporation which are beneficially owned by the
shareholder and (d) any material interest of the shareholder in such business.
Notwithstanding anything in the corporation's By-Laws to the contrary, no
business shall be conducted at any regular or special meeting except in
accordance with the procedures set forth in this Article 8. The Chairman of the
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Article 8 and, if the Chairman should so determine, the
Chairman shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
Notwithstanding any other provisions of these Articles of
Incorporation (and notwithstanding the fact that a lesser percentage or separate
class vote may be specified by law or these Articles of Incorporation), the
affirmative vote of the holders of not less than seventy-five percent (75%) of
the voting power of all then outstanding shares of the corporation entitled to
vote, voting together as a single class, shall be required to amend or repeal,
or adopt any provisions inconsistent with, this Article 8."
3
<PAGE>
IN WITNESS WHEREOF, I have subscribed my name this 30th day of
November, 1993.
/s/ Franklin L. Kuhar
---------------------------------------------
Frankin L. Kuhar, Secretary
4
<PAGE>
ARTICLES OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
EDUCATION ALTERNATIVES, INC.
The undersigned, John T. Golle, Chief Executive Officer of Education
Alternatives, Inc., a Minnesota corporation, (the "Company"), hereby certifies
that:
(i) The name of the Company is Education Alternatives, Inc.
(ii) Article I of the Company's Restated Articles of Incorporation has been
amended to read in its entirety as follows:
"ARTICLE I
The name of the corporation is The TesseracT Group, Inc."
(iii) The foregoing amendment has been adopted pursuant to Chapter 302A of
the Minnesota Statutes.
IN WITNESS WHEREOF, I have subscribed my name this 18th day of December,
1997.
/s/ John T. Golle
----------------------------------------
John T. Golle, Chief Executive Officer
<PAGE>
STATE OF MINNESOTA #5
SECRETARY OF STATE
NOTICE OF CHANGE OF REGISTERED OFFICE/
REGISTERED AGENT
Please read the instructions on the back before completing this form.
1. Corporate Name:
The Tesseract Group, Inc.
--------------------------------------------------------------------------
2. Registered Office Address (No. & Street): List a complete street address
or rural route and rural route box number. A POST OFFICE BOX IS NOT
ACCEPTABLE.
3800 West 80th Street, Suite 1400 Minneapolis MN 55431
--------------------------------------------------------------------------
Street City State Zip Code
3. Registered Agent (Registered agents are required for foreign corporations
but optional for MINNESOTA corporations):
None
--------------------------------------------------------------------------
If you do not wish to designate an agent, you must list "NONE" in this box.
DO NOT LIST THE CORPORATE NAME.
In compliance with MINNESOTA STATUTES, SECTION 302A.123, 303.10, 308A.025,
317A.123 or 322B.135 I certify that the above listed company has resolved to
change the company's registered office and/or agent as listed above.
I certify that I am authorized to execute this certificate and I further certify
that I understand that by signing this certificate I am subject to the penalties
of perjury as set forth in MINNESOTA STATUTES SECTION 609.48 as if I had signed
this certificate under oath.
/s/ Gale R. Mellum, Secretary
- -----------------------------------------------
Signature of Authorized Person
Name and Telephone Number of a Contact Person: Amy M. Greene (612) 336-3526
----------------------------------
PLEASE PRINT LEGIBLY
- --------------------------------------------------------------------------------
Office Use Only
Filing Fee: Minnesota Corporations,
Cooperatives and Limited
Liability Companies: $35.00.
Non-Minnesota Corporations:
$50.00.
Make checks payable to
Secretary of State
Return to: Minnesota Secretary of State
180 State Office Bldg.
100 Constitution Ave.
St. Paul, MN 55155-1299
(612) 296-2803
<PAGE>
COMMON STOCK COMMON STOCK
NUMBER SHARES
[GRAPHIC]
THE TESSERACT GROUP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
SEE REVERSE FOR CERTAIN DEFINITIONS
---------------------------------------
CUSIP 881612 10 5
---------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
SHARES OF FULLY PAID AND NONASSESSABLE COMMON STOCK, PAR VALUE $.01 PER
SHARE, OF
------------- -------------
- --------------------------THE TESSERACT GROUP, INC.----------------------------
------------- -------------
TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF
IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED
BY THE TRANSFER AGENT & REGISTRAR.
WITNESS THE FACSIMILE SIGNATURES OF THE CORPORATION'S DULY AUTHORIZED
OFFICERS.
DATED:
/s/ Gerald A. Haugen /s/ John T. Golle
Secretary Chairman and CEO
Countersigned and Registered:
Norwest Bank Minnesota, National Association
(Minneapolis, Minnesota) Transfer Agent and Registrar
By
[STAMP]
Authorized Signature
<PAGE>
NOTICE
THE TESSERACT GROUP, INC. WILL FURNISH WITHOUT CHARGE TO EACH
SHAREHOLDER WHO SO REQUESTS A FULL STATEMENT OF THE DESIGNATIONS,
PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OR
SERIES AUTHORIZED TO BE ISSUED, SO FAR AS THEY HAVE BEEN DETERMINED, AND A
STATEMENT OF THE AUTHORITY OF THE BOARD OF DIRECTORS OF THE TESSERACT GROUP,
INC. TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT CLASSES
OR SERIES OF CAPITAL STOCK.
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
(Cust) (Minor)
TEN ENT -- as tenants by the entireties under Uniform Transfers to Minors
JT TEN -- as joint tenants with right of Act
survivorship and not as tenants ----------------------------
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 SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
________________________________________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________SHARES
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT ______________________________________
ATTORNEY 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 TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED BY:
This Certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement between The TesseracT
Group, Inc. and Norwest Bank Minnesota National Association, dated as of
September 8, 1993 (the "Rights Agreement"), the terms of which (including
restrictions on the transfer of such Rights) are hereby incorporated herein
by reference and a copy of which is on file with the Secretary at the
principal executive offices of the Company. Under certain circumstances, as
set forth in the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. The Company
will mail to the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor to its Secretary
from such holder. Under certain circumstances, as set forth in the Rights
Agreement, Rights that are or were acquired or beneficially owned by an
Acquiring Person or any Associate or Affiliate thereof (as such terms are
defined in the Rights Agreement), may become null and void.
<PAGE>
LEASE
DATED JUNE 9, 1998
BETWEEN
EDUCORP PROPERTIES, INC., as Lessor
and
THE TESSERACT GROUP, INC., as Lessee
<PAGE>
TABLE OF CONTENTS
ARTICLE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Leased Property . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3.1 Lessor's Acquisition of the Leased Property . . . . . . . 2
1.3.2 Cross-Default with Related Leases . . . . . . . . . . . . 2
1.3.3 Security Documents . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1.1 Minimum Rent . . . . . . . . . . . . . . . . . . . . . . . 7
3.1.2 Pre-Payment of Minimum Rent . . . . . . . . . . . . . . . 8
3.2 Annual Escalation of Minimum Rent . . . . . . . . . . . . . . . . 8
3.3 Additional Charges . . . . . . . . . . . . . . . . . . . . . . . 9
3.4 Net Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.5 Late Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.1 Payment of Impositions . . . . . . . . . . . . . . . . . . . . . 10
4.2 Notice of Impositions . . . . . . . . . . . . . . . . . . . . . . 11
4.3 Utility Charges . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.4 Insurance Premiums . . . . . . . . . . . . . . . . . . . . . . . 11
4.5 Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.6 Pre-Payment of Impositions and Insurance Premiums . . . . . . . . 11
ARTICLE V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 No Termination, Abatement, etc . . . . . . . . . . . . . . . . . 12
5.2 Abatement Procedures . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.1 Ownership of the Leased Property . . . . . . . . . . . . . . . . 13
6.2 Lessee's Personal Property . . . . . . . . . . . . . . . . . . . 13
6.3 Consumable Inventory . . . . . . . . . . . . . . . . . . . . . . 13
6.4 Lessor's Purchase Option . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.1 Condition of Leased Property . . . . . . . . . . . . . . . . . . 15
7.2 Use of the Leased Property . . . . . . . . . . . . . . . . . . . 15
7.3 Radius Restriction . . . . . . . . . . . . . . . . . . . . . . . 16
i
<PAGE>
ARTICLE VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.1 Compliance with Legal and Insurance Requirements,
Instruments, etc. . . . . . . . . . . . . . . . . . . . . . . . . 17
8.2 Legal Requirement Covenants . . . . . . . . . . . . . . . . . . . 17
ARTICLE IX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.1 Maintenance and Repair . . . . . . . . . . . . . . . . . . . . . 18
9.2 Expenditures to Comply with Law . . . . . . . . . . . . . . . . . 19
9.3 Encroachments, Restrictions, etc. . . . . . . . . . . . . . . . . 19
ARTICLE X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
10.1 Lessee's Obligations for Hazardous Materials . . . . . . . . . . 20
10.2 Definition of Hazardous Materials . . . . . . . . . . . . . . . . 20
ARTICLE XI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
11.1 No Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE XII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
12. Permitted Contests . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE XIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
13.1 General Insurance Requirements . . . . . . . . . . . . . . . . . 22
13.2 Replacement Cost . . . . . . . . . . . . . . . . . . . . . . . . 23
13.3 Additional Insurance . . . . . . . . . . . . . . . . . . . . . . 23
13.4 Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . 23
13.5 Form Satisfactory, etc. . . . . . . . . . . . . . . . . . . . . . 23
13.6 Increase in Limits . . . . . . . . . . . . . . . . . . . . . . . 24
13.7 Blanket Policy . . . . . . . . . . . . . . . . . . . . . . . . . 24
13.8 No Separate Insurance . . . . . . . . . . . . . . . . . . . . . . 24
13.9 Continuous Coverage . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE XIV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
14.1 Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . 24
14.2 Reconstruction in the Event of Damage or Destruction Covered
by Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . 25
14.3 Reconstruction in the Event of Damage or Destruction Not
Covered by Insurance . . . . . . . . . . . . . . . . . . . . . . 25
14.4 Lessee's Personal Property . . . . . . . . . . . . . . . . . . . 25
14.5 Restoration of Lessee's Property . . . . . . . . . . . . . . . . 26
14.6 No Abatement of Rent . . . . . . . . . . . . . . . . . . . . . . 26
14.7 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE XV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
15. Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . 26
15.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
15.2 Parties' Rights and Obligations . . . . . . . . . . . . . . . . . 26
15.3 Total Condemnation . . . . . . . . . . . . . . . . . . . . . . . 26
ii
<PAGE>
15.4 Allocation of Portion of Award . . . . . . . . . . . . . . . . . 27
15.5 Partial Taking . . . . . . . . . . . . . . . . . . . . . . . . . 27
15.6 Temporary Taking . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE XVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
16.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . 28
16.2 Certain Remedies . . . . . . . . . . . . . . . . . . . . . . . . 30
16.3 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
16.4 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
16.5 Application of Funds . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE XVII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
17. Lessor's Right to Cure Lessee's Default . . . . . . . . . . . . . 32
ARTICLE XVIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
18.1 Options to Extend . . . . . . . . . . . . . . . . . . . . . . . . 32
18.2 Minimum Rent During Extended Terms . . . . . . . . . . . . . . . 33
ARTICLE XIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
19. Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE XX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
20. Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE XXI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
21. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE XXII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
22. Subletting and Assignment . . . . . . . . . . . . . . . . . . . . 36
22.1 Attornment . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
22.2 Sublease Limitation . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE XXIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
23. Officer's Certificates and Financial Statements . . . . . . . . . 37
ARTICLE XXIV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
24. Lessor's Right of Entry . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE XXV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
25.1 Assignment of Intangibles . . . . . . . . . . . . . . . . . . . . 38
25.2 Adjustments and Prorations . . . . . . . . . . . . . . . . . . . 39
25.3 Transfer of Operations . . . . . . . . . . . . . . . . . . . . . 40
25.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 41
25.5 No Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE XXVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
iii
<PAGE>
26. No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE XXVII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
27. Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE XXVIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
28. Acceptance of Surrender . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE XXIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
29. No Merger of Title . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE XXX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
30. Conveyance by Lessor . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE XXXI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
31. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE XXXII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
32. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE XXXIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
33.1 Lessor May Grant Liens . . . . . . . . . . . . . . . . . . . . . 44
33.2 Lessee's Right to Cure . . . . . . . . . . . . . . . . . . . . . 44
33.3 Breach by Lessor . . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE XXXIV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
34. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . 45
34.1 Survival of Obligations . . . . . . . . . . . . . . . . . . . . . 45
34.2 Late Charges; Interest . . . . . . . . . . . . . . . . . . . . . 45
34.3 Limits of Lessor's Liability . . . . . . . . . . . . . . . . . . 45
34.4 Prohibited Transactions . . . . . . . . . . . . . . . . . . . . . 45
34.5 Addendum, Amendments and Exhibits . . . . . . . . . . . . . . . . 46
34.6 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
34.7 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
34.8 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
34.9 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
34.10 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . 46
34.11 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . 46
34.12 Recordation . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
34.13 Prior and Future Agreements . . . . . . . . . . . . . . . . . . . 46
34.14 Partial Invalidity. . . . . . . . . . . . . . . . . . . . . . . . 46
34.15 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . 47
34.16 Authority of Lessor and Lessee. . . . . . . . . . . . . . . . . . 47
34.17 Relationship of the Parties . . . . . . . . . . . . . . . . . . . 47
34.18 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 47
34.19 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
iv
<PAGE>
LEASE
THIS LEASE (this "Lease") is made as of the 9th day of June, 1998, by and
between EDUCORP PROPERTIES, INC., a Nevada corporation, herein called "Lessor",
and THE TESSERACT GROUP, INC., a Minnesota corporation, herein called "Lessee",
subject to the terms, conditions and contingencies set forth below.
ARTICLE I
1.1 LEASED PROPERTY. Upon and subject to the terms and conditions
hereinafter set forth, Lessor leases to Lessee, and Lessee rents and hires from
Lessor all of the following (the "Leased Property"):
(i) The real property situated in the City of Eagan, County
of Dakota, State of Minnesota and more particularly described in EXHIBIT "A"
attached hereto (the "Land");
(ii) All buildings, structures, Fixtures (as hereinafter
defined) 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");
(iii) All easements, rights and appurtenances relating to the
Land and the Leased Improvements;
(iv) All permanently affixed equipment, machinery, fixtures,
and other items of real and/or personal property, including all components
thereof, 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 greatest extent permitted by the law,
are hereby deemed by the parties hereto to constitute real estate, together with
all replacements, modifications, alterations and additions thereto, to the
extent acquired by Lessor pursuant to the Purchase Agreement (collectively the
"Fixtures"); and
(v) All warranties, indemnities, guaranties or other
contract rights or interests relating to the Leased Improvements, to the extent
acquired by Lessor pursuant to the Purchase Agreement.
The Leased Property includes that certain educational facility
commonly known as "The Eagan School" situated on the Land. Notwithstanding the
foregoing, the Leased Property shall not include any property not acquired by
Lessor pursuant to the Purchase
1
<PAGE>
Agreement. The Leased Property is demised subject to all covenants,
conditions, restrictions, easements, and other matters of record, and all
other matters that affect title, zoning and any other matters set forth in
that certain Title Policy issued by Chicago Title Company concurrently with
Lessor's purchase of the Leased Property and all matters disclosed in the
ALTA survey obtained in connection with such title insurance (collectively
the "Permitted Title Matters").
1.2 TERM. The initial term of the Lease (the "Initial Term")
shall be the period commencing on the closing (the "Closing") under the Purchase
Agreement (the "Commencement Date") and expiring on July 31, 2013. Promptly
after the Closing, Lessor and Lessee shall execute a memorandum setting forth
the Commencement Date. Lessee has the right to extend the term of this Lease,
at Lessee's option, as provided in Article XVIII, below. (The Initial Term plus
all validly exercised options to extend, if any, shall be referred to herein as
the "Term").
1.3 CONTINGENCIES.
1.3.1 LESSOR'S ACQUISITION OF THE LEASED PROPERTY. Lessee
acknowledges and agrees that, at the time of executing this Lease, Lessor does
not own the Leased Property, but Lessor has a right to purchase the Leased
Property pursuant to the Purchase Agreement. This Lease, and all obligations
hereunder of either party, are contingent upon Lessor's acquisition of the fee
simple interest in the Leased Property. Therefore, if Lessor has not acquired
fee simple title to the Leased Property on or before June 30, 1998, this Lease
shall be null and void and of no force or effect whatsoever, and both Lessor and
Lessee shall be relieved of all responsibility under this Lease.
1.3.2 CROSS-DEFAULT WITH RELATED LEASES. Lessor and
Lessee acknowledge and agree that it is a material inducement to Lessor's
willingness to enter into this Lease that this Lease is cross-defaulted with
all of the Related Leases (defined below), and that all of the Related Leases
are cross-defaulted with this Lease. Further, it is the parties' intention
that this Lease be, and it hereby is, cross-defaulted with all of the Related
Leases, and that all of the Related Leases be cross-defaulted with this
Lease, notwithstanding the fact that certain of the Related Leases may not
have been entered into as of the date of this Lease. Accordingly, at the
request of Lessor, Lessee shall promptly execute any amendments or other
documents necessary or appropriate to amend this Lease (and/or the Related
Leases) or otherwise to confirm that this Lease is cross-defaulted with all
of the Related Leases, and that all of the Related Leases are cross-defaulted
with this Lease.
1.3.3 SECURITY DOCUMENTS. Lessee acknowledges and agrees
that Lessor entered into this Lease, and agreed to the amount of Minimum Rent
payable hereunder, subject to the following conditions: (a) that, concurrently
with the execution of this Lease, and as security for Lessee's performance of
its covenants and obligations under this Lease, Lessee will be executing and
delivering to Lessor the Pledge Agreement (defined below) and the Security
Agreement (defined below) (collectively, the "Security Documents"); and (b)
effective upon execution of this Lease, and at all times during the Term hereof,
Lessor will have a valid, perfected and first-priority security interest in all
tangible and intangible collateral pledged or otherwise assigned to Lessor
pursuant to the Security Documents (collectively, the "Collateral").
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Accordingly, it shall be an "Event of Default" under this Lease if, for any
reason whatsoever, Lessee shall fail to execute and deliver the Security
Documents as and when provided hereunder, Lessor shall fail to have a valid,
perfected and first-priority security interest in the Collateral, and such
failure or default is not cured within three (3) Business Days after Notice
thereof from Lessor, in which event, in addition to all of Lessor's remedies
available under Articles XVI and XVII or otherwise under this Lease, in equity
or by law, Lessor may terminate this Lease by giving Lessee Notice of such
termination in which event the Term shall immediately terminate and, subject to
the provisions of Articles VI and XXV, all rights of Lessee under this Lease
shall cease.
ARTICLE II
2. DEFINITIONS. For all purposes of this Lease, except as otherwise
expressly provided, (i) the terms defined in this Article II have the meanings
assigned to them in this Article II and include the plural as well as the
singular; (ii) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles at the time applicable; and (iii) the words "herein", "hereof" and
"hereunder" and other words of similar import refer to this Lease as a whole and
not to any particular Article, Paragraph or other subdivision:
ADDITIONAL CHARGES. As defined in Article III.
AFFILIATE. When used with respect to any corporation, the term
"Affiliate" shall mean any person or entity (including any trust) which,
directly or indirectly, controls or is controlled by or is under common control
with such corporation. For the purposes of this definition, "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), as used with respect to any person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, through the ownership
of voting securities, partnership interests or other equity interests. For the
purposes of this definition, "person" shall mean any natural person, trust,
partnership, corporation, joint venture or other legal entity.
BUSINESS DAY. Each Monday, Tuesday, Wednesday, Thursday, and Friday,
which is not a day on which national banks in the State of Minnesota are
authorized or obligated, by law or executive order, to close.
C.P.I. As defined in Paragraph 3.2.
CODE. The Internal Revenue Code of 1986, as amended.
ENCUMBRANCE. As defined in Article XXXIII.
EVENT OF DEFAULT. As defined in Article XVI.
EXTENDED TERM. As defined in Article XVIII.
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FACILITY. That certain educational facility which is part of the
Leased Property, as defined in Article I, above.
FACILITY MORTGAGE. As defined in Article XIII.
FACILITY MORTGAGEE. As defined in Article XIII.
FISCAL YEAR. The twelve (12) month period from July 1 through the
following June 30.
FIXTURES. As defined in Article I.
IMPOSITIONS. Collectively, all taxes (including, without limitation,
all ad valorem, sales and use, single business, gross receipts, transaction,
privilege, rent taxes, school taxes or fees or any other taxes as the same
relate to or are imposed upon Lessee or Lessor or the business conducted upon
the Leased Property), assessments (including, without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not to be completed within the
Term), water, sewer or other rents and charges, excises, tax levies, fees
(including, without limitation, license, permit, inspection, authorization and
similar fees), and all other governmental charges, in each case whether general
or special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of the Leased Property, Lessor, or the business conducted
thereon by Lessee (including all interest and penalties thereon due to any
failure in payment by Lessee), and all increases in all the above from any cause
whatsoever, including reassessment, which at any time prior to, during or in
respect of the Term may be assessed or imposed on or in respect of or be a lien
upon (a) Lessor's interest in the Leased Property or any part thereof; (b) the
Leased Property or any part thereof, including without limitation any personal
property located thereon or used in connection therewith, or any rent therefrom
or any estate, right, title or interest therein; or (c) any occupancy,
operation, use or possession of, or sales from, or activity conducted on, or in
connection with the Leased Property or the leasing or use of the Leased Property
or any part thereof by Lessee. Without limiting the foregoing, the term
"Imposition" shall include any sales tax on rent paid under this Lease, tuition
or other amounts received with respect to services provided at or by the
Facility, depreciation recapture, any other taxes (except for the specific
exclusions stated below), fees or charges imposed by the State of Minnesota and
any potential subdivision thereof relating to the Facility or the Leased
Property, this Lease, or rents received under this Lease, whether relating to
any period prior to or after the Commencement Date. Nothing contained in this
Lease shall be construed to require Lessee to pay (1) any federal, state or
local income tax of Lessor, taxes based on outstanding corporate shares of
Lessor or Lessor's equity or capitalization, regardless of whether denominated
as an income tax, franchise tax, capital tax or otherwise; (2) any income or
capital gain tax imposed with respect to the sale, exchange or other
disposition, or operation, by Lessor of any Leased Property or the proceeds
thereof; or (3) estate, inheritance or gift taxes.
INSURANCE REQUIREMENTS. All terms of any insurance policy required by
this Lease and all requirements of the issuer of any such policy.
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LAND. As defined in Article I.
LEASE. As defined in the Preamble.
LEASE YEAR. The twelve (12) month period from September 1 to August
31 in each calendar year. In the case of the beginning of the Initial Term, the
provision "Lease Year" shall mean the period from the Commencement Date (defined
in Paragraph 1.2, above) to August 31, 1999; in the case of the end of the Term,
the provision "Lease Year" shall mean the period from the last September 1 to
occur in the Term to the date of expiration of the Lease. The Lease Year 1998
shall mean the Commencement Date through August 31, 1999; the Lease Year 1999
shall mean September 1, 1999 through August 31, 2000, and so on.
LEASED IMPROVEMENTS; LEASED PROPERTY. Each as defined in Article I.
LEGAL REQUIREMENTS. All federal, state, county, municipal, and other
governmental statutes, laws, rules, orders, regulations, ordinances, judgments,
decrees, and injunctions affecting either the Leased Property or the
construction, use or alteration thereof whether now or hereafter enacted and in
force, including any which may (i) require repairs, modifications or alterations
in or to the Leased Property; or (ii) in any way adversely affect the use and
enjoyment thereof, and all permits, licenses and authorizations and regulations
thereto, and all covenants, agreements, restrictions, and encumbrances contained
in any instruments, either of record or known to Lessee, at any time in force
affecting the Leased Property.
LESSEE. The Tesseract Group, Inc., a Minnesota corporation (and any
assignee permitted subject to the terms and conditions in this Lease).
LESSEE'S PERSONAL PROPERTY. All machinery, equipment, furniture,
furnishings, movable walls or partitions, computers, or trade fixtures or other
personal property, and consumable inventory and supplies, owned by Lessee and
used or useful in Lessee's business on the Leased Property, including without
limitation, all items of furniture, furnishings, equipment, supplies and
inventory, all computer software, databases or other intellectual property, and
any and all replacements, substitutions, additions or improvements thereto,
whether now existing or hereafter acquired, save and except those items included
in the Leased Property.
LESSOR. EduCorp Properties, Inc., a Nevada corporation, and its
successors and assigns. Unless Lessee is notified by Lessor otherwise, Lessor's
address is: 300 Esplanade Drive, Suite 1860, Oxnard, California 93030,
Attention: Pamela J. Privett, Esq.
MINIMUM RENT. As defined in Article III.
NOTICE. A notice given pursuant to Article XXXI hereof.
OFFICER'S CERTIFICATE. A certificate of Lessee signed by (i) Lessee's
Chief Executive Officer; AND (ii) Lessee's Chief Financial Officer. Any
signature required above may be substituted with a signature of another person
whose power and authority to act has been
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authorized by an appropriate corporate resolution, subject to Lessor's
approval in its sole discretion.
OTHER LEASES. Any lease now existing or hereafter entered into
between Lessor (or any of its Affiliates) and Lessee (or any of its Affiliates)
relating to any educational facility in any state of the United States,
irrespective of the terms and conditions of such lease, irrespective of the date
such lease is (or was) entered into, irrespective of the total number of leases
of educational facilities by and between Lessor and Lessee, and irrespective of
the location of any such educational facilities.
OVERDUE RATE. On any date, a rate equal to the Prime Rate (defined
below), plus two percent (2%); provided, however, that it is the intent of
Lessor and Lessee that the Overdue Rate (and all other interest rates provided
for hereunder) be in strict compliance with applicable usury laws of the State
of Minnesota, and that in the event the Overdue Rate (or other interest rate
provided for hereunder) shall be deemed to exceed that permitted to be charged
by the laws of the State of Minnesota, any and all excess sums collected by
Lessor shall be credited against the Rent payable under this Lease or if there
is no Rent due, promptly refunded to Lessee.
PAYMENT DATE. Any due date for the payment of the installments of
Minimum Rent or any other payments required under this Lease.
PLEDGE AGREEMENT. As defined in Paragraph 3.1.2, and in the form
attached hereto as Exhibit "C."
PRIMARY INTENDED USE. As defined in Article VII.
PRIME RATE. On any date, a rate equal to the annual rate on such date
announced by Citibank, N.A. to be its prime rate for 90-day unsecured loans to
its corporate borrowers of the highest credit standing or, if not available,
such other rate as may be published by The Wall Street Journal as the prime rate
in its listing of "Money Rates."
PURCHASE AGREEMENT. That certain Agreement of Purchase and Sale and
Joint Escrow Instructions, dated as of even date herewith, between Lessee as
"Seller" and Lessor as "Buyer" providing for Lessor's acquisition of all of
Lessee's interest in and to the Leased Property.
RELATED LEASES. One or more certain leases now existing or hereafter
entered into between Lessor (or any of its Affiliates) and Lessee (or any of its
Affiliates) relating to educational facilities with the following names in the
following locations: (i) "Paradise Valley Montessori School" located at 16210
N. 40th Street and 3916 E. Paradise Lane, in the City of Phoenix, Arizona; (ii)
"Paradise Valley School," located at 4800 East Doubletree Ranch Road, Paradise
Valley, Arizona 85253; (iii) "Ahwatukee TesseracT School" located at 4515 E.
Muirwood Drive, in the City of Phoenix, Arizona; and (iv) "North Scottsdale
Tesseract School" located at 9701 East Bell Road, in the City of Scottsdale,
Arizona.
RENT. Any and all monetary obligations of Lessee owing under this
Lease.
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SECURITY AGREEMENT. As defined in Paragraph 6.4, and in the form
attached hereto as Exhibit "D."
SECURITY DOCUMENTS. As defined in Paragraph 1.3.2.
SUBSIDIARIES. Corporations, of which either Lessee or Lessor owns,
directly or indirectly, more than 50% of the voting stock (individually, a
"Subsidiary").
TERM. Collectively, the Initial Term plus any Extended Terms, as the
context may require, unless earlier terminated pursuant to the provisions
hereof.
UNSUITABLE FOR ITS PRIMARY INTENDED USE. A state of condition of the
Facility such that by reason of damage or destruction, or a partial taking by
Condemnation, the number of students that can be accommodated at the Facility is
reduced by fifty percent (50%) or more.
UNAVOIDABLE DELAYS. Delays due to strikes, lock-outs, inability to
procure materials, power failure, acts of God, governmental restrictions,
enemy action, civil commotion, fire, unavoidable casualty or other causes
beyond the control of the party responsible for performing an obligation
hereunder; provided that lack of funds shall not be deemed a cause beyond the
control of either party hereto unless such lack of funds available to Lessor
results from Lessee's failure to perform any of its obligations under this
Lease.
The above does not include all the definitions to be used in this
Lease. Various definitions of other terms are included in the other Articles of
this Lease.
ARTICLE III
3.1 RENT.
3.1.1 MINIMUM RENT. Lessee will pay to Lessor in lawful
money of the United States of America which shall be legal tender for the
payment of public and private debts, at Lessor's address set forth above or at
such other place or to such other person, firms or corporations as Lessor from
time-to-time may designate in a Notice, Minimum Rent (as defined below), during
the Term, as follows:
(a) INITIAL TERM. The "Minimum Rent" is the annual
sum of $378,750.00. The Minimum Rent shall be subject to increase as and when
provided below in this Article III. The Minimum Rent shall be paid in advance
in equal, consecutive monthly installments on the first (1st) day of each
calendar month of the Term (each, a "Minimum Rent Payment Date"); provided,
however, that if the Commencement Date occurs on a day which is not the first
(1st) day of a calendar month, then the first Minimum Rent Payment Date shall be
the Commencement Date, in which event a prorated amount of Minimum Rent shall be
payable on the Commencement Date based on the number of days from and including
the Commencement Date to the first Minimum Rent Payment Date following the
Commencement Date. Minimum Rent shall be prorated for any partial month at the
beginning or end of the Term; and
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(b) EXTENDED TERMS. The Minimum Rent during the
Extended Terms shall be as stated in Article XVIII, below.
3.1.2 PRE-PAYMENT OF MINIMUM RENT. Notwithstanding the
provisions of Paragraph 3.1.1, or any other provision of this Lease to the
contrary, Lessee agrees that as additional security for Lessee's performance
under this Article III, on or prior to the commencement of each Lease Year
during the Term (the Initial Term as well as any Extended Terms) Lessee shall
deposit into an interest-bearing deposit account ("Deposit Account") with a
depository institution entirely acceptable to Lessor ("Depository
Institution") an amount equal to all Minimum Rent payable up to the first day
of the succeeding Lease Year; provided, however, that if the Commencement
Date of this Lease is on a day prior to September 1, 1998, Lessee shall make
the following deposits for the Lease Year 1998: (a) on or prior to the
Commencement Date, an amount equal to the annual Minimum Rent payable under
this Lease (to wit, twelve (12) months' of Minimum Rent); and (b) on or prior
to September 1, 1998, an amount sufficient to pay all Minimum Rent up to the
first day of Lease Year 1999 (to wit, September 1, 1999). Concurrently with
each such deposit into the Deposit Account, Lessee shall give Lessor written
Notice thereof, specifying the amount of such deposit and including a
reasonably detailed breakdown of such amount. Pursuant to that certain
Collateral Pledge Agreement ("Pledge Agreement"), dated as of even date
herewith, by Lessee for the benefit of Lessor, in the form attached hereto as
Exhibit "C," Lessee shall grant to Lessor a security interest in, among other
things, all funds now or hereafter deposited in the Deposit Account pursuant
to this Paragraph 3.1.2, and such funds shall be pledged by Lessee to Lessor
for the purpose of securing Lessee's payment of Minimum Rent and other
amounts payable by Lessee under this Article III. The Pledge Agreement shall
provide that Lessor shall be entitled to disbursements from the Deposit
Account on each Minimum Rent Payment Date in an amount equal to one-twelfth
of the annual Minimum Rent owing under this Lease, without the need for
further written authorization from Lessee, and without demand, abatement,
setoff or notice, and otherwise upon and subject to the terms and conditions
set forth under the Pledge Agreement. If at any time the funds deposited in
the Deposit Account are or will be insufficient to pay the Minimum Rent
payable by Lessee for the then applicable Lease Year, Lessor may notify
Lessee and Lessee shall immediately deposit an amount equal to the deficiency
in the Deposit Account. Upon the expiration of the Term of this Lease, and
provided that Lessee is not in default under this Lease, and that no Rent or
other payments are due to Lessor hereunder, Lessor shall cause all funds held
in the Deposit Account to be refunded to Lessee. Failure to make any
deposits required hereunder as and when due shall be a default under this
Lease.
3.2 ANNUAL ESCALATION OF MINIMUM RENT. Commencing on the first
day of Lease Year 1999 (to wit, September 1, 1999), and continuing on the first
day of each subsequent Lease Year during the Term (the Initial Term as well as
any Extended Terms) (each, an "Escalation Date"), the Minimum Rent (irrespective
of any prorations made pursuant to Paragraph 3.1(a) of this Lease) shall
increase by an amount equal to the Minimum Rent for the immediately preceding
twelve (12) month period multiplied by an amount ("Annual Multiplier") equal to
one hundred fifty percent (150%) of the following fraction: (i) the numerator
of which shall be the C.P.I. (defined below) for the second month preceding the
month in which such Escalation Date occurs (for example, if the Escalation Date
is September 1, 1999, then the C.P.I. from July 1999 shall be used); and (ii)
the denominator of which shall be the C.P.I. for
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the second month preceding the month in which the prior year's Escalation
Date occurred (or, in the case of the first Escalation Date, the C.P.I. for
the month of July, 1998); PROVIDED, HOWEVER, that the Annual Multiplier shall
not ever exceed two percent (2%) per year, nor shall it ever result in a
decrease in the Minimum Rent payable hereunder. "C.P.I." shall mean and
refer to the Consumer Price Index published as the "CPI-U" index by the
Bureau of Labor Statistics of the Department of Labor, U.S. Cities Average,
All Items (1982-84 = 100) in the manner calculated as of the date of this
Lease; provided that if compilation of the C.P.I. is discontinued or
transferred to any other governmental department or bureau, then the index
most nearly the same as the C.P.I. shall be used.
3.3 ADDITIONAL CHARGES. In addition to the Minimum Rent, (1)
Lessee will also pay and discharge as and when due and payable all other
amounts, liabilities, obligations and Impositions which Lessee assumes or
agrees to pay under this Lease, and (2) in the event of any failure on the
part of Lessee to pay any of those items referred to in the immediately
preceding clause (1) above, Lessee will also promptly pay and discharge every
fine, penalty, interest and cost which may be added for non-payment or late
payment of such items (the items referred to in clauses (1) and (2) above
being referred to herein collectively as the "Additional Charges"), and
Lessor shall have all legal, equitable and contractual rights, powers and
remedies provided either in this Lease or by statute or otherwise in the case
of non-payment of the Additional Charges. If any elements of Additional
Charges shall not be paid within seven (7) Business Days after its due date
and Lessor pays any such amount (which Lessor shall have the right, but not
the obligation, to do), then, in addition to Lessor's other rights and
remedies, Lessee will pay Lessor on demand, as Additional Charges, interest
on such unpaid Additional Charges computed at the Overdue Rate from the due
date of such installment to the date of Lessee's payment thereof.
3.4 NET LEASE. Subject to the provisions of Article V, below,
without limiting any provision of this Lease, the Rent shall be paid
absolutely net to Lessor, so that this Lease shall yield to Lessor the full
amount of the installments of Minimum Rent throughout the Term, all as more
fully set forth in Articles IV, VIII, IX and XIII, and other provisions of
this Lease, so that, accordingly, Lessee shall pay all Additional Charges and
any other expenses of any kind associated with this Lease and the Leased
Property to insure that Lessor receives the Minimum Rent, net of all
expenses. Further, Lessee shall be responsible for all Additional Charges
and all other amounts due under this Lease for any period prior to the Term.
3.5 LATE CHARGE. LESSEE HEREBY ACKNOWLEDGES THAT LATE PAYMENT BY
LESSEE TO LESSOR OF RENT (INCLUDING WITHOUT LIMITATION MINIMUM RENT AND
ADDITIONAL CHARGES) WILL CAUSE LESSOR TO INCUR COSTS NOT CONTEMPLATED BY THIS
LEASE, THE EXACT AMOUNT OF WHICH WILL BE EXTREMELY DIFFICULT TO ASCERTAIN. SUCH
COSTS INCLUDE, BUT ARE NOT LIMITED TO, PROCESSING AND ACCOUNTING CHARGES.
ACCORDINGLY, IF ANY INSTALLMENT OF MINIMUM RENT OR ANY OTHER SUM DUE FROM LESSEE
SHALL NOT BE RECEIVED BY LESSOR WITHIN FIVE (5) BUSINESS DAYS AFTER SUCH AMOUNT
SHALL BE DUE, THEN WITHOUT ANY REQUIREMENT FOR NOTICE TO LESSEE, LESSEE SHALL
PAY TO LESSOR A LATE CHARGE EQUAL TO FIVE PERCENT (5%) OF SUCH OVERDUE AMOUNT.
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THE PARTIES HEREBY AGREE THAT SUCH LATE CHARGE REPRESENTS A FAIR AND REASONABLE
ESTIMATE OF THE COSTS LESSOR WILL INCUR BY REASON OF LATE PAYMENT BY LESSEE.
ACCEPTANCE OF SUCH LATE CHARGE BY LESSOR SHALL IN NO EVENT CONSTITUTE A WAIVER
OF LESSEE'S DEFAULT OR BREACH WITH RESPECT TO ANY UNPAID OVERDUE AMOUNTS, NOR
PREVENT LESSOR FROM EXERCISING ANY OF THE OTHER RIGHTS AND REMEDIES GRANTED
UNDER THIS LEASE WITH RESPECT TO ANY SUCH UNPAID OVERDUE AMOUNTS.
ARTICLE IV
4.1 PAYMENT OF IMPOSITIONS. Subject to the provisions of
Paragraph 4.6, Lessee will pay, or cause to be paid, all Impositions coming
due prior to or during the Term, or which relate to any period within the
Term or prior to the Term, before any fine, penalty, interest or cost may be
added for non-payment (or earlier if required by any taxing authority), such
payments to be made directly to the taxing authorities where feasible, and
will promptly furnish to Lessor copies of official receipts or other
satisfactory proof evidencing such payments. Lessee's obligation to pay
Impositions shall be deemed absolutely fixed upon the date such Impositions
become a lien upon the Leased Property or any part thereof. Lessee, at its
expense, shall, to the extent required or permitted by Legal Requirements,
prepare and file all tax returns and reports in respect of any Imposition as
may be required by governmental authorities. If any refund shall be due from
any taxing authority in respect of any Imposition, the same shall be paid
over to or retained by Lessee if no Event of Default shall have occurred
hereunder and be continuing, but if such Event of Default has occurred and is
continuing (I.E., it has not been cured), such refund shall be paid to Lessor
and utilized to cure any such continuing Event of Default. After fully
curing such Event of Default, any excess funds from such refund shall be paid
by Lessor to Lessee. Any such funds retained by Lessor, as provided above,
shall be applied as provided in Article XVI. Lessor and Lessee shall, upon
request of the other, provide such data as is maintained by the party to whom
the request is made with respect to the Leased Property as may be necessary
to prepare any required returns and reports. In the event governmental
authorities classify any property covered by this Lease as personal property,
Lessee shall file all personal property tax returns in such jurisdictions
where it must legally so file. Lessor, to the extent it possesses the same,
and Lessee, to the extent it possesses the same, will provide the other
party, upon request, with cost and depreciation records necessary for filing
returns for any property so classified as personal property. Where Lessor is
legally required to file personal property tax returns, Lessee will provide
to Lessor copies of assessment notices indicating a value in excess of the
reported value in sufficient time for Lessor to file a protest. Lessee may,
upon notice to Lessor, at Lessee's option and at Lessee's sole cost and
expense, protest, appeal or institute such proceedings as Lessee may deem
appropriate to effect a reduction of real estate or personal property
assessments and Lessor, at Lessee's sole cost and expense as aforesaid, shall
fully cooperate with Lessee in such protest, appeal, or other action,
provided that Lessee may not withhold payments pending such challenges except
under the conditions set forth in Article XII. Billings for reimbursement by
Lessee to Lessor of personal property taxes shall be accompanied by copies of
a bill therefor and payments thereof which identify the personal property
with respect to which such payments are made. Unless Lessee is notified by
Lessor otherwise, Lessee shall pay all Impositions directly to the
appropriate
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taxing or other authorities to which payments are due, and Lessee shall
provide Lessor written evidence and notice that all such payments have been
made. Without limiting any of the other indemnities set forth in this Lease,
Lessee hereby agrees to defend, indemnify, protect and hold harmless Lessor
in connection with any Impositions that relate to any time prior to or during
the Term, and Lessee acknowledges and agrees that it will not make claims
against, or otherwise look to, Lessor to reimburse Lessee for payments made
relating to any period prior to the Commencement Date.
4.2 NOTICE OF IMPOSITIONS. Lessor shall give prompt Notice to
Lessee for all Impositions payable by Lessee hereunder of which Lessor has
knowledge, but Lessor's failure to give any such Notice shall in no way diminish
Lessee's obligations hereunder to pay such Impositions, but such failure shall
obviate any default hereunder for a reasonable time after Lessee receives notice
(from any source) of any Imposition which it is obligated to pay. However,
notwithstanding the foregoing, it shall be Lessee's sole duty to inquire and
determine all of the Impositions for which it is liable as provided herein and
shall promptly pay such Impositions when due, and Lessor shall have no duty of
inquiry concerning Impositions.
4.3 UTILITY CHARGES. Lessee will pay or cause to be paid all
charges for electricity, power, gas, oil, water, sewer connection and all other
utilities used in or for the Leased Property during the Term.
4.4 INSURANCE PREMIUMS. Subject to the provisions of Paragraph
4.6, Lessee will pay or cause to be paid all premiums for the insurance coverage
required to be maintained pursuant to Article XIII during the Term.
4.5 PAYABLES. Lessee acknowledges and agrees that prior to the
Commencement Date, certain liabilities and other obligations were incurred
arising from the development, construction and operation of the Facility for
which Lessee is and shall remain responsible and liable and Lessor shall have no
responsibility, liability or obligation whatsoever with respect to the same.
Therefore, Lessee agrees as part of this Lease to pay all liabilities and
obligations concerning the Facility, whether arising before or after the
Commencement Date.
4.6 PRE-PAYMENT OF IMPOSITIONS AND INSURANCE PREMIUMS.
Notwithstanding the provisions of Paragraph 4.1 or 4.4, or any other provision
of this Lease to the contrary, Lessee agrees that as additional security for
Lessee's performance under this Article IV, on or prior to the commencement of
each Lease Year during the Term (the Initial Term as well as any Extended
Terms), Lessee shall pay all Impositions payable by Lessee under Paragraph 4.1
and all insurance premiums payable by Lessee under Paragraph 4.4 up to the first
day of the succeeding Lease Year, and shall furnish Lessor with evidence
satisfactory to Lessor that the same have been paid; provided, however, that (a)
to the extent that such Impositions payable by Lessee under Paragraph 4.1 cannot
be paid in full for any Lease Year for any reason outside of the control of
Lessee, then on or prior to the first day of such Lease Year, Lessee shall
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deposit into the Deposit Account an amount sufficient, as estimated by Lessor
in its reasonable discretion, to pay all such Impositions payable up to the
first day of the succeeding Lease Year, and (b) Lessee may elect not to pay
in full all insurance premiums payable by Lessee under Paragraph 4.4 through
the first day of the succeeding Lease Year, in which event Lessee shall
deposit into the Deposit Account an amount sufficient, as estimated by Lessor
in its reasonable discretion, to pay for all additional amounts necessary to
pay all such insurance premiums up to the first day of the succeeding Lease
Year. Concurrently with each such deposit into the Deposit Account, Lessee
shall give Lessor written Notice thereof, specifying the amount of such
deposit and including a reasonably detailed breakdown of such amount.
Pursuant to the Pledge Agreement, Lessee shall grant to Lessor a security
interest in, among other things, all funds now or hereafter deposited in the
Deposit Account pursuant to this Paragraph 4.6, and such funds shall be
pledged by Lessee to Lessor as security for the payment of the Impositions
payable under Paragraph 4.1 and the insurance premiums payable under
Paragraph 4.4, and as otherwise provided thereunder. The Pledge Agreement
shall provide that Lessee shall be entitled to withdraw and use funds in the
Pledge Account for payment of Impositions payable by Lessee under Paragraph
4.1 and for payment of insurance premiums payable by Lessee under Paragraph
4.4, upon and subject to the terms and conditions set forth under the Pledge
Agreement. If at any time the funds deposited in the Deposit Account are or
will be insufficient to pay the Impositions payable by Lessee under Paragraph
4.1 for the then applicable Lease Year, or to pay all insurance premiums
payable by Lessee under Paragraph 4.4 for the then applicable Lease Year,
Lessor may notify Lessee and Lessee shall immediately deposit an amount equal
to the deficiency in the Deposit Account. Upon the expiration of the Term of
this Lease, and provided that Lessee is not in default under this Lease, and
that no Rent or other payments are due to Lessor hereunder, Lessor shall
cause all funds held in the Deposit Account to be refunded to Lessee.
Failure to make any deposits required hereunder as and when due shall be a
default under this Lease.
ARTICLE V
5.1 NO TERMINATION, ABATEMENT, ETC. Subject to the provisions
of Paragraph 5.2, Lessee shall not be entitled to any abatement, deduction,
deferment or reduction of Rent, or set-off against the Rent, nor shall the
respective obligations of Lessor and Lessee be otherwise affected by reasons
of (a) any damage to, or destruction of, any Leased Property or any portion
thereof; (b) the lawful or unlawful prohibition of, or restriction upon,
Lessee's use of the Leased Property, or any portion thereof, the interference
with such use by any person, corporation, partnership or other entity, or by
reason of eviction by paramount title; (c) any claim which Lessee has or
might have against Lessor or by reason of any default or breach of any
warranty by Lessor under this Lease or any other agreement between Lessor and
Lessee, or to which Lessor and Lessee are parties; (d) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation,
dissolution, winding-up or other proceedings affecting Lessor or any assignee
or transferee of Lessor; or (e) for any other cause whether similar or
dissimilar to any of the foregoing other than a discharge of Lessee from any
such obligations as a matter of law. Lessee hereby specifically waives all
rights, arising from any occurrence whatsoever, which may now or hereafter be
conferred upon it by law to (i) modify, surrender or terminate this Lease or
quit or surrender the Leased Property or any portion thereof; or (ii) entitle
Lessee to any abatement, reduction, suspension or deferment of the Rent
payable under this Lease. The obligations of Lessor and Lessee hereunder
shall be separate and independent covenants and agreements and the Rent due
under this Lease shall continue to be payable in all events, irrespective of
Lessor's performance or non-performance under this Lease, unless the
obligations
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to pay the same shall be terminated pursuant to the express provisions of
this Lease or by termination of this Lease other than by reason of an Event
of Default.
5.2 ABATEMENT PROCEDURES. In the event Lessee is entitled to an
abatement of Minimum Rent under Article XV (by reason of any Condemnation as
provided thereunder), the Lease shall not terminate (except as provided in
Article XV) but the Minimum Rent shall be abated in proportion to the reduced
capacity of the Leased Property for the use made of the same by Lessee at the
time of the Condemnation (I.E., the reduction in the number of students the
Leased Property can accommodate under standards existing immediately prior to
the Condemnation). If Lessor and Lessee are unable to agree upon the amount
of such abatement within thirty (30) days after any partial taking as
provided under Article XV, the matter shall be submitted by either party to a
court of competent jurisdiction for resolution, but Lessee during such
resolution shall continue to perform its obligations hereunder, including,
but not limited to, payment of that portion of the Minimum Rent which is not
then in dispute.
ARTICLE VI
6.1 OWNERSHIP OF THE LEASED PROPERTY. Lessee acknowledges and
agrees that the Leased Property is the property of Lessor and that Lessee has
only the right to the exclusive possession and use of the Leased Property upon
the terms and conditions of this Lease.
6.2 LESSEE'S PERSONAL PROPERTY. Lessee may (and shall as
provided hereinbelow), at its expense, install, assemble or place on any
parcels of the Land or in any of the Leased Improvements, any items of
Lessee's Personal Property. Lessee shall provide and maintain during the
entire Term all such Lessee's Personal Property as shall be necessary in
order to operate the Facility in a manner consistent with its standard of
operation as of the commencement of this Lease, in compliance with
accreditation requirements (if the Facility has obtained accreditation), in
compliance with all other applicable Legal Requirements and Insurance
Requirements, and otherwise in accordance with customary practice in the
industry for the Primary Intended Use. On or prior to the commencement of
each Lease Year during the Term, Lessee shall provide Lessor with an updated
list identifying in reasonable detail all of Lessee's Personal Property.
Notwithstanding the foregoing, the parties acknowledge and agree that,
pursuant to that certain Security Agreement ("Security Agreement") dated as
of even date herewith, by Lessee for the benefit of Lessor, in the form
attached hereto as Exhibit "D," Lessee shall grant to Lessor a security
interest in, among other things, all of Lessee's Personal Property and all
Consumable Inventory (defined in Paragraph 6.3 below). To the extent that
Lessor elects not to purchase Lessee's Personal Property pursuant to its
Purchase Option contained in Paragraph 6.4 below, Lessee shall remove the
same upon the expiration of the Term, and Lessee shall, within twenty (20)
days following the expiration of this Lease, at its sole cost and expense,
repair any damage to the Land or the Leased Improvements occasioned by the
installation, maintenance or removal thereof, and restore the Land or Leased
Improvements to its condition immediately prior to any such installation.
6.3 CONSUMABLE INVENTORY. Lessor and Lessee acknowledge that
certain inventory, including consumables, located at the Facility as of the
Commencement Date ("Consumable Inventory") will be completely consumed or
otherwise disposed of during the
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course of Lessee's operation of the Facility. Lessee agrees that, at all
times during the Term, Lessee shall replace and restore the Consumable
Inventory in accordance with normal business practices, so that at all times
during the Term there is sufficient Consumable Inventory to fully equip the
Facility for its operation and maintenance as may be customary for
educational facilities comparable to the Leased Property.
6.4 LESSOR'S PURCHASE OPTION. Without limiting Lessor's rights
and remedies under the Security Agreement or otherwise under this Lease, and as
a material consideration to Lessor's agreement to enter into this Lease, Lessee
hereby grants to Lessor the option ("Purchase Option") to purchase Lessee's
Personal Property and Consumable Inventory, in whole or in part, which Purchase
Option may be exercised by Lessor effective as of the expiration of the Term (or
the Extended Term, as the case may be), for a purchase price ("Option Purchase
Price") equal to the lower of (a) the book value thereof, as determined in
accordance with GAAP and based upon audited financial statements, as of the time
of Lessor's exercise of its Purchase Option; and (b) the fair market value
thereof, as of the time of Lessor's exercise of its Purchase Option. In the
event Lessor desires to exercise its Purchase Option granted under this
Paragraph 6.4, Lessor shall give Lessee written Notice ("Notice of Exercise")
not less than thirty (30) days prior to the expiration of the Term, which Notice
of Exercise shall identify with reasonable specificity all items of Lessee's
Personal Property and Consumable Inventory which Lessor desires to purchase
(collectively, the "Purchase Option Property") and Lessor's estimation of the
Option Purchase Price applicable thereto. Upon the termination of this Lease,
Lessee shall transfer and convey to Lessor all Purchase Option Property, by
execution and delivery of a bill of sale or other instrument acceptable to
Lessor, and, subject to the conditions set forth below, Lessor shall pay to
Lessee the Option Purchase Price. Lessor shall have the right to inspect the
Lessee's Personal Property and Consumable Inventory, and Lessee's books and
records concerning the same, for any purpose in connection with preparation of
the Notice of Exercise or otherwise in connection with Lessee's Purchase Option
granted hereunder, on at least one Business Day's prior notice during usual
business hours, and Lessee shall cooperate with Lessor in connection therewith.
Lessee shall have five (5) days after receipt of Lessor's Notice of Exercise
within which to give Lessor written notice of its objection to any items or
information, including without limitation Lessor's estimate of the Option
Purchase Price, contained on Lessor's Notice of Exercise. In the event that
Lessee notifies Lessor of any objection within such five (5) day period, and the
parties fail to resolve any disagreement regarding the Notice of Exercise by the
date of termination of this Lease, the conveyance of the Purchase Option
Property shall occur upon expiration of the Term as contemplated hereunder for a
purchase price equal to the book value thereof, as determined in accordance with
GAAP and based upon audited financial statements, and the parties shall
thereafter submit any disputes to an auctioneer or state certified party with at
least five years experience appraising personal property for resolution. Any
overpayment or deficiency between the book value and the Option Purchase Price
shall be paid to the party to whom the same is owing within thirty (30) days
after determination thereof. Without limiting the foregoing, Lessee agrees to
perform such other acts, and to execute, acknowledge and/or deliver subsequent
to the expiration or earlier termination of the Term, all such instruments,
documents and materials, as Lessor may reasonably request in order to effectuate
Lessor's exercise of the Purchase Option contemplated hereunder.
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ARTICLE VII
7.1 CONDITION OF LEASED PROPERTY. Lessee acknowledges receipt
and delivery of possession of the Leased Property and further acknowledges
that Lessee has examined and otherwise has knowledge of the condition of the
Leased Property prior to the execution and delivery of this Lease and has
found the same to be in good order and repair and satisfactory for it
purposes hereunder. Lessee represents and warrants that the Lessee's Personal
Property includes all equipment and property required under applicable
federal and state law to operate the Facility. Lessee is leasing the Leased
Property "AS-IS" in its present condition. Lessee waives any claim or action
against Lessor in respect of the condition of the Leased Property. LESSOR
MAKES NO WARRANTY OR REPRESENTATIONS, EXPRESS OR IMPLIED, IN RESPECT OF THE
LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN
OR CONDITION FOR THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT
BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE
ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS
SATISFACTORY TO IT. WITHOUT LIMITING THE FOREGOING, IT SHALL BE LESSEE'S
RESPONSIBILITY TO DETERMINE THE AMOUNT OF REIMBURSEMENT AND OTHER PAYMENTS
THAT IT MAY BE ENTITLED RECEIVE FROM THE FEDERAL, STATE OR LOCAL GOVERNMENTS
AND LESSEE'S OBLIGATIONS UNDER THIS LEASE SHALL NOT BE MODIFIED, CHANGED OR
OTHERWISE BE REDUCED IN THE EVENT THAT LESSEE HAS INCORRECTLY ANALYZED THE
AMOUNTS TO BE PAID TO LESSEE BY ANY GOVERNMENT OR AGENCY THEREOF.
7.2 USE OF THE LEASED PROPERTY.
7.2.1 Lessee covenants that it will obtain and, at all
times during the Term, maintain all licenses, permits and approvals necessary
or desirable for the use and operation of the Leased Property and the
Facility under applicable federal, state and local law, and to use reasonable
best efforts to obtain and thereafter maintain the full accreditation of the
Facility. Lessee shall provide to Lessor, at Lessor's request a copy of any
report or survey conducted by any federal, state or local government entity
regarding the Facility, and any other such information or documents
concerning the operation of the Facility.
7.2.2 After the Commencement Date and during the entire
Term, Lessee shall use or cause to be used the Leased Property as an
educational facility having all licenses, permits and approvals necessary to
operate a private pre-school and elementary/middle school (serving
kindergarten and certain higher grades) in the State of Minnesota and uses
incidental to the foregoing (the particular such use to which the Leased
Property is put at any particular time is herein referred to as the "Primary
Intended Use"). Lessee shall not use the Leased Property or any portion
thereof for any other use without the prior written consent of Lessor, which
consent may be withheld in Lessor's sole and absolute discretion. No use
shall be made of the Leased Property, and no acts shall be done, which will
cause the cancellation of any insurance policy, or permit to be kept, used or
sold in or about the Leased Property any article which may be prohibited by
law or by the standard form of fire insurance policies, or any other
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insurance policies required to be carried hereunder, or fire underwriter's
regulations. Lessee shall, at its sole cost, comply with all of the
requirements pertaining to the Leased Property or other improvements of any
insurance board, association, organization, or company necessary for the
maintenance of insurance, as herein provided, covering the Leased Property
and Lessee's Personal Property.
7.2.3 Lessee covenants and agrees that during the Term (a)
it will operate continuously the Leased Property in accordance with its
Primary Intended Use and all applicable permits, licenses and approvals; and
(b) it will apply for, use reasonable best efforts to obtain, and thereafter
maintain its accreditation.
7.2.4 Lessee covenants and agrees that all so-called
"classroom" teachers for all elementary school grades, commencing with
kindergarten and continuing through any higher grade served by the Facility,
are, and at all times during the Term will be, certified under applicable
state law.
7.2.5 Lessee shall not commit or suffer to be committed
any waste on the Leased Property, or in the Facility nor shall Lessee cause
or permit any nuisance thereon.
7.2.6 Lessee shall neither suffer nor permit the Leased
Property or any portion thereof, including Lessee's Personal Property, to be
used in such a manner as (i) might reasonably tend to impair Lessor's (or
Lessee's, as the case may be), title thereto or to any portion thereof; or
(ii) may reasonably make possible a claim or claims of adverse usage or
adverse possession by the public, as such, or of implied dedication of the
Leased Property or any portion thereof.
7.3 RADIUS RESTRICTION; RIGHT OF FIRST REFUSAL. Lessee
acknowledges that a fair return to Lessor on its investment in the Leased
Property is dependent, in part, on the concentration on the Leased Property
during the Term of the educational services and facilities provided by Lessee
and its Affiliates in the geographical area of the Leased Property.
Accordingly, as a material inducement to Lessor's agreement to enter into
this Lease, Lessee agrees as follows:
7.3.1 During the Term, neither Lessee nor any of its
Affiliates, directly or indirectly, shall operate, own, manage or have any
interest in or otherwise participate in or receive revenues from any other
facility or institution providing services similar to those provided in
connection with the Facility and the Primary Intended Use, within a ten (10)
mile radius outward from the outside boundary of the Leased Property, without
the prior consent of Lessor, which consent may be given or withheld in
Lessor's sole discretion; provided, however, that the foregoing restriction
shall not apply to those facilities owned by Lessee and listed on Exhibit "E"
attached hereto and incorporated herein. All distances shall be measured on
a straight line rather than on a driving distance basis. In the event that
any portion of such other facility or institution is located within such
restricted area the entire facility or institution shall be deemed located
within such restricted area.
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7.3.2 Without limiting the provisions set forth in
subparagraph 7.3.1 above, Lessee agrees that concurrently with any request
for Lessor's consent to Lessee's (or any of its Affiliates') operation or
investment in any facility or institution as required under subparagraph
7.3.1, Lessee shall notify Lessor of any financing that Lessee may desire in
connection with such facility. Prior to Lessee's committing to financing
with any other lender or investor, Lessee shall notify Lessor of the proposed
terms of such financing, and provide Lessor with a copy of any nonbinding
term sheet or any other information as may be reasonably requested by Lessor,
and Lessor (or any of its Affiliates) shall have the right (to be exercised
not later than ten (10) Business Days following the receipt by Lessor of the
requested information) to provide financing for the facility on the same
terms and conditions as proposed by such lender. In the event Lessor fails
to timely exercise its right of first refusal to provide financing on such
terms and conditions, Lessor shall be deemed to have waived such right,
except that if the proposed transaction does not occur within thirty (30)
days after the date set forth in the information provided to Lessor, or if
the terms and conditions of such financing are materially changed from those
set forth on the information provided to Lessor, this right of first refusal
shall be deemed applicable to said transaction. It is further understood
that, in the event Lessor (or any of its Affiliates) does not exercise its
right of first refusal, this provision shall nevertheless be applicable to
any further or future transfer which is subject to subparagraph 7.3.1.
ARTICLE VIII
8.1 COMPLIANCE WITH LEGAL AND INSURANCE REQUIREMENTS,
INSTRUMENTS, ETC. Subject to Article XII relating to permitted contests,
Lessee, at its sole cost and expense, will promptly (a) comply with all
applicable Legal Requirements and Insurance Requirements in respect of the
use, operation, maintenance, repair, and restoration of the Leased Property,
whether or not compliance therewith shall require structural changes in any
of the Leased Improvements or interfere with the use and enjoyment of the
Leased Property; and (b) procure, maintain and comply with all licenses,
permits and other approvals, if any, required for any use of the Leased
Property and Lessee's Personal Property then being made, and for the proper
erection, installation, operation, and maintenance of the Leased Property or
any part thereof.
8.2 LEGAL REQUIREMENT COVENANTS. Lessee covenants and agrees
that the Leased Property and Lessee's Personal Property shall not be used for
any unlawful purpose. Lessee further warrants and represents that Lessee has
obtained all necessary governmental approvals and has given all necessary
notices to allow Lessee to operate the Leased Property for its Primary
Intended Use. Lessee shall acquire and maintain all licenses, permits and
approvals necessary or desirable for the use and operation of the Leased
Property in its customary manner for the Primary Intended Use, and any other
use conducted on the Leased Property as may be permitted by Lessor from
time-to-time hereunder. Lessee further covenants and agrees that Lessee's use
of the Leased Property and maintenance, alteration and operation of the same,
and all parts thereof, shall at all times conform to all applicable federal,
state and local laws, ordinances, rules, and regulations unless the same are
held by a court of competent jurisdiction to be unlawful. Lessee, may,
however, upon prior written notice to Lessor, contest the legality or
applicability of any such law, ordinance, rule, or regulation, or any
licensure or certification decision if Lessee maintains such action in good
faith, with due diligence, without prejudice to
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Lessor's rights hereunder, and at Lessee's own expense. If by the terms of
any such law, ordinance, rule or regulation, compliance therewith pending the
prosecution of any such proceeding may legally be delayed without the
incurrence of any fine, charge or liability of any kind against the Leased
Property, including the Facility, or Lessee's leasehold interest therein and
without subjecting Lessor to any liability, civil or criminal, for failure so
to comply therewith, Lessee may delay compliance therewith until the final
determination of such proceeding. If any lien, charge or civil or criminal
liability would be incurred by reason of any such delay, Lessee, on the prior
written consent of Lessor, may nonetheless contest as aforesaid and delay as
aforesaid provided that such delay would not subject Lessor to criminal
liability and Lessee both (a) furnishes to Lessor security reasonably
satisfactory to Lessor against any loss or injury by reason of such contest
or delay; and (b) prosecutes the contest continuously, with due diligence and
in good faith.
ARTICLE IX
9.1 MAINTENANCE AND REPAIR.
9.1.1 Lessee, at its sole cost and expense, will keep the
Leased Property and Lessee's Personal Property and all private roadways,
sidewalks and curbs appurtenant thereto and which are under Lessee's control
in good order and repair (whether or not the need for such repairs occurs as
a result of Lessee's use, any prior use, the elements or the age of the
Leased Property, or any portion thereof), and, except as otherwise provided
in Article XIV, with reasonable promptness, make all necessary and
appropriate repairs thereto of every kind and nature, whether interior or
exterior, structural or non-structural, ordinary or extraordinary, foreseen
or unforeseen or arising by reason of a condition existing prior to the
Commencement Date (concealed or otherwise). All repairs shall, to the extent
reasonably achievable, be at least equivalent in quality to the original
work. Lessee will not take or omit to take any action the taking or omission
of which may materially or adversely impair the value or the usefulness of
the Leased Property or any part thereof for its Primary Intended Use. Any
repair work performed by Lessee shall be paid for so that no lien (I.E.,
mechanics', materialmen's or other liens) shall attach to the Leased
Property, subject to the provisions of Article XII.
9.1.2 Lessor shall not under any circumstances be required
in connection with this Lease to build or rebuild any improvements on the
Leased Property, or to make any repairs, replacements, alterations,
restorations, or renewals of any nature or description to the Leased
Property, whether ordinary or extraordinary, structural or non-structural,
foreseen or unforeseen, or to make any expenditure whatsoever with respect
thereto, or to maintain the Leased Property in any way. Lessee hereby
waives, to the extent permitted by law, the right to make repairs at the
expense of Lessor pursuant to any law in effect at the time of the execution
of this Lease or hereafter enacted. Lessor shall have the right to give,
record and post, as appropriate, notices of non-responsibility (or similar
notices) under any mechanics' or materialmen's lien laws now or hereafter
existing.
9.1.3 Lessee shall not make any modifications, alterations or
improvements to the Leased Improvements or any portion thereof, whether by
addition or deletion, without Lessor's prior written consent, which consent may
be given or withheld in
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Lessor's sole and absolute discretion; provided that Lessor shall not
unreasonably withhold its consent to any non-structural modifications,
alterations or improvements that do not constitute capital improvements and
that are otherwise made in compliance with this Lease, so long as the total
cost thereof does not exceed $50,000 and the total cost in any twelve (12)
month period does not exceed $100,000. Nothing contained in this Lease and
no action or inaction by Lessor shall be construed as (i) constituting the
consent or request of Lessor, express or implied, to any contractor,
sub-contractor, laborer, materialman, or vendor to or for the performance of
any labor or services or the furnishing of any materials or other property
for the construction, alteration, addition, repair, or demolition of, or to
the Leased Property or any part thereof; or (ii) giving Lessee any right,
power or permission to contract for or permit the performance of any labor or
services or the furnishing of any materials or other property in such fashion
as would permit the making of any claim against Lessor in respect thereof or
to make any agreement that may create, or in any way be the basis for any
right, title, interest, lien, claim, or other encumbrance upon the estate of
Lessor in the Leased Property, or any portion thereof. Lessor shall have the
right to give, record and post, as appropriate, notices of non-responsibility
(or similar notices) under any mechanics' or materialmen's lien laws now or
hereafter existing.
9.1.4 Lessee will, upon the expiration or prior
termination of the Term, vacate and surrender the Leased Property in the
condition in which the Leased Property was originally received from Lessor,
except as repaired, rebuilt, restored, altered or added to as permitted or
required under this Lease and except for ordinary wear and tear (subject to
the obligation of Lessee to maintain the Leased Property in good order and
repair during the entire Term).
9.2 EXPENDITURES TO COMPLY WITH LAW. Without limiting Lessee's
other obligations, during the Term of this Lease, Lessee will, at its
expense, make whatever expenditures (including, but not limited to capital
and non-capital expenditures) that are required to conform the Leased
Property to such standards as may from time-to-time be required by federal,
state or local law or regulation, whether in connection with state
accreditation requirements or any other applicable programs or legislation,
or capital improvements required by any other governmental agency having
jurisdiction over the Leased Property as a condition of the continued
operation of the Leased Property during the Term (as extended) as an
educational facility pursuant to present or future laws or governmental
regulation. Lessor shall not unreasonably withhold its consent to any
expenditures or capital improvements made by Lessee pursuant to this
Paragraph 9.2 and otherwise made in compliance with this Lease.
9.3 ENCROACHMENTS, RESTRICTIONS, ETC. If any of the Leased
Improvements shall, at any time, encroach upon any property, street or
right-of-way adjacent to the Leased Property, or shall violate the agreements
or conditions contained in any lawful restrictive covenant or other agreement
affecting the Leased Property, or any part thereof, or shall impair the
rights of others under any easement or right-of-way to which the Leased
Property is subject, then promptly upon the request of Lessor at the behest
of any person affected by any such encroachment, violation or impairment,
Lessee shall, at its sole cost and expense, (and after Lessor's prior
approval) subject to Lessee's right to sue Lessor's predecessors in title
with respect thereto or to contest the existence of any such encroachment,
violation or impairment and, in such case, in the event of an adverse final
determination, either (i) obtain valid and
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effective waivers or settlements of all claims, liabilities and damages
resulting from each such encroachment, violation or impairment, whether the
same shall affect Lessor or the Leased Property; or (ii) make such changes in
the Leased Improvements, and take such other actions, as Lessee in the good
faith exercise of its judgment deems reasonably practicable, to remove such
encroachment, and to end such violation or impairment, including, if
necessary, the alteration of any of the Leased Improvements, and in any event
take all such actions as may be necessary in order to be able to continue the
operation of the Leased Improvements for the Primary Intended Use
substantially in the manner and to the extent the Leased Improvements were
operated prior to the assertion of such violation, impairment or
encroachment. Any such alteration shall be made in conformity with the
applicable requirements of Paragraph 6.2 and this Article IX. Lessee's
obligations under this Paragraph 9.3 shall be in addition to and shall in no
way discharge or diminish any obligation of any insurer under any policy of
title or other insurance.
ARTICLE X
10.1 LESSEE'S OBLIGATIONS FOR HAZARDOUS MATERIALS. Lessee shall,
at its sole cost and expense, take all actions as required to cause the
Leased Property including, but not limited to, the Land and all Leased
Improvements, to be free and clear of the presence of all Hazardous Materials
during the Term. In this connection, Lessee shall, upon its discovery, belief
or suspicion of the presence of Hazardous Materials on, in or under any part
of the Leased Property, including, but not limited to, the Land and all
Leased Improvements, immediately notify Lessor and, at no expense to Lessor,
cause any such Hazardous Materials to be removed immediately, in compliance
with all applicable laws and in a manner causing the least disruption of or
interference with the operation of Lessee's business. Lessee hereby agrees
to fully indemnify, protect, defend and hold harmless Lessor from any costs,
damages, claims, liability or loss of any kind or nature arising out of or in
any way in connection with the presence, suspected presence, removal or
remediation of Hazardous Materials in, on, or about the Leased Property, or
any part thereof. Lessee acknowledges that it has received and reviewed that
certain environmental report, dated March 12, 1997, and prepared by Nova
Environmental Services as Project No. M97-239 (Client No. M-2557), together
with the reliance letter dated May 26, 1998 from Nova Environmental Services
to Lessor and the review thereof performed by SECOR International
Incorporated (the "Environmental Report"). Without limiting Lessee's other
obligations under this Lease, Lessee agrees, at Lessee's sole cost, to fully
comply with all recommendations set forth in the Environmental Report, as
updated, promptly after the Commencement Date hereunder. Lessee's
obligations hereunder shall apply to all Hazardous Materials, irrespective of
whether the existence of such Hazardous Materials is known by Lessor and no
matter when they arose or were discovered and therefore will include any
Hazardous Materials that existed prior to, at, or after the Commencement Date
and during the Term.
10.2 DEFINITION OF HAZARDOUS MATERIALS. For purposes of this
Lease, "Hazardous Materials" shall include, but not be limited to, any
substance, material, waste, pollutant or contaminant, now or hereafter
defined, listed or regulated by the "Environmental Laws" (defined below) or
any other federal state or local law, regulation or order or by common law
decision. "Environmental Laws" means and includes any law, ordinance,
regulation or requirement now or hereinafter in effect relating to land use,
air, soil, surface water,
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groundwater (including the protection, cleanup, removal, remediation or
damage thereof), human health and safety or any other environmental matter,
including, without limitation, the following laws as the same may be amended
from time to time: Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), 42 U.S.C. Section 9601, et seq.; Federal
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.;
Clean Water Act, 33 U.S.C. Section 1251, et seq.; Toxic Substances Control
Act, 15 U.S.C. Section 2601, et seq.; Refuse Act, 33 U.S.C. Section 407;
Occupational Safety and Health Act, 29 U.S.C. Section 651, et seq.; Clean
Air Act, 42 U.S.C. Section 7401, et seq.; and any and all similar state and
local laws and ordinances and the regulations now or hereafter adopted,
published and/or promulgated pursuant thereto.
ARTICLE XI
11.1 NO LIENS. Subject to the provisions of Article XII relating
to permitted contests, Lessee will not directly or indirectly, voluntarily or
by operation of law, create or allow to remain and will promptly discharge at
its expense any lien, mortgage, encumbrance, attachment, title retention
agreement, or claim upon the Leased Property.
ARTICLE XII
12. PERMITTED CONTESTS. Lessee shall have the right to contest the
amount or validity of any Imposition or any Legal Requirement or Insurance
Requirement or any lien, attachment, levy, encumbrance, charge or claim
("Claims") not otherwise permitted by Article XI, by appropriate legal
proceedings in good faith and with due diligence, and to delay payment if
legally permitted; provided this shall not be deemed or construed in any way
as relieving Lessee's covenants to pay or its covenants to cause to be paid
any such charges in the manner as in this Lease provided and further provided
that, such legal proceedings (and delay in payment) shall not cause the sale
of the Leased Property, or any part thereof, to satisfy the same or cause
Lessor or Lessee to be in default under any mortgage or deed of trust
encumbering the Leased Property or any interest therein or otherwise threaten
to cause loss or damage to Lessor or the Leased Property. Upon the request
of Lessor, Lessee shall provide to Lessor reasonable security satisfactory to
Lessor to assure the payment of all Claims which may be assessed against the
Leased Property, together with interest and penalties, if any, thereon.
Lessor agrees to join in any such proceedings if the same be required to
legally prosecute such contest of the validity of such Claims; provided,
however, that Lessor shall not thereby be subjected to any liability for the
payment of any costs or expenses in connection with any proceedings brought
by Lessee; and Lessee covenants to indemnify and save harmless Lessor from
any such costs or expenses. In the event that Lessee fails to pay any Claims
when due or, upon Lessor's request, to provide the security therefor as
provided in this Article XII and to diligently prosecute any contest of the
same or in the event the same threatens to cause loss or damage to Lessor or
the Leased Property, Lessor may, upon thirty (30) days advance written Notice
to Lessee, pay such charges together with any interest and penalties and the
same shall be repayable by Lessee to Lessor at the next Payment Date provided
for in this Lease. Provided, however, that should Lessor reasonably
determine that the giving of such Notice would risk loss to the Leased
Property or otherwise threaten to cause loss or damage to Lessor, then Lessor
shall give such written Notice as is practical under the circumstances.
Lessee shall be entitled to any refund of any Claims and
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such charges and penalties or interest thereon which have been paid by Lessee
or paid by Lessor and for which Lessor has been fully reimbursed.
ARTICLE XIII
13.1 GENERAL INSURANCE REQUIREMENTS. Subject to the provisions
of Paragraph 13.8, during the Term, Lessee shall at all times keep the Leased
Property, and all property located in or on the Leased Property, including
Lessee's Personal Property, insured with the kinds and amounts of insurance
described below. This insurance shall be written by companies authorized to
do insurance business in the state in which the Leased Property is located,
having an A.M. Best rating of A X or higher or otherwise approved by Lessor
in its sole discretion. The policies must name Lessor as loss payee and
additional named insured, shall contain a provision that such insurance may
not be canceled or amended without at least thirty (30) days' notice to
Lessor and shall be payable to Lessor as provided in Article XIV. In
addition, upon Lessor's written request, the policies shall name as
mortgagee, loss payee and additional insured the holder ("Facility
Mortgagee") of any mortgage, deed of trust or other security agreement and
any other Encumbrance placed on the Leased Property in accordance with the
provisions of Article XXXIII, as well as any other entity interested in the
Leased Property ("Facility Mortgage") by way of a standard form of
mortgagee's loss payable endorsement. Evidence of insurance shall be
deposited with Lessor and, if requested, with any Facility Mortgagee(s). If
any provision of any Facility Mortgage requires deposits of premiums for
insurance to be made with such Facility Mortgagee, or, pursuant to written
direction by Lessor upon the occurrence of any Event of Default hereunder
(and irrespective of whether such Event of Default is continuing or has been
cured), Lessee shall make such deposits directly with such Facility Mortgagee
or with Lessor, as required. The policies on the Leased Property, including
the Leased Improvements, Fixtures and Lessee's Personal Property, shall
insure against the following risks:
13.1.1 Loss or damage by fire, vandalism and malicious
mischief, extended coverage perils commonly known as "All Risk," and all
physical loss perils normally included in such All Risk insurance, including,
but not limited to, sprinkler leakage, in an amount not less than one hundred
percent (100%) of the then full replacement cost thereof (as defined below in
Paragraph 13.2);
13.1.2 Loss or damage by explosion of steam boilers,
pressure vessels or similar apparatus, now or hereafter installed in the
Facility, if any, in such amounts with respect to any one accident as may be
reasonably requested by Lessor from time-to-time;
13.1.3 Loss of rental under a rental value insurance policy
covering risk of loss during the first twelve (12) months of reconstruction
necessitated by the occurrence of any of the hazards described in Paragraph
13.1.1 or 13.1.2 in an amount sufficient to prevent Lessor from becoming a
co-insurer.
13.1.4 Claims for personal injury or property damage under
a policy of comprehensive general public liability insurance with amounts not
less than One
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Million Dollars ($1,000,000.00) per occurrence, and with an annual aggregate
of Three Million Dollars ($3,000,000.00);
13.1.5 Flood (if the Leased Property is located in whole or
in part within a flood plain area, as designated by any governmental or other
responsible agency and if such insurance is available pursuant to applicable
law) and such other hazards and in such amounts as may be customary for
comparable properties in the area; and
13.1.6 Any other kinds of insurance, and in such amounts,
as Lessor may reasonably require from time to time to the extent available in
the state where the Leased Property is located.
13.2 REPLACEMENT COST. The term "full replacement cost" as used
herein, shall mean the full actual replacement cost of the Leased Property as
determined from time-to-time upon the request of Lessor, including an
increased cost of construction endorsement, less exclusions provided in the
standard form of fire insurance policy in the state where the Leased Property
is located. Lessor and Lessee agree that as of the Commencement Date the full
replacement cost shall be deemed to be $3,200,000.00.
13.3 ADDITIONAL INSURANCE. In addition to the insurance
described above, Lessee shall maintain such additional insurance as may be
reasonably required from time-to-time by Lessor or any Facility Mortgagee (to
the extent available in the state where the Leased Property is located) and
shall further at all times maintain adequate worker's compensation insurance
coverage for all persons employed by Lessee on the Leased Property. Such
worker's compensation insurance shall be in accordance with the requirements
of applicable federal, state and local law.
13.4 WAIVER OF SUBROGATION. All insurance policies carried by
either party covering the Leased Property, the Fixtures, the Facility, or
Lessee's Personal Property including without limitations, contents, fire and
casualty insurance, shall expressly waive any right of subrogation on the
part of the insurer against the other party. The parties hereto agree that
their policies will include such waiver clause or endorsement so long as the
same are obtainable without extra cost, and in the event of such an extra
charge the other party, at its election, may pay the same, but shall not be
obligated to do so. Upon written request, each party shall provide the other
party with a copy of each insurance policy with the waiver clause or
endorsement attached.
13.5 FORM SATISFACTORY, ETC. All of the policies of insurance
referred to in this Article XIII shall be written in a form reasonably
satisfactory to Lessor and by insurance companies having an A.M. Best rating of
A X or higher or otherwise approved by Lessor in its sole discretion. Subject
to the foregoing, Lessor agrees that it will not unreasonably withhold its
approval as to the form of the policies of insurance or as to the insurance
companies selected by Lessee. Lessee shall pay all of the premiums therefor,
and deliver such policies or certificates thereof to Lessor prior to their
effective date (and, with respect to any renewal policy, prior to the expiration
of the existing policy), and in the event of the failure of Lessee either to
effect such insurance as herein called for or to pay the premiums therefor, or
to deliver
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such policies or certificates thereof to Lessor at the times required, Lessor
shall be entitled, but shall have no obligation, to effect such insurance and
pay the premiums therefor, which premiums shall be repayable by Lessee to
Lessor upon written demand therefor, and failure to repay the same shall
constitute an Event of Default within the meaning of Paragraph 16.1(c). Each
insurer mentioned in this Article XIII shall agree, by endorsement on the
policy or policies issued by it, or by independent instrument furnished to
Lessor, that will give to Lessor (and to any Facility Mortgagee, if required
by the same) thirty (30) days written notice before the policy or policies in
questions shall be altered, allowed to expire or cancel.
13.6 INCREASE IN LIMITS. In the event that Lessor or a Facility
Mortgagee shall at any reasonable time deem, in the reasonable exercise of
its discretion, the limits of the personal injury or property damage public
liability insurance then carried to be insufficient, Lessee shall thereafter
carry the insurance with increased limits until further change pursuant to
the provisions of this Paragraph.
13.7 BLANKET POLICY. Notwithstanding anything to the contrary
contained in this Article XIII, Lessee's obligations to carry the insurance
provided for herein may be brought within the coverage of a so-called blanket
policy or policies of insurance carried and maintained by Lessee; provided,
however, that the coverage afforded Lessor will not be reduced or diminished
or otherwise be different from that which would exist under a separate policy
meeting all other requirements of this Lease by reason of the use of such
blanket policy of insurance, and provided further that the requirements of
this Article XIII are otherwise satisfied.
13.8 NO SEPARATE INSURANCE. Lessee shall not on Lessee's own
initiative or pursuant to the request or requirement of any third party take
out separate insurance concurrent in form or contributing in the event of
loss with that required in this Article, to be furnished or which may
reasonably be required to be furnished, by Lessee or increase the amount of
any then existing insurance by securing any additional policy or additional
policies, unless all parties having an insurable interest in the subject
matter of the insurance, including in all cases Lessor and all Facility
Mortgagees, are included therein as additional insureds, and the loss is
payable under said insurance in the same manner as losses are payable under
the Lease. Lessee shall immediately notify Lessor of the taking out of any
such separate insurance or of the increasing of any of the amount of the then
existing insurance.
13.9 CONTINUOUS COVERAGE. Lessee shall assure that there is no
gap in the insurance coverage provided in connection with the Facility at or
after the Commencement Date, and therefore, the insurance provided by Lessee
shall be continuous, with the types and amounts of coverage, described herein
to be applicable on the Commencement Date. To the extent there is not full,
complete and continuous coverage for all issues, no matter when arising,
claimed or occurring, Lessee shall, at its sole cost, obtain such insurance.
ARTICLE XIV
14.1 INSURANCE PROCEEDS. All proceeds payable by reason of any
loss of or damage to the Leased Property, or any portion thereof, which is
insured under any policy of insurance required by Article XIII of the Lease,
where the total proceeds paid by the insurer are
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less than $150,000.00, shall be paid to Lessee and applied to the
reconstruction or repair, as the case may be, of any damage to or destruction
of the Leased Property, or any portion thereof. All proceeds payable by
reason of any loss of or damage to the Leased Property, or any portion
thereof, which is insured under any policy of insurance required by Article
XIII of this Lease where the total proceeds paid by the insurer are equal to
or in excess of $150,000.00 shall be paid to Lessor and held by Lessor in
trust (subject to the provisions of Paragraph 14.7) and shall be made
available for reconstruction or repair, as the case may be, of any damage to
or destruction of the Leased Property, or any portion thereof, and shall be
paid out by Lessor from time-to-time for the reasonable costs of such
reconstruction or repair. Any excess proceeds of insurance remaining after
the completion of the restoration or reconstruction of the Leased Property
shall go to Lessee, provided the Lease is in force and there exists no
uncured Event of Default; otherwise such excess shall be paid to Lessor for
application as set forth in Article XVI hereof. In the event neither Lessor
nor Lessee is required or elects to repair and restore, and the Lease is
terminated pursuant to Article XVI, all such insurance proceeds shall be
retained by Lessor. All salvage resulting from any risk covered by insurance
shall belong to Lessor except that any salvage relating to Lessee's Personal
Property shall belong to Lessee.
14.2 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION COVERED
BY INSURANCE PROCEEDS.
14.2.1 If during the Term, the Leased Property is totally
or partially destroyed by a risk covered by the insurance described in
Article XIII and whether or not the Facility thereby is rendered Unsuitable
for Its Primary Intended Use, Lessee shall restore the Leased Property to
substantially the same condition as existed immediately before the damage or
destruction.
14.2.2 If the cost of the repair or restoration exceeds the
amount of proceeds received by Lessee or Lessor from the insurance required
under Article XIII, Lessee shall be obligated to restore the Leased Property
and pay the extra cost therefor, provided that, prior to commencing the
repair and restoration, Lessee shall either (i) contribute any excess amount
needed to restore the Leased Property, or (ii) provide Lessor with
satisfactory evidence that such funds are, and throughout the entire period
of reconstruction will be, available. If Lessee contributes such excess in
cash, such excess shall be paid by Lessee to Lessor to be held in trust,
together with any insurance proceeds, for application to the cost of repair
and restoration.
14.3 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION NOT
COVERED BY INSURANCE. If during the Term, the Leased Property is damaged or
destroyed irrespective of the extent of the damage from a risk not covered by
the insurance described in Article XIII, whether or not such damage or
renders the Facility Unsuitable for Its Primary Intended Use, Lessee shall
restore the Leased Property to substantially the same condition it was in
immediately before such damage or destruction and such damage or destruction
shall not terminate this Lease.
14.4 LESSEE'S PERSONAL PROPERTY. Subject to Lessor's rights
pursuant to the Security Agreement, all insurance proceeds payable by reason of
any loss of or damage to any
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of Lessee's Personal Property shall be paid to Lessee, and Lessee shall hold
such insurance proceeds in trust to pay the cost of repairing or replacing
damaged Lessee's Personal Property. Any proceeds in excess of the cost of
repairing or replacing any such Lessee's Personal Property shall belong to
Lessee.
14.5 RESTORATION OF LESSEE'S PROPERTY. Without limiting Lessee's
obligation to restore the Leased Property as provided in Paragraphs 14.2 and
14.3, Lessee shall also pay the cost to restore all Alterations and other
improvements made by Lessee which Lessee elects to restore, including
Lessee's Personal Property to the extent that Lessee's Personal Property is
necessary to the operation of the Leased Property for its Primary Intended
Use in accordance with applicable Legal Requirements.
14.6 NO ABATEMENT OF RENT. This Lease shall remain in full force
and effect and Lessee's obligation to make rental payments and to pay all
other charges required by this Lease shall remain unabated during any period
required for repair and restoration.
14.7 WAIVER. Lessee hereby waives any statutory rights of
termination which may arise by reason of any damage to or destruction of the
Leased Property which Lessor is obligated to restore or may restore under any
of the provisions of this Lease.
ARTICLE XV
15. CONDEMNATION.
15.1 DEFINITIONS.
15.1.1 "Condemnation" means (a) the exercise of any
governmental power, whether by legal proceedings or otherwise, by a
Condemnor; (b) a voluntary sale or transfer by Lessor to any Condemnor,
either under threat of Condemnation or while legal proceedings for
Condemnation are pending.
15.1.2 "Date of Taking" means the date the Condemnor has
the right to possession of the property being condemned.
15.1.3 "Award" means all compensation, sums or anything of
value awarded, paid or received on a total or partial Condemnation.
15.1.4 "Condemnor" means any public or quasi-public
authority, or private corporation or individual, having the power of
Condemnation.
15.2 PARTIES' RIGHTS AND OBLIGATIONS. If during the Term there
is any taking of all or any part of the Leased Property or any interest in
this Lease by Condemnation, the rights and obligations of the parties shall
be determined by this Article XV.
15.3 TOTAL CONDEMNATION. If title to the fee of the whole of the
Leased Property shall be taken or condemned by any Condemnor, this Lease shall
cease and terminate
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as of the Date of Condemnation by said Condemnor. If title to the fee of
less than the whole of the Leased Property shall be so taken or condemned,
which nevertheless renders the Leased Property Unsuitable for Its Primary
Intended Use, as reasonably determined by Lessor and Lessee, Lessee and
Lessor shall each have the option by written Notice to the other, at any time
at or prior to the taking of possession by, or the date of vesting of title
in, such Condemnor, whichever first occurs, to terminate this Lease as of the
date of the occurrence of such first event. If such Notice has timely been
given, this Lease shall thereupon cease and terminate. Upon the termination
of the Lease, all Minimum Rent, and Additional Charges paid or payable by
Lessee hereunder shall be apportioned as of the date the Lease terminates.
15.4 ALLOCATION OF PORTION OF AWARD. The total Award made with
respect to all or any portion of the Leased Property or for loss of rent, or
for loss of business, whether or not beyond the Term of this Lease, or for
the loss of value of the leasehold (including the bonus value of the Lease)
shall be solely the property of and payable to Lessor and Lessee hereby
assigns to Lessor any and all rights in such Award; provided, however, that
Lessee shall be entitled to make a separate claim for the taking of Lessee's
Personal Property and relocation expense, subject to Lessor's rights pursuant
to the Security Agreement, and as long as any such claim will not in any way
diminish Lessor's Award, or for any other loss that can be awarded to Lessee
separately from Lessor's claim and which will not in any respect whatsoever
diminish or threaten to diminish the total amounts to be awarded to Lessor,
as set forth above or otherwise. To the extent Lessee's claim may thereafter
reduce Lessor's claim, Lessee shall, and hereby does, assign its claim to
Lessor. In any Condemnation proceedings, each of the Lessor and Lessee shall
seek its own claim in conformity herewith, at its own expense.
15.5 PARTIAL TAKING. If title to the fee of less than the whole
of the Leased Property shall be so taken or condemned, and the Leased
Property is still suitable for its Primary Intended Use, as reasonably
determined by Lessor and Lessee, or if Lessee or Lessor shall be so entitled,
but shall not elect to terminate this Lease as provided in Paragraph 15.3
hereof, Lessee, at its own cost and expense (subject to Lessor's contribution
described below), shall with all reasonable dispatch restore the untaken
portion of any Leased Improvements on the Leased Property so that such Leased
Improvements shall constitute a complete architectural unit of the same
general character and condition (as nearly as may be possible under the
circumstances) as the Leased Improvements existed immediately prior to such
Condemnation. Lessor shall contribute to the cost of restoration that part
of its Award specifically allocated to such restoration, provided, however,
the amount of such contribution shall not exceed the cost of restoration.
The Minimum Rent shall be reduced as set forth in Paragraph 5.2.
15.6 TEMPORARY TAKING. Lessee agrees that if, at any time after
the date hereof, the whole or any part of the Leased Property or of Lessee's
interest under this Lease, shall be Condemned by any Condemnor for its
temporary use or occupancy, this Lease shall not terminate by reason thereof,
and Lessee shall continue to pay, in the manner and at the times herein
specified, the full amounts of Minimum Rent and Additional Charges. Except
only to the extent that Lessee may be prevented from doing so pursuant to the
terms of the order of the Condemnor, Lessee shall also continue to perform
and observe all of the other terms, covenants, conditions and obligations
hereof, on the part of the Lessee to be performed and observed, as though
such Condemnation had not occurred. In the event of any such Condemnation as
in this
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Paragraph 15.6 described, the entire amount of any such Award made for such
temporary use, whether paid by way of damages, rent or otherwise, shall be
paid to Lessee to the extent attributable to any period within the Initial
Term (as extended by any already exercised options to extend) and except as
otherwise provided hereunder. Notwithstanding the foregoing, in the event
that any temporary use or occupancy covered under this Paragraph 15.6 renders
any portion of the Leased Property Unsuitable for its Primary Intended Use
for a period in excess of twelve (12) calendar months, Lessee shall have the
right to elect a reduction in Minimum Rent as set forth in Paragraph 5.2
commencing on the twelve (12) month anniversary of any such use or occupancy
and continuing so long as such temporary use or occupancy continues, in which
event any Award made for such temporary use or occupancy shall be paid to
Lessor to the extent attributable to the period that Minimum Rent is so
abated. Lessee covenants that upon the termination of any such period of
temporary use or occupancy as set forth in this Paragraph 15.6, it will, at
its sole cost and expense, restore the Leased Property as nearly as may be
reasonably possible, to the condition in which the same was immediately prior
to the Condemnation, unless such period of temporary use or occupancy shall
extend beyond the expiration of the Term, in which case Lessee shall not be
required to make such restoration, and in such case, Lessee shall contribute
to the cost of such restoration that portion of its entire Award which is
specifically allocated to such restoration in the judgment or order of the
court, if any.
ARTICLE XVI
16.1 EVENTS OF DEFAULT. In addition to any other "Event of
Default" provided for under Paragraphs 1.3.3 or otherwise under this Lease or
any other documents executed concurrently herewith, any one or more of the
following events shall be an "Event of Default":
(a) if any payment of the Rent payable by Lessee under this
Lease is not paid as and when the same becomes due and payable, and such
failure shall continue for more than five (5) Business Days; or
(b) if Lessee fails to observe or perform any term,
covenant or condition of this Lease other than those described under
Paragraphs 1.3.3, 16.1(a) and 16.1(c) through and including 16.1(n) of this
Lease, and such failure is not cured by Lessee within a period of thirty (30)
days after Notice thereof from Lessor, unless such failure cannot with due
diligence be cured within a period of thirty (30) days, in which case such
failure shall not be deemed an Event of Default if Lessee proceeds promptly,
continuously and with due diligence to cure the failure and diligently
completes the curing thereof within ninety (90) days; or
(c) if Lessee commits an "Event of Default" under any of
the Other Leases. Without limiting the foregoing, if Lessee commits an
"Event of Default" under this Lease, Lessee shall thereby be in default (and
shall therefore have committed an "Event of Default") under all of the Other
Leases; or
(d) if Lessee commits an "Event of Default" under any of
the Related Leases. Without limiting the foregoing, if Lessee commits an
"Event of Default" under this
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Lease, Lessee shall thereby be in default (and shall therefore have committed
an "Event of Default") under all of the Related Leases; or
(e) if Lessee commits an "Event of Default" under any of
the Security Documents; or
(f) if Lessee does any of the following:
(i) admit in writing its inability to pay its
debts generally as they become due;
(ii) file a petition in bankruptcy or a petition
to take advantage of any insolvency law;
(iii) make an assignment for the benefit of
creditors;
(iv) consent to the appointment of a receiver of
itself or of the whole or any substantial part of its property; or
(v) file a petition or answer seeking
reorganization or arrangement under the Federal bankruptcy laws or any other
applicable law or statute of the United States of America or any state
thereof; or
(g) if Lessee, on a petition in bankruptcy filed against
it, is adjudicated a bankrupt or an order for relief thereunder is entered
against it or a court of competent jurisdiction shall enter an order or
decree appointing, without the consent of Lessee, a receiver for Lessee or of
the whole or substantially all of its property or the Facility, or approving
a petition filed against Lessee seeking reorganization or arrangement of
Lessee under the Federal bankruptcy laws or other applicable law or statute
of the United States of America or any state thereof, and such judgment,
order or decree shall not be vacated or set aside within sixty (60) days from
the date of the entry thereof; or
(h) if Lessee shall be liquidated or dissolved, or shall
begin proceedings toward such liquidation or dissolution, or shall, in any
manner, permit the sale or divestiture of substantially all of its assets; or
(i) subject to the provisions of Article XII hereof, if the
estate or interest of Lessee in the Leased Property or any part thereof be
levied upon or attached in a proceeding and the same shall not be vacated or
discharged within the later of ninety (90) days after commencement thereof or
thirty (30) days after Notice thereof from Lessor, or a mechanic's or similar
lien is filed with respect to the Leased Property and is not released or
bonded around for a period exceeding sixty (60) days after Lessee first has
knowledge of the same; or
(j) if Lessee voluntarily ceases operations on the Leased
Property for a period in excess of two (2) days, other than by reason of
regularly-scheduled school holidays, school vacations or breaks between
sessions; or
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(k) if any of Lessee's representations or warranties
expressly set forth in this Lease (or financial statements provided to
Lessor) proves to have been untrue when made, or
(l) if Lessee attempts to assign or sublease, in violation
of the provisions of this Lease; or
(m) subject to the provisions of Article XII hereof, if
Lessee ceases to maintain in effect any license, permit, certificate or
approval necessary or otherwise required to operate the Facility in
accordance with its Primary Intended Use.
Upon the occurrence of an Event of Default, in addition to all of
Lessor's other remedies, Lessor may terminate this Lease by giving Lessee not
less than ten (10) Business Days Notice of such termination and upon the
expiration of the time fixed in such Notice, the Term shall terminate and all
rights of Lessee under this Lease shall cease.
In the event litigation is commenced with respect to any alleged
default under this Lease, the prevailing party in such litigation shall
receive, in addition to its damages incurred, such sum as the court shall
determine as its reasonable attorneys' fees, and all costs and expenses
incurred in connection therewith, including reasonable attorneys' fees and
costs incurred on appeal.
16.2 CERTAIN REMEDIES. Lessor shall have all remedies and rights
provided under this Lease and/or otherwise available in law and equity as a
result of an Event of Default or Lessee's other breach under this Lease,
including, to the extent permitted by Minnesota law, the right to appoint a
receiver as a matter of strict right without regard to the solvency of
Lessee, for the purpose of procuring the Leased Property, preventing waste,
protecting and otherwise enforcing the provisions of this Lease and for any
and all other purposes for which a receiver is allowed under the laws of the
State of Minnesota. Without limiting the foregoing, if an Event of Default
occurs (and the event giving rise to such Event of Default has not been cured
within the curative period, if any, relating thereto as set forth in this
Lease) whether or not this Lease has been terminated pursuant to Paragraph
16.1, Lessee shall, to the extent permitted by law, and if required by Lessor
to so do, immediately surrender to Lessor the Leased Property pursuant to the
provisions of Paragraph 16.1 and quit the same and Lessor may enter upon and
repossess the Leased Property, in person, by agent or by a court-appointed
receiver, by reasonable force, summary proceedings, ejectment or otherwise,
and may remove Lessee and all other persons and any and all personal property
from the Leased Property subject to rights of any residents (and their
property) and to any requirements of law. Without limiting all other rights
and remedies of Lessor under this Lease and under law, Lessor shall have the
right to accelerate all Rent (including Minimum Rent) and therefore, upon
Lessee's default, at Lessor's option, all such Rent shall become immediately
due and payable in accordance with Paragraph 16.3, below. Further, without
limiting all other rights and remedies of Lessor under this Lease and under
law, Lessor shall be entitled to recover from Lessee, and Lessee shall
therefore be liable for, all costs of recovering possession (including
without limitation all costs associated with any receiver) and renovating the
Leased Property for a new lessee and all other
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costs of re-leasing, including, but not limited to, broker's commissions and
attorneys' fees, except as limited by Paragraph 16.3 below.
16.3 DAMAGES. Neither (i) the termination of this Lease pursuant
to Section 16.1, (ii) the repossession of the Leased Property; (iii) the
failure of Lessor to relet the Leased Property; nor (iv) the reletting of all
or any portion thereof, shall relieve Lessee of its liability and obligations
hereunder, all of which shall survive any such termination, repossession or
reletting (except for proceeds received on subletting). In the event of any
such termination, Lessee shall forthwith pay to Lessor all Rent due and
payable with respect to the Leased Property to and including the date of such
termination.
(a) Lessor shall not be deemed to have terminated this
Lease unless Lessor delivers written Notice to Lessee of such election. If
Lessor voluntarily elects to terminate this Lease upon an Event of Default,
then in addition to all remedies available to Lessor, Lessor may recover the
sum of:
(i) the worth at the time of award of the unpaid
Rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount
by which the unpaid Rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that Lessee proves
could have been reasonably avoided;
(iii) the worth at the time of award of the amount
by which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such rental loss that Lessee proves could be reasonably
avoided; and
(iv) any other amount necessary to compensate
Lessor for all the detriment proximately caused by Lessee's failure to
perform its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom.
The "worth at the time of award" of the amounts
referred to in subparagraphs (i) and (ii) above is computed by allowing
interest at the Overdue Rate. The worth at the time of award of the amount
referred to in subparagraph (iii) is computed by discounting such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent (1%).
(b) Without limiting Lessor's other remedies provided
herein and provided by law, Lessor may continue the Lease in effect after
Lessee's breach and abandonment and recover Rent as it becomes due, provided
that, in such event, Lessee has the right to sublet or assign subject only to
reasonable conditions imposed by Lessor. Accordingly, without termination of
Lessee's right to possession of the Leased Property, Lessor may demand and
recover each installment of Minimum Rent and other sums payable by Lessee to
Lessor under the Lease as the same becomes due and payable, which Minimum
Rent and other sums shall bear interest at the maximum interest rate
permitted in accordance with the laws of the State of Minnesota (or the
Overdue Rate, whichever is lower), from the date when due until paid, and
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Lessor may enforce, by action or otherwise, any other term or covenant of
this Lease. If Lessor elects to recover each installment of Rent as it
becomes due, then Lessor may file any number of lawsuits for the recovery of
the amounts due hereunder.
16.4 WAIVER. If this Lease is terminated pursuant to Paragraph
16.1, Lessee waives, to the extent permitted by applicable law, the benefit
of any laws now or hereafter in force exempting property from liability for
rent or for debt.
16.5 APPLICATION OF FUNDS. Any payments received by Lessor under
any of the provisions of this Lease during the existence or continuance of
any Event of Default shall be applied to Lessee's obligations in the order
which Lessor may determine or as may be prescribed by the laws of the State
of Minnesota.
ARTICLE XVII
17. LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT. If Lessee fails to make
any payment or to perform any act required to be made or performed under this
Lease, and to cure the same within the relevant time periods, if any,
provided under this Lease, Lessor, after fifteen (15) days' Notice to and
demand upon Lessee, and without waiving or releasing any obligation of Lessee
or default, may (but shall be under no obligation to) at any time thereafter
make such payment or perform such act for the account and at the expense of
Lessee, and may, to the extent permitted by law, enter upon the Leased
Property, in person, by agent or by court-appointed receiver, for such
purpose and take all such action thereon as, in Lessor's opinion, may be
necessary or appropriate therefor. Provided, however, that should Lessor
reasonably determine that the giving of such Notice would risk loss to the
Leased Property, or cause damage to Lessor, then Lessor shall give such
written Notice as is practical under the circumstances. No such entry shall
be deemed an eviction of Lessee. In exercising any remedy under this Article
XVII, Lessor shall use its good faith efforts not to violate any rights of
students, teachers or administrators who may be on the premises at the
Facility. All sums so paid by Lessor and all costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses, in each case) so
incurred, together with a late charge thereon (to the extent permitted by
law) at the Overdue Rate from the date on which sums or expenses are paid or
incurred by Lessor, shall be paid by Lessee to Lessor on demand. The
obligations of Lessee and rights of Lessor contained in this Article shall
survive the expiration or earlier termination of this Lease.
ARTICLE XVIII
18.1 OPTIONS TO EXTEND. Provided there exists no uncured Event
of Default under this Lease, or any of the Related Leases at the time Lessee
exercises any option to extend (in accordance with this Article XVIII),
Lessee will have the right to extend this Lease for two (2) periods of ten
(10) years each (each such additional term shall be referred to herein as an
"Extended Term"), commencing immediately following the end of the Initial
Term or the immediately preceding Extended Term, as the case may be.
Notwithstanding anything stated in this Paragraph 18.1 or elsewhere in this
Lease, Lessee shall not be entitled to exercise its option to extend this
Lease for any Extended Term (and any such option to extend shall
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automatically expire and terminate) unless Lessee concurrently exercises its
option to extend each of the Related Leases for the same period, as provided
in each of the Related Leases; and any attempt to exercise Lessee's option to
extend this Lease without Lessee exercising its options under all of the
Related Leases shall be null and void. The Lease during any Extended Term
shall be on the same terms and conditions as during the Initial Term, except
that the Minimum Rent shall be determined as set forth in Paragraph 18.2
below. In the event Lessee desires to exercise any option to extend granted
in this Article XVIII, Lessee shall give Landlord written notice ("Notice to
Extend") not less than two hundred ten (210) days prior to the expiration of
the Initial Term or the immediately preceding Extended Term, as the case may
be. If Lessee fails to give Landlord any such notice, then such option to
extend and all future options to extend granted in this Article XVIII shall
be null and void and of no further force or effect.
18.2 MINIMUM RENT DURING EXTENDED TERMS. The Minimum Rent at the
commencement of each Extended Term shall be determined as set forth below:
(a) The Minimum Rent at the commencement of the first
Extended Term shall be the higher of: (i) the annual Minimum Rent at the rate
paid during the twelve (12) month period immediately preceding the first
Extended Term, increased by two percent (2%); (ii) the annual Minimum Rent at
the rate that was payable as of the Commencement Date of this Lease,
multiplied by a fraction, the numerator of which shall be the C.P.I. for the
first calendar month of the first Extended Term and the denominator of which
shall be the C.P.I. for the calendar month in which the Commencement Date of
the Initial Term occurs; and (iii) the Fair Market Rent, as determined below.
(b) The Minimum Rent at the commencement of the second
Extended Term shall be the higher of: (i) the annual Minimum Rent at the rate
paid during the twelve (12) month period immediately preceding the second
Extended Term, increased by two percent (2%); (ii) the annual Minimum Rent at
the rate paid during the first twelve (12) months of the first Extended Term
multiplied by a fraction, the numerator of which shall be the C.P.I. for the
first calendar month of the second Extended Term and the denominator of which
shall be C.P.I. for the first calendar month of the first Extended Term; and
(iii) the Fair Market Rent, as determined below.
(c) If Lessor and Lessee cannot agree on the Fair Market
Rent within thirty (30) days after the date of any Notice to Extend, each
party shall, by notice to the other, appoint a disinterested and licensed
M.A.I. Real Estate Appraiser with at least five years of experience
appraising educational facilities to determine the Fair Market Rent. If any
party should fail to appoint an appraiser within ten (10) days after notice,
the appraiser selected by the other party shall determine the Fair Market
Rent. In determining the Fair Market Rent, each appraiser shall give
appropriate consideration to, among other things, generally applicable
minimum rent for tenancies of property comparable to the Leased Property in
the area in which the Leased Property is located.
(d) If the two appraisers selected pursuant to Paragraph
18.2(c) above, cannot agree upon the Fair Market Rent within forty-five (45)
days, they shall immediately give written notice of such inability ("Notice
of Disagreement") to both Lessor and Lessee setting
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forth the Fair Market Rent determinations of each of the appraisers. If the
determinations of each of the two appraisers of the Fair Market Rent at the
commencement of such Extended Term differ by less than ten percent (10%) of
the lower determination, the Fair Market Rent shall be fixed at an amount
equal to the average of the two determinations.
(e) If the determinations of each of the two appraisers
selected pursuant to Paragraph 18.2(c), above, differ by ten percent (10%) or
more of the lower determination with respect to the Fair Market Rent to be
paid at the commencement of such Extended Term, then within thirty (30) days
after the giving of the Notice of Disagreement, the two appraisers shall
appoint a third disinterested and licensed M.A.I. Real Estate Appraiser with
at least 5 years of experience appraising educational facilities. If the
parties cannot then agree on the Fair Market Rent, the third appraiser shall
determine the Fair Market Rent, and in so doing, shall give appropriate
consideration to those items described in Paragraph 18.2(c). The third
appraiser shall not select a Fair Market Rent either (i) higher than the
highest of the two appraisals made pursuant to Paragraph 18.2(c); or (ii)
lower than the lowest of the two appraisals made pursuant to Paragraph
18.2(c), above. If the first two appraisers cannot agree on the selection of
a third appraiser within such thirty (30) days, or if the first two
appraisers fail to provide a Notice of Disagreement (as stated above in
Paragraph 18.2(d), above, then the Fair Market Rent shall be determined by a
third appraiser selected by the American Arbitration Association (or such
other organization at Lessor's election) upon application by Lessor.
(f) During the time before the determination of the Fair
Market Rent, Lessee shall pay Minimum Rent at the rate paid immediately
preceding such Extended Term, increased by two percent (2%); provided,
however, that, if the Fair Market Rent is determined to be higher than such
amount, the Minimum Rent owed by Lessee at the Fair Market Rent shall be
effective retroactively as of the first day of such Extended Term. If, after
the Minimum Rent for an Extended Term is adjusted and applied retroactively
as of the first day of such Extended Term, it is determined that additional
Minimum Rent is due Lessor, the aggregate amount of any such additional
Minimum Rent shall be paid to Lessor within thirty (30) days of the
determination of the Fair Market Rent for such Extended Term.
(g) Each of the parties shall pay the fees of the
appraiser that it selects pursuant to Paragraph 18.2(c), above, and shall
equally share the cost of the third appraiser, if necessary, and shall
equally share the cost of arbitration (excluding attorneys' fees), if
necessary.
ARTICLE XIX
19. HOLDING OVER. If Lessee shall for any reason remain in possession
of the Leased Property after the expiration of the Term or earlier
termination of the Term hereof, such possession shall be as a month-to-month
tenant during which time Lessee shall pay as rental each month, one and
one-half times the aggregate of (i) one-twelfth of the aggregate Minimum Rent
payable with respect to the last Lease Year of the Term; (ii) all Additional
Charges accruing during the month; and (iii) all other sums payable by Lessee
pursuant to the provisions of this Lease. During such period of
month-to-month tenancy, Lessee shall be obligated to perform and observe all
of the terms, covenants and conditions of this Lease, but shall have no
rights hereunder other than the right, to the extent given by law to
month-to-month tenancies, to
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continue its occupancy and use of the Leased Property. Nothing contained
herein shall constitute the consent, express or implied, of Lessor to the
holding over of Lessee after the expiration or earlier termination of this
Lease.
ARTICLE XX
20. RISK OF LOSS. During the Term of this Lease, the risk of loss or
of decrease in the enjoyment and beneficial use of the Leased Property in
consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise, or in consequence of
foreclosures (to the extent caused by or through Lessee), attachments, levies
or executions (other than those caused by or through Lessor) is assumed by
Lessee, and Lessor shall in no event be answerable or accountable therefor,
nor shall any of the events mentioned in this Paragraph entitle Lessee to any
abatement of Rent except as specifically provided in this Lease, or any right
to terminate this Lease, except as provided in Articles XIV or XV, above.
Without limiting the foregoing, Lessor shall not be liable for injury or
damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Leased Property, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, air conditioning, or lighting
fixtures, or from any other cause, whether the said injury or damage results
from conditions arising upon the Leased Property, or upon other portions of
the Land, or any part thereof, or from other sources or places, and
regardless of whether the cause of such damage or injury or the means of
repairing the same is accessible or not. Lessor shall not be liable for any
damages arising from any act or neglect of Lessee, or any other party named
above. Lessor shall, however, remain liable for any damages arising from
Lessor's own willful misconduct.
ARTICLE XXI
21. INDEMNIFICATION. Notwithstanding the existence of any insurance
provided for in Article XIII, and without regard to the policy limits of any
such insurance, Lessee will protect, indemnify, hold harmless and defend
Lessor from and against all liabilities, obligations, claims, demands,
damages, penalties, causes of action, costs, and expenses (including, without
limitation, actual reasonable attorneys' fees and expenses), to the extent
permitted by law, imposed upon or incurred by or asserted against Lessor by
reason of any of the following: (a) any accident, injury to or death of
persons or loss of or damage to property occurring on or about the Leased
Property or adjoining sidewalks, including without limitation any claims of
malpractice, whether occurring prior to or after the Commencement Date; (b)
any third party claims of any kind relating to the Leased Property, the
Facility or the operation thereof, whether sounding in contract or tort, and
whether arising directly or indirectly from the acts or omissions of Lessor,
Lessee, or any of Lessee's teachers, administrators, students, employees,
agents, invitees, guests, permittees or trespassers; (c) any occupancy, use,
misuse, non-use, condition, maintenance, or repair by Lessee of the Leased
Property; (d) any Impositions (which are the obligations of Lessee to pay
pursuant to the applicable provisions of this Lease, which include any
Impositions arising prior to the Commencement Date); (e) any failure on the
part of Lessee to perform or comply with any of the terms of this Lease; (f)
the non-performance of any of the
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terms and provisions of any and all existing and future subleases of the
Leased Property to be performed by the landlord (Lessee) thereunder; (g) any
Hazardous Materials, as defined in Paragraph 10.2, above that now or
hereafter during the Term may be located in, on or around, or may potentially
affect, any part of the Land or Leased Improvements; (h) any and all other
matters pertaining to the Leased Property or the operation of the Facility
after the date of this Lease or otherwise during the Term, including without
limitation compliance with or failure to comply with the provisions of the
Fair Housing Amendments Act of 1988, as amended from time to time, to the
extent applicable; and (i) any liability relating to the construction or
development of the Facility, or any patent or latent defects in the physical
plant of the Facility, whether arising in connection with events occurring
prior to or after the Commencement Date, including without limitation
compliance with or failure to comply with the provisions of the federal
Americans with Disabilities Act, as amended from time to time. Any amounts
which become payable by Lessee under this Paragraph shall be paid within ten
(10) days of the date the same becomes due and if not timely paid, shall bear
a late charge (to the extent permitted by law) at the Overdue Rate from the
date of such determination to the date of payment. Lessee, at its expense,
shall contest, resist and defend any such claim, action or proceeding
asserted or instituted against Lessor or may compromise or otherwise dispose
of the same as Lessee sees fit, at Lessee's sole cost, but after consultation
with and approval by Lessor. Nothing herein shall be construed as
indemnifying Lessor against its willful misconduct. Lessee's liability for a
breach of the provisions of this article arising during the Term hereof shall
survive any termination of this Lease.
ARTICLE XXII
22. SUBLETTING AND ASSIGNMENT. Lessee may not assign, sublease or
sublet, encumber, appropriate, pledge or otherwise transfer, the Lease or the
leasehold or other interest in the Leased Property without the prior written
consent of Lessor, which consent may be given or withheld in Lessor's sole
discretion. Upon Lessor's consent, (a) in the case of any subletting, the
sublessee shall comply with the provisions of Paragraph 22.2, and (b) in the
case of any assignment, any such assignee shall assume in writing and agree
to keep and perform all of the terms of this Lease on the part of Lessee to
be kept and performed and shall be, and become, jointly and severally liable
with Lessee for the performance thereof. In the case of either an assignment
or a subletting, (i) an original counterpart of each sublease and assignment
and assumption, duly executed by Lessee and such sublessee or assignee, as
the case may be, in form and substance satisfactory to Lessor, shall be
delivered promptly to Lessor, and (ii) Lessee shall remain primarily liable,
as principal rather than as surety, for the prompt payment of the Rent and
for the performance and observance of all of the covenants and conditions to
be performed by Lessee hereunder.
22.1 ATTORNMENT. Lessee shall insert in each sublease permitted
under Paragraph 22 provisions to that effect that (i) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and
the rights of Lessor hereunder; (ii) in the event this Lease shall terminate
before the expiration of such sublease, the sublessee thereunder will, at
Lessor's option, attorn to Lessor and waive any right the sublessee may have
to terminate the sublease or to surrender possession thereunder, as a result
of the termination of this Lease; and (iii) in the event the sublessee
receives a written Notice from Lessor or Lessor's assignees, if
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any, stating that Lessee is in default under this Lease, the sublessee shall
thereafter be obligated to pay all rentals accruing under said sublease
directly to the party giving such Notice, or as such party may direct. All
rents received from the sublessee by Lessor or Lessor's assignees, if any, as
the case may be, shall be credited against amounts owing by Lessee under this
Lease.
22.2 SUBLEASE LIMITATION. Anything contained in this Lease to
the contrary notwithstanding, Lessee shall not sublet the Leased Property on
any basis such that the rental to be paid by the sublessee thereunder would
be based, in whole or in part, on either (i) the income or profits derived by
the business activities of the sublessee; or (ii) any other formula such that
any portion of the sublease rental received by Lessor would fail to qualify
as "rents from real property" within the meaning of Paragraph 856(d) of the
Code, or any similar or successor provision thereto.
ARTICLE XXIII
23. OFFICER'S CERTIFICATES AND FINANCIAL STATEMENTS.
(a) At any time from time-to-time upon not less than
twenty (20) days Notice by Lessor, Lessee will furnish to Lessor an Officer's
Certificate certifying that this Lease is unmodified and in full force and
effect (or that this Lease is in full force and effect as modified and
setting forth the modifications), the date to which the Rent has been paid
and such other information concerning this Lease as may be reasonably
requested by Lessor. Any such certificate furnished pursuant to this
Paragraph may be relied upon by Lessor and any prospective purchaser or
lender of the Leased Property.
(b) Within one hundred twenty (120) days after the end
of each Fiscal Year, Lessee agrees to provide to Lessor consolidating
financials for the Facility for such Fiscal Year, together with an Officer's
Certificate certifying that all information thereon is true and correct.
(c) Within one hundred twenty (120) days after the end
of each Fiscal Year, Lessee agrees to provide to Lessor audited annual
financial statements and the Annual Report Form 10-K of Lessee.
(d) In addition to all other obligations to provide
financial information contained in the Lease, Lessee will furnish the
following statements to Lessor:
(i) within one hundred twenty (120) days after the
end of each Lease Year, an Officer's Certificate stating that to the best of
the signer's knowledge and belief after making reasonable inquiry, Lessee is
not in default in the performance or observance of any of the terms of this
Lease, or if Lessee shall be in default to its knowledge, specifying all such
defaults, the nature thereof, and the steps being taken to remedy the same,
and
(ii) with reasonable promptness, such other
information respecting the financial condition and affairs of Lessee as
Lessor may reasonably request from time-to-time.
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ARTICLE XXIV
24. LESSOR'S RIGHT OF ENTRY. Lessee shall allow Lessor and its
authorized representatives access to the Leased Property on at least one
Business Day's prior notice during usual business hours, (i) to inspect the
Leased Property; or (ii) in the event that Lessee does not give Lessor Notice
to Extend as and when provided under Paragraph 18.1 above, or in any case
during the last six (6) months of the Term, to show the Leased Property to
prospective mortgagees or lessees, and otherwise to prepare the Leased
Property for the change of operation as of the expiration of the Term.
Lessor shall not unreasonably interfere with Lessee's operation of the Leased
Property.
ARTICLE XXV
25.1 ASSIGNMENT OF INTANGIBLES. The date on which this Lease
either terminates pursuant to its terms or is terminated by either party
whether pursuant to a right granted to it hereunder or otherwise shall be
referred to as the "Closing Date" in this Article XXV. On the Closing Date,
this Lease shall be deemed and construed as an absolute assignment for
purposes of vesting in Lessor (or its designee) all of Lessee's right, title
and interest in and to the following intangible property which is now or
hereafter used in connection with the operation of the Leased Property (the
"Intangibles") and an assumption by Lessor (or its designee) of Lessee's
obligations under the Intangibles:
(a) service contracts for the benefit of the Leased
Property to which Lessee is a party, and which can be terminated without
penalty by Lessee or within thirty (30) or fewer days' notice;
(b) any state, federal or other third-party payor
programs (excluding the right to any reimbursement for periods on or prior to
the Closing Date) entered in connection with the Leased Property to the
extent assignable by Lessee;
(c) all licenses, permits, accreditations and
certificates of occupancy issued by any federal, state, municipal or
quasi-governmental authority for the use, maintenance or operation of the
Leased Property, running to or in favor of Lessee;
(d) all documents, charts, personnel records, property
manuals, records and lists maintained with respect to the Leased Property,
books, records, files and other business records attributable to the business
or operations of the Leased Property;
(e) all existing agreements with or relating to students
at the Leased Property (excluding the right to any payments for periods prior
to the Closing Date, as hereinafter defined);
(f) all assignable indemnities, guaranties and
warranties in favor of Lessee with respect to the Leased Property, the
Lessee's Personal Property and/or the Consumable Inventory;
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(g) all other assignable intangible property not
enumerated herein which is now or hereafter used in connection with the
operation of the Leased Property as an educational facility; and
(h) The business of the Lessee as conducted at the
Leased Property as a going concern, including but not limited to the name of
the school and any other tradenames associated therewith, and all telephone
numbers presently in use therein.
25.2 ADJUSTMENTS AND PRORATIONS. Lessor shall be responsible for
and pay all accrued expenses with respect to the Leased Property accruing on
or after 12:01 a.m. on the day after the Closing Date (the "Adjustment Date")
and shall be entitled to receive and retain all revenues from the Leased
Property accruing on or after the Adjustment Date. Within fifteen (15)
business days after the Closing Date, the following adjustments and
prorations shall be determined as of the Adjustment Date:
(a) All Impositions. To the extent the actual amount of
such Impositions is not available on the Closing Date for the tax year in
which the Adjustment Date occurs, the proration of such taxes shall be
estimated at the Closing Date based upon reasonable information available to
the parties, including information disclosed by the local tax office or other
public information, and an adjustment shall be made when actual figures are
published or otherwise become available.
(b) Lessee will terminate the employment of all
employees on the Closing Date. The obligation for wages and the obligation,
if any, to pay to employees of the Leased Property accrued vacation and sick
leave pay or employer severance pay or other accrued benefits which may be
payable as the result of any termination of any employee on or prior to the
Closing Date for the period prior to the Closing Date shall remain the
Lessee's obligation and shall be satisfied by Lessee as of the Closing Date.
(c) Lessor shall receive a credit equal to any tuition
or other payments received with respect to students at the Leased Property to
the extent attributable to periods following the Closing Date.
(d) The present insurance coverage on the Leased
Property shall be terminated as of the Closing Date and there shall be no
proration of insurance premiums.
(e) All other income from, and expenses of, the Leased
Property (other than mortgage interest, principal and trustee fees),
including but not limited to public utility charges and deposits, maintenance
charges and service charges shall be prorated between Lessee and Lessor as of
the Adjustment Date. Lessee shall, if possible, obtain final utility meter
readings as of the Closing Date. To the extent that information for any such
proration is not available on the Closing Date, Lessee and Lessor shall
effect such proration within thirty (30) days after the Closing Date.
(f) Lessee shall receive a credit equal to (i) any
pre-paid Rent, Impositions, insurance premiums or other amounts; (ii) any
sums held in the Deposit Account
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for Impositions, Rent or other amounts; and (iii) any other sums being held
by Lessor or any Facility Mortgagee for the benefit of Lessee, which sums
shall continue to be held in accordance with the applicable provisions of
this Lease, which provisions shall remain in effect solely for the purposes
of determining the disposition of such funds being held in escrow.
25.3 TRANSFER OF OPERATIONS.
25.3.1 All necessary arrangements shall be made to provide
possession of the Leased Property to Lessor on the Closing Date, at which
time of possession Lessee shall deliver to Lessor all records and other
personal information concerning all students enrolled at the Leased Property
at any time prior to or during the Term and other relevant records used or
developed in connection with the business conducted at the Leased Property.
Such transfer and delivery shall be in accordance with all applicable laws,
rules and regulations concerning the transfer of student records.
25.3.2 Lessee shall provide Lessor with an accounting of
all funds belonging to students or employees at the Leased Property which are
held by Lessee in a custodial capacity. Such accounting shall set forth the
names of the parties for whom such funds are held, the amounts held on behalf
of each such party and the Lessee's warranty that, to the actual current
knowledge of Lessee, the accounting is true, correct and complete.
Additionally, Lessee in accordance with all applicable rules and regulations,
shall make all necessary arrangements to transfer such funds to a bank
account designated by Lessor, and Lessor shall in writing acknowledge receipt
of and expressly assume all the Lessee's financial and custodial obligations
with respect thereto. Notwithstanding the foregoing, Lessee will indemnify,
defend and hold Lessor harmless from all liabilities, claims and demands,
including reasonable attorney's fees, in the event the amount of funds, if
any, transferred to Lessor's bank account as provided above, did not
represent the full amount of the funds then or thereafter shown to have been
delivered to Lessee as custodian that remain undisbursed for the benefit of
the parties for whom such funds were deposited, or with respect to any
matters relating to any such funds which accrue during the Term of this Lease.
25.3.3 All cash, check and cash equivalent at the Leased
Property and deposits in bank accounts (other than the trust accounts
referenced in subparagraph 25.3.2 above) relating to the Leased Property on
the Closing Date shall remain Lessee's property after the Closing Date. All
accounts receivable, loans receivable and other receivables of Lessee,
whether derived from operation of the Leased Property or otherwise, shall
remain the property of Lessee after the Closing Date. Lessee shall retain
full responsibility for the collection thereof. Lessor shall assume
responsibility for the billing and collection of payment on account of
services rendered by it on and after the Closing Date. In order to
facilitate Lessee's collection efforts, Lessee agrees to deliver to Lessor,
within a reasonable time after the Closing Date, a schedule identifying all
outstanding balances owing for the month prior to the Closing Date and Lessor
agrees to apply any payments received which are specifically designated as
being applicable to services rendered prior to the Closing Date to reduce
such pre-Closing balances by promptly remitting said payments to Lessee. In
the event payments specifically indicate that they relate to services
rendered post-Closing, such payments shall be retained by Lessor. In the
event no designation is made, such payments shall be applied one-half to
Lessee's
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accounts receivable and one-half to Lessor's accounts receivable. Lessor
shall cooperate with Lessee in Lessee's collection of its preclosing accounts
receivable. Lessor shall have no liability for uncollectible receivables and
shall not be obligated to bear any expense as a result of such activities on
behalf of Lessee. Lessor shall remit to Lessee or its assignee those
portions of any payments received by Lessor arising out of any federal, state
or local government payment or reimbursement programs to the extent the same
relate to any period ending on or prior to the Closing Date.
25.3.4 If, following the Closing Date, Lessor receives
payment from any state or federal agency or third-party provider which
represents reimbursement with respect to services provided at the Leased
Property prior to the Adjustment Date, Lessor agrees that it shall remit such
payments to Lessee. Payments by Lessor to Lessee shall be accompanied by a
copy of the appropriate remittance.
25.3.5 In addition to the obligations required to be
performed hereunder by Lessee and Lessor at the Closing Date, Lessee and
Lessor agree to perform such other acts, and to execute, acknowledge, and/or
deliver subsequent to the Closing Date such other instruments, documents and
materials, as the other may reasonably request in order to effectuate the
consummation of the transaction contemplated herein.
25.3.6 Lessor shall have the right to offset against any
monies due Lessee pursuant to the terms of this Article XXV, any amounts due
by Lessee to Lessor pursuant to this Lease or due by Lessee to any third
party for taxes, utilities, unemployment insurance premiums, payroll
obligations or any service for which a comparable service and provider is not
reasonably available in the applicable geographical area.
25.3.7 If the termination of this Lease is a result of an
Event of Default, then to the extent any monies are due to Lessee pursuant to
this Article XXV, such sums shall be applied by Lessor to any damages
suffered by Lessor as a result of Lessee's Event of Default.
25.4 INDEMNIFICATION. Lessee for itself, its successors and
assigns hereby indemnifies and agrees to defend and hold Lessor and its
successors and assigns harmless from any and all claims, demands,
obligations, losses, liabilities, damages, recoveries and deficiencies
(including interest, penalties and reasonable attorney's fees, costs and
expenses) which any of them may suffer as a result of the breach by Lessee in
the performance of any of its commitments, covenants, or obligations under
this Article XXV, or with respect to any suits, arbitration proceedings,
administrative actions or investigations which relate to the use by Lessee of
the Leased Property during the Term of this Lease or any liability which may
arise from operation of the Leased Property as an educational facility during
the Term of this Lease. The rights of Lessor under this paragraph are
without prejudice to any other remedies not inconsistent herewith which
Lessor may have against Lessee pursuant to the terms of this Lease.
25.5 NO LIMITATION. The provisions of this Article XXV shall not
limit in any way Lessor's rights and remedies under the Security Agreement or
otherwise under this Lease.
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ARTICLE XXVI
26. NO WAIVER. The waiver by Lessor or Lessee of any term, covenant or
condition in this Lease shall not be deemed to be a waiver of any other term,
covenant or condition or any subsequent waiver of the same or any other term,
covenant or condition contained in this Lease. The subsequent acceptance of
rent hereunder by Lessor or any payment by Lessee shall not be deemed to be a
waiver of any preceding default of any term, covenant or condition of this
Lease, other than the failure to pay the particular amount so received and
accepted, regardless of the knowledge of any preceding default at the time of
the receipt or acceptance.
ARTICLE XXVII
27. REMEDIES CUMULATIVE. To the extent permitted by law, each legal,
equitable or contractual right, power and remedy of each party now or
hereafter provided either in this Lease 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 each party
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.
ARTICLE XXVIII
28. ACCEPTANCE OF SURRENDER. No surrender to Lessor of this Lease or
of the Leased Property or any part thereof, or of any interest therein, shall
be valid or effective unless agreed to and accepted in writing by Lessor and
no act by Lessor or any representative or agent of Lessor, other than such a
written acceptance by Lessor, shall constitute an acceptance of any such
surrender.
ARTICLE XXIX
29. NO MERGER OF TITLE. There shall be no merger of this Lease or of
the leasehold estate created hereby by reason of the fact that the same
person, firm, corporation, or other entity may acquire, own or hold, directly
or indirectly, (a) this Lease or the leasehold estate created hereby or any
interest in this Lease or such leasehold estate; and (b) the fee estate in
the Leased Property.
ARTICLE XXX
30. CONVEYANCE BY LESSOR. If Lessor or any successor owner of the
Leased Property shall transfer or assign Lessor's title or interest in the
Leased Property or this Lease other than as security for a debt, then,
subject to the provisions of this Article XXX and provided the new owner has
agreed in writing for the benefit of Lessee to recognize this Lease and be
bound by all of the terms and conditions hereof, Lessor shall thereupon be
released from all future liabilities and obligations of Lessor under this
Lease arising or accruing from and after the date of such transfer or
assignment and all such future liabilities and obligations shall thereupon be
binding upon the new owner.
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ARTICLE XXXI
31. QUIET ENJOYMENT. So long as Lessee shall pay all Rent as the same
becomes due and shall comply with all of the terms of this Lease and perform
its obligations hereunder, and except for any claims, actions, liens or
encumbrances arising from the acts or omissions of Lessee or otherwise from
events occurring prior to the Commencement Date hereunder, Lessee shall
peaceably and quietly have, hold and enjoy the Leased Property for the Term
hereof, free of any claim or other action by Lessor or anyone claiming by,
through or under Lessor, but subject to all liens and encumbrances of record
as of the date hereof or hereafter consented to by Lessee. Except as
otherwise provided in this Lease, no failure by Lessor to comply with the
foregoing covenant or any covenant of this Lease shall give Lessee any right
to cancel or terminate this Lease or abate, reduce or made a deduction from
or offset against the Rent or any other sum payable under this Lease, or to
fail to perform any other obligation of Lessee hereunder.
ARTICLE XXXII
32. NOTICES. All notices, demands, requests, consents, approvals, and
other communications ("Notice" or "Notices") hereunder shall be in writing
and shall be either (a) personally served; (b) sent by facsimile transmittal;
or (c) sent by overnight courier (such as Federal Express, DHL, etc.). If
sent by facsimile, receipt shall be deemed effective upon confirmation of
transmittal thereof; and if sent via overnight courier, receipt shall be
deemed effective twenty-four (24) hours after the sending thereof. All
notices to be given pursuant to this Lease shall be given to the parties at
the following respective addresses.
(a) If to Lessee: The Tesseract Group, Inc.
3800 West 80th Street, Suite 1400
Minneapolis, Minnesota 55431
Attention: Mr. John T. Golle
with a copy to: Faegre & Benson
2500 Republic Plaza
370 Seventeenth Street
Denver, Colorado 80202-4004
Attention: Diane B. Davies, Esq.
(b) If to Lessor: EduCorp Properties, Inc.
c/o LTC Properties, Inc.
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
Attention: Mr. Christopher T. Ishikawa
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with a copy to: EduCorp Properties, Inc.
c/o LTC Properties, Inc.
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
Attention: Pamela J. Privett, Esq.
and: Stern, Neubauer, Greenwald & Pauly
1299 Ocean Avenue, Tenth Floor
Santa Monica, CA 90401-1007
Attention: Dennis L. Greenwald, Esq.
ARTICLE XXXIII
33.1 LESSOR MAY GRANT LIENS. Lessor may, subject to the terms
and conditions set forth below in this Paragraph 33.1, from time-to-time,
directly or indirectly, create or otherwise cause to exist any lien or
encumbrance or any other change of title ("Encumbrance") upon the Leased
Property, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing. Any such Encumbrance
shall contain the right to prepay (whether or not subject to a prepayment
penalty) and shall provide that it is subject to the rights of Lessee under
this Lease, provided that any holder of an Encumbrance shall (a) give Lessee
the same notice, if any, given to Lessor of any default or acceleration of
any obligation underlying any such mortgage or any sale in foreclosure under
such mortgage; (b) permit Lessee to cure any such default on Lessor's behalf
within any applicable cure period, and Lessee shall be reimbursed by Lessor
or shall be entitled to offset against Minimum Rent payments next accruing or
coming due for any and all costs incurred in effecting such cure, including,
without limitation, out-of-pocket costs incurred to effect any such cure
(including reasonable attorneys' fees); (c) permit Lessee to appear and to
bid at any sale in foreclosure made with respect to, and/or any sale by
virtue of the exercise of the power of sale contained in, any such mortgage,
and (d) provide that in the event of foreclosure or other possession of the
Leased Property by the Mortgagee, that the Mortgagee (or other purchaser)
shall be bound by the terms and provisions of this Lease. Upon the
reasonable request of Lessor, Lessee shall execute an agreement to the effect
that this Lease shall be subject and subordinate to the lien of a new
mortgage on the Leased Property, and that in the event of any default or
foreclosure under such mortgage, Lessee shall attorn to the new mortgagee,
and as otherwise requested by Lessor on the condition that the mortgagee
execute a non-disturbance agreement recognizing this Lease and agreeing, for
itself and its successor and assigns, to comply with the provisions of this
Article XXXIII.
33.2 LESSEE'S RIGHT TO CURE. Subject to the provisions of
Paragraph 33.3, if Lessor breaches any covenant to be performed by it under
this Lease, Lessee, after Notice to and demand upon Lessor, without waiving
or releasing any obligation hereunder, and in addition to any other remedies
available to Lessee, may (but shall be under no obligation at any time
thereafter to) make such payment or perform such act for the account and at
the expense of Lessor. All sums so paid by Lessee and all costs and expenses
(including, without limitation, reasonable attorneys' fees) so incurred,
together with interest thereon from the date on which
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such sums or expenses are paid or incurred by Lessee, shall be paid by Lessor
to Lessee on demand, but may not be offset by Lessee against payments of Rent
hereunder.
33.3 BREACH BY LESSOR. It shall be a breach of this Lease if
Lessor fails to observe or perform any term, covenant or condition of this
Lease on its part to be performed, and such failure shall continue for a
period of thirty (30) days after Notice thereof from Lessee unless such
failure cannot with due diligence be cured within a period of thirty (30)
days, in which case such failure shall not be deemed to continue if Lessor,
within said thirty (30) day period, proceeds promptly, continuously and with
due diligence to cure the failure and diligently completes the curing
thereof. The time within which Lessor shall be obligated to cure any such
failure shall also be subject to extension of time due to the occurrence of
any Unavoidable Delay.
ARTICLE XXXIV
34. MISCELLANEOUS.
34.1 SURVIVAL OF OBLIGATIONS. Anything contained in this Lease
to the contrary notwithstanding, all claims against, and liabilities of,
Lessee or Lessor arising prior to, or in connection with any event occurring
prior to, the date of any expiration or termination of this Lease or the date
of Lessee's surrender of possession, whichever is later, shall survive such
termination or surrender of possession.
34.2 LATE CHARGES; INTEREST. If any late charge or interest rate
provided for in any provision of this Lease is based upon a rate in excess of
the maximum rate permitted by applicable law, the parties agree that such
charges shall be fixed at the maximum permissible rate.
34.3 LIMITS OF LESSOR'S LIABILITY. Lessee specifically agrees to
look solely to the assets of Lessor for recovery of any judgment against
Lessor, it being specifically agreed that no constituent shareholder, officer
or director of Lessor shall ever be personally liable for any such judgment
or the payment of any monetary obligation to Lessee. The provision contained
in the foregoing sentence is not intended to, and shall not, limit any right
that Lessee might otherwise have to obtain injunctive relief against Lessor
or Lessor's successors in interest, or any action not involving the personal
liability of Lessor (original or successor). Additionally, Lessor shall be
exonerated from any further liability under this Lease upon Lessor's transfer
or other divestiture of its ownership of the Leased Property, provided that
the assignee or grantee shall expressly assume in writing the obligations of
Lessor hereunder. Furthermore, in no event shall Lessor (original or
successor) ever be liable to Lessee for any indirect or consequential damages
suffered by Lessee from whatever cause.
34.4 PROHIBITED TRANSACTIONS. At all times during the Term of
this Lease, Lessee shall be prohibited from directly or indirectly engaging
in any of the following transactions (collectively, "Prohibited
Transactions"): (a) buying back any shares of corporate stock; (b) declaring
a dividend to shareholders of Lessee; and (c) repaying any loan or other
indebtedness to any current or former directors, officers, shareholders or
affiliates of Lessee;
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provided, however, that Lessee may engage in Prohibited Transactions during
any period that, and so long as, Lessee's debt to adjusted equity (measured
as total shareholders' equity determined in accordance with GAAP, less
goodwill) ratio is less than twenty-five percent (25%).
34.5 ADDENDUM, AMENDMENTS AND EXHIBITS. Any addendum, amendments
and exhibits attached to this Lease are hereby incorporated in this Lease and
made a part of this Lease.
34.6 HEADINGS. The headings and paragraph titles in this Lease
are not a part of this Lease and shall have no effect upon the construction
or interpretation of any part of this Lease.
34.7 TIME. Time is of the essence of this Lease and each and all
of its provisions.
34.8 DAYS. Unless otherwise expressly indicated herein, any
reference to "days" in this Lease shall be deemed to refer to calendar days.
34.9 RENT. Each and every monetary obligation under this Lease
shall be deemed to be "Rent" under this Lease and for all other purposes
under law.
34.10 APPLICABLE LAW. This Lease shall be governed by and
construed in accordance with the laws of the State of Minnesota, but not
including its conflicts of laws rules; thus the law that will apply is the
law applicable to a transaction solely within the State of Minnesota,
including parties solely domiciled in the State of Minnesota.
34.11 SUCCESSORS AND ASSIGNS. The covenants and conditions
contained in this Lease shall, subject to the provisions regarding assignment
(Article XXII), apply to and bind the heirs, successors, executors,
administrators, and assigns of Lessor and Lessee.
34.12 RECORDATION. Lessor and Lessee shall execute with
appropriate acknowledgments and record in the Official Records of Dakota
County, that certain Short Form Lease in the form and content of EXHIBIT "B"
attached hereto. Lessor and Lessee shall equally share the cost of recording
the Memorandum of Lease.
34.13 PRIOR AND FUTURE AGREEMENTS. This Lease contains all of the
agreements of Lessor and Lessee with respect to any matter covered or
mentioned in this Lease, and no prior agreements or understanding pertaining
to any such matters shall be effective for any purpose. No provision of this
Lease may be amended or supplemented except by an agreement in writing signed
by both Lessor and Lessee or their respective successors in interest. This
Lease shall not be effective or binding on any party until fully executed by
both Lessor and Lessee.
34.14 PARTIAL INVALIDITY. Any provision of this Lease which shall
be held by a court of competent jurisdiction to be invalid, void or illegal
shall in no way affect, impair or
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invalidate any other provision or term of this Lease, and such other
provision or terms shall remain in full force and effect.
34.15 ATTORNEYS' FEES. In the event of any action or proceeding
brought by one party against the other under this Lease, the prevailing party
shall be entitled to recover its attorneys' fees in such action or proceeding
from the other party, including all attorneys' fees incurred in connection
with any appeals, and any post-judgment attorneys' fees incurred in efforts
to collect on any judgment.
34.16 AUTHORITY OF LESSOR AND LESSEE. Lessor and Lessee each
hereby represent and warrant that the individuals signing on its behalf are
duly authorized to execute and deliver this Lease on behalf of the
corporation, in accordance with the bylaws of the corporation, and that this
Lease is binding upon the corporation.
34.17 RELATIONSHIP OF THE PARTIES. Nothing contained in this
Lease shall be deemed or construed by Lessor or Lessee, nor by any third
party, as creating the relationship of principal and agent or a partnership,
or a joint venture by Lessor or Lessee, it being understood and agreed that
no provision contained in this Lease nor any acts of Lessor and Lessee shall
be deemed to create any relationship other than the relationship of landlord
and tenant.
34.18 COUNTERPARTS. This Lease may be executed in one or more
separate counterparts, each of which, once they are executed, shall be deemed
to be an original. Such counterparts shall be and constitute one and the
same instrument.
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34.19 BROKERS. Lessor warrants to Lessee that, other than Sperry
Van Ness, it has had no dealings with any real estate broker or agent in
connection with the negotiation of this Lease and it knows of no real estate
broker or agent who is entitled to a commission in connection with this
Lease. Lessee warrants to Lessor that, other than Stanford M. Baratz or
Baratz Financial, it has had no dealings with any real estate broker or agent
in connection with the negotiation of this Lease and it knows of no real
estate broker or agent who is entitled to a commission in connection with
this Lease. Lessor and Lessee hereby agree to indemnify the other and to hold
the other harmless from and against any and all costs, expenses, claims,
damages, suits, including attorneys' fees, in any way resulting from claims
or demands for commissions or other compensation from any real estate brokers
claiming through such party with respect to this Lease.
WHEREFORE, each of the parties has accepted and agreed by affixing their
respective authorized signatures below as of the date first above written.
"LESSEE" THE TESSERACT GROUP, INC.,
A MINNESOTA CORPORATION
By: /s/ Tony Verbeten
---------------------------------------
Name: /s/ Tony Verbeten
-------------------------------------
Its: Chief Financial Officer
--------------------------------------
"LESSOR" EDUCORP PROPERTIES, INC.,
A NEVADA CORPORATION
By:
---------------------------------------
Name:
-------------------------------------
Its:
--------------------------------------
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AMENDED AND RESTATED LEASE
DATED JUNE 9, 1998
BETWEEN
EDUCORP PROPERTIES, INC., as Lessor
and
THE TESSERACT GROUP, INC., as Lessee
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Leased Property. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1.1 Paradise Valley Montessori Property. . . . . . . . . . . 1
1.1.2 Paradise Valley Property . . . . . . . . . . . . . . . . 2
1.1.3 Leased Property; Land; Leased Improvements . . . . . . . 3
1.2 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Contingencies. . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3.1 Lessor's Acquisition of the Paradise Valley
Property . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3.2 Cross-Default with Related Leases. . . . . . . . . . . . 3
1.3.3 Security Documents . . . . . . . . . . . . . . . . . . . 4
ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.1 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.1.1 Minimum Rent . . . . . . . . . . . . . . . . . . . . . . 9
3.1.2 Pre-Payment of Minimum Rent. . . . . . . . . . . . . . . 9
3.2 Annual Escalation of Minimum Rent. . . . . . . . . . . . . . . . 10
3.3 Additional Charges . . . . . . . . . . . . . . . . . . . . . . . 10
3.4 Net Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.5 Late Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 Payment of Impositions . . . . . . . . . . . . . . . . . . . . . 11
4.2 Notice of Impositions. . . . . . . . . . . . . . . . . . . . . . 12
4.3 Utility Charges. . . . . . . . . . . . . . . . . . . . . . . . . 13
4.4 Insurance Premiums . . . . . . . . . . . . . . . . . . . . . . . 13
4.5 Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.6 Pre-Payment of Impositions and Insurance Premiums. . . . . . . . 13
ARTICLE V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.1 No Termination, Abatement, etc . . . . . . . . . . . . . . . . . 14
5.2 Abatement Procedures . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.1 Ownership of the Leased Property . . . . . . . . . . . . . . . . 15
6.2 Lessee's Personal Property . . . . . . . . . . . . . . . . . . . 15
6.3 Consumable Inventory . . . . . . . . . . . . . . . . . . . . . . 15
6.4 Lessor's Purchase Option . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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<TABLE>
<S> <C>
7.1 Condition of Leased Property . . . . . . . . . . . . . . . . . . 17
7.2 Use of the Leased Property . . . . . . . . . . . . . . . . . . . 17
7.3 Radius Restriction . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.1 Compliance with Legal and Insurance Requirements,
Instruments, etc.. . . . . . . . . . . . . . . . . . . . . . . . 19
8.2 Legal Requirement Covenants. . . . . . . . . . . . . . . . . . . 19
ARTICLE IX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.1 Maintenance and Repair . . . . . . . . . . . . . . . . . . . . . 20
9.2 Expenditures to Comply with Law. . . . . . . . . . . . . . . . . 21
9.3 Encroachments, Restrictions, etc.. . . . . . . . . . . . . . . . 22
ARTICLE X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
10.1 Lessee's Obligations for Hazardous Materials . . . . . . . . . . 22
10.2 Definition of Hazardous Materials. . . . . . . . . . . . . . . . 23
ARTICLE XI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
11.1 No Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE XII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
12. Permitted Contests . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE XIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
13.1 General Insurance Requirements . . . . . . . . . . . . . . . . . 24
13.2 Replacement Cost . . . . . . . . . . . . . . . . . . . . . . . . 25
13.3 Additional Insurance . . . . . . . . . . . . . . . . . . . . . . 25
13.4 Waiver of Subrogation. . . . . . . . . . . . . . . . . . . . . . 26
13.5 Form Satisfactory, etc.. . . . . . . . . . . . . . . . . . . . . 26
13.6 Increase in Limits . . . . . . . . . . . . . . . . . . . . . . . 26
13.7 Blanket Policy . . . . . . . . . . . . . . . . . . . . . . . . . 26
13.8 No Separate Insurance. . . . . . . . . . . . . . . . . . . . . . 27
13.9 Continuous Coverage. . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE XIV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
14.1 Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . 27
14.2 Reconstruction in the Event of Damage or Destruction
Covered by Insurance Proceeds. . . . . . . . . . . . . . . . . . 27
14.3 Reconstruction in the Event of Damage or Destruction Not
Covered by Insurance . . . . . . . . . . . . . . . . . . . . . . 28
14.4 Lessee's Personal Property . . . . . . . . . . . . . . . . . . . 28
14.5 Restoration of Lessee's Property . . . . . . . . . . . . . . . . 28
14.6 No Abatement of Rent . . . . . . . . . . . . . . . . . . . . . . 28
14.7 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
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<TABLE>
<S> <C>
ARTICLE XV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
15. Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . 29
15.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
15.2 Parties' Rights and Obligations. . . . . . . . . . . . . . . . . 29
15.3 Total Condemnation . . . . . . . . . . . . . . . . . . . . . . . 29
15.4 Allocation of Portion of Award . . . . . . . . . . . . . . . . . 29
15.5 Partial Taking . . . . . . . . . . . . . . . . . . . . . . . . . 30
15.6 Temporary Taking . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE XVI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
16.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . 31
16.2 Certain Remedies . . . . . . . . . . . . . . . . . . . . . . . . 33
16.3 Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
16.4 Remedies Relating to Operation of the Paradise Valley
Montessori Property as a Charter School. . . . . . . . . . . . . 35
16.5 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
16.6 Application of Funds . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE XVII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
17. Lessor's Right to Cure Lessee's Default. . . . . . . . . . . . . 36
ARTICLE XVIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
18.1 Options to Extend. . . . . . . . . . . . . . . . . . . . . . . . 37
18.2 Minimum Rent During Extended Terms . . . . . . . . . . . . . . . 37
ARTICLE XIX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
19. Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE XX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
20. Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE XXI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
21. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE XXII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
22. Subletting and Assignment. . . . . . . . . . . . . . . . . . . . 41
22.1 Attornment . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
22.2 Sublease Limitation. . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE XXIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
23. Officer's Certificates and Financial Statements. . . . . . . . . 42
ARTICLE XXIV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
24. Lessor's Right of Entry. . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
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ARTICLE XXV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
25.1 Assignment of Intangibles. . . . . . . . . . . . . . . . . . . . 43
25.2 Adjustments and Prorations . . . . . . . . . . . . . . . . . . . 44
25.3 Transfer of Operations . . . . . . . . . . . . . . . . . . . . . 45
25.4 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 46
25.5 No Limitation. . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE XXVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
26. No Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE XXVII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
27. Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE XXVIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
28. Acceptance of Surrender. . . . . . . . . . . . . . . . . . . . . 47
ARTICLE XXIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
29. No Merger of Title . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE XXX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
30. Conveyance by Lessor . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE XXXI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
31. Quiet Enjoyment. . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE XXXII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
32. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE XXXIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
33.1 Lessor May Grant Liens . . . . . . . . . . . . . . . . . . . . . 49
33.2 Lessee's Right to Cure . . . . . . . . . . . . . . . . . . . . . 49
33.3 Breach by Lessor . . . . . . . . . . . . . . . . . . . . . . . . 50
ARTICLE XXXIV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
34. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . 50
34.1 Survival of Obligations. . . . . . . . . . . . . . . . . . . . . 50
34.2 Late Charges; Interest . . . . . . . . . . . . . . . . . . . . . 50
34.3 Limits of Lessor's Liability . . . . . . . . . . . . . . . . . . 50
34.4 Prohibited Transactions. . . . . . . . . . . . . . . . . . . . . 50
34.5 Addendum, Amendments and Exhibits. . . . . . . . . . . . . . . . 51
34.6 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
34.7 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
34.8 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
34.9 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
34.10 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
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34.11 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 51
34.12 Recordation. . . . . . . . . . . . . . . . . . . . . . . . . . . 51
34.13 Prior and Future Agreements. . . . . . . . . . . . . . . . . . . 51
34.14 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . 52
34.15 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . 52
34.16 Authority of Lessor and Lessee . . . . . . . . . . . . . . . . . 52
34.17 Relationship of the Parties. . . . . . . . . . . . . . . . . . . 52
34.18 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 52
34.19 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
</TABLE>
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<PAGE>
AMENDED AND RESTATED LEASE
THIS AMENDED AND RESTATED LEASE (this "Lease"), dated as of June 9, 1998,
by and between EDUCORP PROPERTIES, INC., a Nevada corporation, herein called
"Lessor", and THE TESSERACT GROUP, INC., a Minnesota corporation, herein called
"Lessee", amends and restates in its entirety that certain Lease ("Original
Lease"), dated as of the 29th day of May, 1998, by and between Lessor and
Lessee. This Lease does not terminate or replace the Original Lease, which
shall remain effective (as amended and restated hereby) until the expiration or
earlier termination of this Lease. In the event of any conflict or
inconsistency between the terms of this Lease and the terms of the Original
Lease, the terms of this Lease shall prevail.
ARTICLE I
1.1 LEASED PROPERTY.
1.1.1 PARADISE VALLEY MONTESSORI PROPERTY. Upon and subject
to the terms and conditions hereinafter set forth, Lessor leases to Lessee, and
Lessee rents and hires from Lessor all of the following (the "Paradise Valley
Montessori Property"):
(i) The real property situated in the City of Phoenix,
County of Maricopa, State of Arizona, and more particularly described in EXHIBIT
"A-1" attached hereto (the "Paradise Valley Montessori Land");
(ii) All buildings, structures, Fixtures (as hereinafter
defined) 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 Paradise Valley Montessori Land,
including without limitation that certain educational facility commonly known as
"Paradise Valley Montessori School" (collectively, the "Paradise Valley
Montessori Improvements");
(iii) All easements, rights and appurtenances relating to the
Paradise Valley Montessori Land and the Paradise Valley Montessori Improvements;
(iv) All permanently affixed equipment, machinery, fixtures,
and other items of real and/or personal property, including all components
thereof, permanently affixed to or incorporated into the Paradise Valley
Montessori 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 greatest extent
permitted by the law, are hereby deemed by the parties hereto to constitute real
estate, together with all replacements,
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modifications, alterations and additions thereto, to the extent acquired by
Lessor pursuant to the Paradise Valley Montessori Purchase Agreement
(collectively the "Fixtures"); and
(v) All warranties, indemnities, guaranties or other
contract rights or interests relating to the Paradise Valley Montessori
Improvements, to the extent acquired by Lessor pursuant to the Paradise Valley
Montessori Purchase Agreement.
Notwithstanding the foregoing, the Paradise Valley Montessori Property
shall not include any property not acquired by Lessor pursuant to the Paradise
Valley Montessori Purchase Agreement. The Paradise Valley Montessori Property
is demised subject to all covenants, conditions, restrictions, easements, and
other matters of record, and all other matters that affect title, zoning and any
other matters set forth in that certain Title Policy issued by Stewart Title
Company concurrently with Lessor's purchase of the Paradise Valley Montessori
Property and all matters disclosed in the ALTA survey obtained in connection
with such title insurance.
1.1.2 PARADISE VALLEY PROPERTY. Upon and subject to the
terms and conditions hereinafter set forth, Lessor leases to Lessee, and Lessee
rents and hires from Lessor all of the following (the "Paradise Valley
Property"):
(i) The real property situated in the City of Phoenix,
County of Maricopa, State of Arizona, and more particularly described in EXHIBIT
"A-2" attached hereto (the "Paradise Valley Land");
(ii) All buildings, structures, Fixtures (as hereinafter
defined) 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 Paradise Valley Land, including
without limitation that certain educational facility commonly known as "Paradise
Valley School" (collectively, the "Paradise Valley Improvements");
(iii) All easements, rights and appurtenances relating to the
Paradise Valley Land and the Paradise Valley Improvements;
(iv) All permanently affixed equipment, machinery, fixtures,
and other items of real and/or personal property, including all components
thereof, permanently affixed to or incorporated into the Paradise Valley
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 greatest extent permitted by the law,
are hereby deemed by the parties hereto to constitute real estate, together with
all replacements, modifications, alterations and additions thereto, to the
extent acquired by Lessor pursuant to the Paradise Valley Purchase Agreement
(collectively the "Fixtures"); and
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(v) All warranties, indemnities, guaranties or other
contract rights or interests relating to the Paradise Valley Improvements, to
the extent acquired by Lessor pursuant to the Paradise Valley Purchase
Agreement.
Notwithstanding the foregoing, the Paradise Valley Property shall not
include any property not acquired by Lessor pursuant to the Paradise Valley
Purchase Agreement. The Paradise Valley Property is demised subject to all
covenants, conditions, restrictions, easements, and other matters of record, and
all other matters that affect title, zoning and any other matters set forth in
that certain Title Policy issued by Chicago Title Company concurrently with
Lessor's purchase of the Paradise Valley Property and all matters disclosed in
the ALTA survey obtained in connection with such title insurance.
1.1.3 LEASED PROPERTY; LAND; LEASED IMPROVEMENTS. The
Paradise Valley Montessori Property and the Paradise Valley Property shall
hereinafter collectively be referred to as the "Leased Property." The Paradise
Valley Montessori Land and the Paradise Valley Land shall hereinafter
collectively be referred to as the "Land;" and the Paradise Valley Montessori
Improvements and the Paradise Valley Improvements shall collectively be referred
to as the "Leased Improvements."
1.2 TERM. The initial term of the Lease (the "Initial Term")
shall be the period commencing on the Commencement Date (as hereinafter defined)
as to each Leased Property and expiring on July 31, 2013. The "Commencement
Date" is and shall be, (a) as to the Paradise Valley Montessori Property, May
29, 1998; and (b) as to the Paradise Valley Property, June 10, 1998. Lessee has
the right to extend the term of this Lease, at Lessee's option, as provided in
Article XVIII, below. (The Initial Term plus all validly exercised options to
extend, if any, shall be referred to herein as the "Term").
1.3 CONTINGENCIES.
1.3.1 LESSOR'S ACQUISITION OF THE PARADISE VALLEY
PROPERTY. Lessee acknowledges and agrees that, at the time of executing this
Lease, Lessor does not own the Paradise Valley Property, but Lessor has a
right to purchase the Paradise Valley Property pursuant to the Paradise
Valley Purchase Agreement. This Lease, and all obligations hereunder of
either party, are contingent upon Lessor's acquisition of the fee simple
interest in the Paradise Valley Property. Therefore, if Lessor has not
acquired fee simple title to the Paradise Valley Property on or before June
30, 1998, this Lease shall be null and void and of no force or effect
whatsoever, and both Lessor and Lessee shall be relieved of all
responsibility under this Lease.
1.3.2 CROSS-DEFAULT WITH RELATED LEASES. Lessor and
Lessee acknowledge and agree that it is a material inducement to Lessor's
willingness to enter into this Lease that this Lease is cross-defaulted with
all of the Related Leases (defined below), and that all of the Related Leases
are cross-defaulted with this Lease. Further, it is the parties' intention
that this Lease be, and it hereby is, cross-defaulted with all of the Related
Leases, and that all of the Related Leases be cross-defaulted with this
Lease, notwithstanding the fact that certain of the Related Leases may not
have been entered into as of the date of this Lease. Accordingly,
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at the request of Lessor, Lessee shall promptly execute any amendments or
other documents necessary or appropriate to amend this Lease (and/or the
Related Leases) or otherwise to confirm that this Lease is cross-defaulted
with all of the Related Leases, and that all of the Related Leases are
cross-defaulted with this Lease.
1.3.3 SECURITY DOCUMENTS. Lessee acknowledges and agrees
that Lessor entered into this Lease, and agreed to the amount of Minimum Rent
payable hereunder, subject to the following conditions: (a) that, concurrently
with the execution of this Lease, and as security for Lessee's performance of
its covenants and obligations under this Lease, Lessee will be executing and
delivering to Lessor the Pledge Agreement (defined below) and the Security
Agreements (defined below) (collectively, the "Security Documents"); and (b)
effective upon execution of this Lease, and at all times during the Term hereof,
Lessor will have a valid, perfected and first-priority security interest in all
tangible and intangible collateral pledged or otherwise assigned to Lessor
pursuant to the Security Documents (collectively, the "Collateral").
Accordingly, it shall be an "Event of Default" under this Lease if, for any
reason whatsoever, Lessee shall fail to execute and deliver the Security
Documents as and when provided hereunder, Lessor shall fail to have a valid,
perfected and first-priority security interest in the Collateral, and such
failure or default is not cured within three (3) Business Days after Notice
thereof from Lessor, in which event, in addition to all of Lessor's remedies
available under Articles XVI and XVII or otherwise under this Lease, in equity
or by law, Lessor may terminate this Lease by giving Lessee Notice of such
termination in which event the Term shall immediately terminate and, subject to
the provisions of Articles VI and XXV, all rights of Lessee under this Lease
shall cease.
ARTICLE II
2. DEFINITIONS. For all purposes of this Lease, except as otherwise
expressly provided, (i) the terms defined in this Article II have the meanings
assigned to them in this Article II and include the plural as well as the
singular; (ii) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles at the time applicable; and (iii) the words "herein", "hereof" and
"hereunder" and other words of similar import refer to this Lease as a whole and
not to any particular Article, Paragraph or other subdivision:
ADDITIONAL CHARGES. As defined in Article III.
AFFILIATE. When used with respect to any corporation, the term
"Affiliate" shall mean any person or entity (including any trust) which,
directly or indirectly, controls or is controlled by or is under common control
with such corporation. For the purposes of this definition, "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), as used with respect to any person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, through the ownership
of voting securities, partnership interests or other equity interests. For the
purposes of this definition, "person" shall mean any natural person, trust,
partnership, corporation, joint venture or other legal entity.
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BUSINESS DAY. Each Monday, Tuesday, Wednesday, Thursday, and
Friday, which is not a day on which national banks in the State of Arizona
are authorized or obligated, by law or executive order, to close.
C.P.I. As defined in Paragraph 3.2.
CODE. The Internal Revenue Code of 1986, as amended.
ENCUMBRANCE. As defined in Article XXXIII.
EVENT OF DEFAULT. As defined in Article XVI.
EXTENDED TERM. As defined in Article XVIII.
FACILITIES. Collectively, these certain educational facilities
located on the Paradise Valley Montessori Property, and that certain educational
facility located on the Paradise Valley Property (each, a "Facility").
FACILITY MORTGAGE. As defined in Article XIII.
FACILITY MORTGAGEE. As defined in Article XIII.
FISCAL YEAR. The twelve (12) month period from July 1 through the
following June 30.
FIXTURES. As defined in Article I.
IMPOSITIONS. Collectively, all taxes (including, without limitation,
all ad valorem, sales and use, single business, gross receipts, transaction,
privilege, rent taxes, school taxes or fees or any other taxes as the same
relate to or are imposed upon Lessee or Lessor or the business conducted upon
the Leased Property), assessments (including, without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not to be completed within the
Term), water, sewer or other rents and charges, excises, tax levies, fees
(including, without limitation, license, permit, inspection, authorization and
similar fees), and all other governmental charges, in each case whether general
or special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of the Leased Property, Lessor, or the business conducted
thereon by Lessee (including all interest and penalties thereon due to any
failure in payment by Lessee), and all increases in all the above from any cause
whatsoever, including reassessment, which at any time prior to, during or in
respect of the Term may be assessed or imposed on or in respect of or be a lien
upon (a) Lessor's interest in the Leased Property or any part thereof; (b) the
Leased Property or any part thereof, including without limitation any personal
property located thereon or used in connection therewith, or any rent therefrom
or any estate, right, title or interest therein; or (c) any occupancy,
operation, use or possession of, or sales from, or activity conducted on, or in
connection with the Leased Property or the leasing or use of the Leased
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Property or any part thereof by Lessee. Without limiting the foregoing, the
term "Imposition" shall include any sales tax on rent paid under this Lease,
tuition or other amounts received with respect to services provided at or by
the Facilities, depreciation recapture, any other taxes (except for the
specific exclusions stated below), fees or charges imposed by the State of
Arizona and any potential subdivision thereof relating to the Facilities or
the Leased Property, this Lease, or rents received under this Lease, whether
relating to any period prior to or after the Commencement Date. Nothing
contained in this Lease shall be construed to require Lessee to pay (1) any
federal, state or local income tax of Lessor, taxes based on outstanding
corporate shares of Lessor or Lessor's equity or capitalization, regardless
of whether denominated as an income tax, franchise tax, capital tax or
otherwise; (2) any income or capital gain tax imposed with respect to the
sale, exchange or other disposition, or operation, by Lessor of any Leased
Property or the proceeds thereof; or (3) estate, inheritance or gift taxes.
INSURANCE REQUIREMENTS. All terms of any insurance policy required by
this Lease and all requirements of the issuer of any such policy.
LAND. As defined in Paragraph 1.1.3.
LEASE. As defined in the Preamble.
LEASE YEAR. The twelve (12) month period from September 1 to August
31 in each calendar year. In the case of the beginning of the Initial Term, the
provision "Lease Year" shall mean the period from the Commencement Date (defined
in Paragraph 1.2, above) to August 31, 1999; in the case of the end of the Term,
the provision "Lease Year" shall mean the period from the last September 1 to
occur in the Term to the date of expiration of the Lease. The Lease Year 1998
shall mean the Commencement Date through August 31, 1999; the Lease Year 1999
shall mean September 1, 1999 through August 31, 2000, and so on.
LEASED IMPROVEMENTS; LEASED PROPERTY. Each as defined in Paragraph
1.1.3.
LEGAL REQUIREMENTS. All federal, state, county, municipal, and other
governmental statutes, laws, rules, orders, regulations, ordinances, judgments,
decrees, and injunctions affecting either the Leased Property or the
construction, use or alteration thereof whether now or hereafter enacted and in
force, including any which may (i) require repairs, modifications or alterations
in or to the Leased Property; or (ii) in any way adversely affect the use and
enjoyment thereof, and all permits, licenses and authorizations and regulations
thereto, and all covenants, agreements, restrictions, and encumbrances contained
in any instruments, either of record or known to Lessee, at any time in force
affecting the Leased Property.
LESSEE. The Tesseract Group, Inc., a Minnesota corporation (and any
assignee permitted subject to the terms and conditions in this Lease).
LESSEE'S PERSONAL PROPERTY. All machinery, equipment, furniture,
furnishings, movable walls or partitions, computers, or trade fixtures or other
personal property, and consumable inventory and supplies, owned by Lessee and
used or useful in Lessee's business
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on the Leased Property, including without limitation, all items of furniture,
furnishings, equipment, supplies and inventory, all computer software,
databases or other intellectual property, and any and all replacements,
substitutions, additions or improvements thereto, whether now existing or
hereafter acquired, save and except those items included in the Leased
Property.
LESSOR. EduCorp Properties, Inc., a Nevada corporation, and its
successors and assigns. Unless Lessee is notified by Lessor otherwise, Lessor's
address is: 300 Esplanade Drive, Suite 1860, Oxnard, California 93030,
Attention: Pamela J. Privett, Esq.
MINIMUM RENT. As defined in Article III.
NOTICE. A notice given pursuant to Article XXXI hereof.
OFFICER'S CERTIFICATE. A certificate of Lessee signed by (i) Lessee's
Chief Executive Officer; AND (ii) Lessee's Chief Financial Officer. Any
signature required above may be substituted with a signature of another person
whose power and authority to act has been authorized by an appropriate corporate
resolution, subject to Lessor's approval in its sole discretion.
OTHER LEASES. Any lease now existing or hereafter entered into
between Lessor (or any of its Affiliates) and Lessee (or any of its Affiliates)
relating to any educational facility in any state of the United States,
irrespective of the terms and conditions of such lease, irrespective of the date
such lease is (or was) entered into, irrespective of the total number of leases
of educational facilities by and between Lessor and Lessee, and irrespective of
the location of any such educational facilities.
OVERDUE RATE. On any date, a rate equal to the Prime Rate (defined
below), plus two percent (2%); provided, however, that it is the intent of
Lessor and Lessee that the Overdue Rate (and all other interest rates provided
for hereunder) be in strict compliance with applicable usury laws of the State
of Arizona, and that in the event the Overdue Rate (or other interest rate
provided for hereunder) shall be deemed to exceed that permitted to be charged
by the laws of the State of Arizona, any and all excess sums collected by Lessor
shall be credited against the Rent payable under this Lease or if there is no
Rent due, promptly refunded to Lessee.
PARADISE VALLEY MONTESSORI PURCHASE AGREEMENT. That certain Agreement
of Purchase and Sale and Joint Escrow Instructions, dated as of May 29, 1998,
between Lessee as "Seller" and Lessor as "Buyer" providing for Lessor's
acquisition of all of Lessee's interest in and to the Paradise Valley Montessori
Property.
PARADISE VALLEY PURCHASE AGREEMENT. That certain Agreement of
Purchase and Sale and Joint Escrow Instructions, dated as of even date herewith,
between Lessee as "Seller" and Lessor as "Buyer" providing for Lessor's
acquisition of all of Lessee's interest in and to the Paradise Valley Property.
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PAYMENT DATE. Any due date for the payment of the installments of
Minimum Rent or any other payments required under this Lease.
PLEDGE AGREEMENT. As defined in Paragraph 3.1.2, and in the form
attached hereto as Exhibit "C."
PRIMARY INTENDED USE. As defined in Article VII.
PRIME RATE. On any date, a rate equal to the annual rate on such date
announced by Citibank, N.A. to be its prime rate for 90-day unsecured loans to
its corporate borrowers of the highest credit standing or, if not available,
such other rate as may be published by The Wall Street Journal as the prime rate
in its listing of "Money Rates."
RELATED LEASES. Those certain leases now existing or hereafter
entered into between Lessor (or any of its Affiliates) and Lessee (or any of its
Affiliates) relating to educational facilities with the following names in the
following locations: (i) "The Eagan School" located at 3800 Tesseract Place, in
the City of Eagan, Minnesota; (ii) "Ahwatukee TesseracT School" located at 4515
E. Muirwood Drive, in the City of Phoenix, Arizona; and (iii) "North Scottsdale
Tesseract School" located at 9701 East Bell Road, in the City of Scottsdale,
Arizona.
RENT. Any and all monetary obligations of Lessee owing under this
Lease.
SECURITY AGREEMENTS. As defined in Paragraph 6.4, and in the form
attached hereto as Exhibit "D."
SECURITY DOCUMENTS. As defined in Paragraph 1.3.2.
SUBSIDIARIES. Corporations, of which either Lessee or Lessor owns,
directly or indirectly, more than 50% of the voting stock (individually, a
"Subsidiary").
TERM. Collectively, the Initial Term plus any Extended Terms, as the
context may require, unless earlier terminated pursuant to the provisions
hereof.
UNSUITABLE FOR ITS PRIMARY INTENDED USE. A state of condition of any
one or more of the Facilities such that by reason of damage or destruction, or a
partial taking by Condemnation, the number of students that can be accommodated
at such Facility is reduced by fifty percent (50%) or more.
UNAVOIDABLE DELAYS. Delays due to strikes, lock-outs, inability to
procure materials, power failure, acts of God, governmental restrictions, enemy
action, civil commotion, fire, unavoidable casualty or other causes beyond the
control of the party responsible for performing an obligation hereunder;
provided that lack of funds shall not be deemed a cause beyond the control of
either party hereto unless such lack of funds available to Lessor results from
Lessee's failure to perform any of its obligations under this Lease.
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The above does not include all the definitions to be used in this
Lease. Various definitions of other terms are included in the other Articles of
this Lease.
ARTICLE III
3.1 RENT.
3.1.1 MINIMUM RENT. Lessee will pay to Lessor in lawful
money of the United States of America which shall be legal tender for the
payment of public and private debts, at Lessor's address set forth above or at
such other place or to such other person, firms or corporations as Lessor from
time-to-time may designate in a Notice, Minimum Rent (as defined below), during
the Term, as follows:
(a) INITIAL TERM. The annual "Minimum Rent" is the
sum of the following: (i) as to the Paradise Valley Montessori Property,
$193,450.00 (the "Paradise Valley Montessori Component of Minimum Rent"); and
(ii) as to the Paradise Valley Property, $282,800.00 (the "Paradise Valley
Component of Minimum Rent"). The Minimum Rent shall be subject to increase as
and when provided below in this Article III. The Minimum Rent shall be paid in
advance in equal, consecutive monthly installments on the first (1st) day of
each calendar month of the Term (each, a "Minimum Rent Payment Date"); provided,
however, that if the Commencement Date occurs on a day which is not the first
(1st) day of a calendar month, then the first Minimum Rent Payment Date shall be
the Commencement Date, in which event a prorated amount of Minimum Rent shall be
payable on the Commencement Date based on the number of days from and including
the Commencement Date to the first Minimum Rent Payment Date following the
Commencement Date. Minimum Rent shall be prorated for any partial month at the
beginning or end of the Term; and
(b) EXTENDED TERMS. The Minimum Rent during the
Extended Terms shall be as stated in Article XVIII, below.
3.1.2 PRE-PAYMENT OF MINIMUM RENT. Notwithstanding the
provisions of Paragraph 3.1.1, or any other provision of this Lease to the
contrary, Lessee agrees that as additional security for Lessee's performance
under this Article III, on or prior to the commencement of each Lease Year
during the Term (the Initial Term as well as any Extended Terms) Lessee shall
deposit into an interest-bearing deposit account ("Deposit Account") with a
depository institution entirely acceptable to Lessor ("Depository Institution")
an amount equal to all Minimum Rent payable up to the first day of the
succeeding Lease Year; provided, however, that if the Commencement Date of this
Lease is on a day prior to September 1, 1998, Lessee shall make the following
deposits for the Lease Year 1998: (a) on or prior to the Commencement Date, an
amount equal to the annual Minimum Rent payable under this Lease (to wit, twelve
(12) months' of Minimum Rent); and (b) on or prior to September 1, 1998, an
amount sufficient to pay all Minimum Rent up to the first day of Lease Year 1999
(to wit, September 1, 1999). Concurrently with each such deposit into the
Deposit Account, Lessee shall give Lessor written Notice thereof, specifying the
amount of such deposit and including a reasonably detailed breakdown of such
amount. Pursuant to that certain Collateral Pledge
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Agreement ("Pledge Agreement"), dated as of even date herewith, by Lessee for
the benefit of Lessor, in the form attached hereto as Exhibit "C," Lessee
shall grant to Lessor a security interest in, among other things, all funds
now or hereafter deposited in the Deposit Account pursuant to this Paragraph
3.1.2, and such funds shall be pledged by Lessee to Lessor for the purpose of
securing Lessee's payment of Minimum Rent and other amounts payable by Lessee
under this Article III. The Pledge Agreement shall provide that Lessor shall
be entitled to disbursements from the Deposit Account on each Minimum Rent
Payment Date in an amount equal to one-twelfth of the annual Minimum Rent
owing under this Lease, without the need for further written authorization
from Lessee, and without demand, abatement, setoff or notice, and otherwise
upon and subject to the terms and conditions set forth under the Pledge
Agreement. If at any time the funds deposited in the Deposit Account are or
will be insufficient to pay the Minimum Rent payable by Lessee for the then
applicable Lease Year, Lessor may notify Lessee and Lessee shall immediately
deposit an amount equal to the deficiency in the Deposit Account. Upon the
expiration of the Term of this Lease, and provided that Lessee is not in
default under this Lease, and that no Rent or other payments are due to
Lessor hereunder, Lessor shall cause all funds held in the Deposit Account to
be refunded to Lessee. Failure to make any deposits required hereunder as
and when due shall be a default under this Lease.
3.2 ANNUAL ESCALATION OF MINIMUM RENT. Commencing on the first
day of Lease Year 1999 (to wit, September 1, 1999), and continuing on the first
day of each subsequent Lease Year during the Term (the Initial Term as well as
any Extended Terms) (each, an "Escalation Date"), the Minimum Rent (irrespective
of any prorations made pursuant to Paragraph 3.1(a) of this Lease) shall
increase by an amount equal to the Minimum Rent for the immediately preceding
twelve (12) month period multiplied by an amount ("Annual Multiplier") equal to
one hundred fifty percent (150%) of the following fraction: (i) the numerator
of which shall be the C.P.I. (defined below) for the second month preceding the
month in which such Escalation Date occurs (for example, if the Escalation Date
is September 1, 1999, then the C.P.I. from July 1999 shall be used); and (ii)
the denominator of which shall be the C.P.I. for the second month preceding the
month in which the prior year's Escalation Date occurred (or, in the case of the
first Escalation Date, the C.P.I. for the month of July, 1998); PROVIDED,
HOWEVER, that the Annual Multiplier shall not ever exceed two percent (2%) per
year, nor shall it ever result in a decrease in the Minimum Rent payable
hereunder. "C.P.I." shall mean and refer to the Consumer Price Index published
as the "CPI-U" index by the Bureau of Labor Statistics of the Department of
Labor, U.S. Cities Average, All Items (1982-84 = 100) in the manner calculated
as of the date of this Lease; provided that if compilation of the C.P.I. is
discontinued or transferred to any other governmental department or bureau, then
the index most nearly the same as the C.P.I. shall be used.
3.3 ADDITIONAL CHARGES. In addition to the Minimum Rent, (1)
Lessee will also pay and discharge as and when due and payable all other
amounts, liabilities, obligations and Impositions which Lessee assumes or agrees
to pay under this Lease, and (2) in the event of any failure on the part of
Lessee to pay any of those items referred to in the immediately preceding clause
(1) above, Lessee will also promptly pay and discharge every fine, penalty,
interest and cost which may be added for non-payment or late payment of such
items (the items referred to in clauses (1) and (2) above being referred to
herein collectively as the "Additional
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Charges"), and Lessor shall have all legal, equitable and contractual rights,
powers and remedies provided either in this Lease or by statute or otherwise
in the case of non-payment of the Additional Charges. If any elements of
Additional Charges shall not be paid within seven (7) Business Days after its
due date and Lessor pays any such amount (which Lessor shall have the right,
but not the obligation, to do), then, in addition to Lessor's other rights
and remedies, Lessee will pay Lessor on demand, as Additional Charges,
interest on such unpaid Additional Charges computed at the Overdue Rate from
the due date of such installment to the date of Lessee's payment thereof.
3.4 NET LEASE. Subject to the provisions of Article V, below,
without limiting any provision of this Lease, the Rent shall be paid absolutely
net to Lessor, so that this Lease shall yield to Lessor the full amount of the
installments of Minimum Rent throughout the Term, all as more fully set forth in
Articles IV, VIII, IX and XIII, and other provisions of this Lease, so that,
accordingly, Lessee shall pay all Additional Charges and any other expenses of
any kind associated with this Lease and the Leased Property to insure that
Lessor receives the Minimum Rent, net of all expenses. Further, Lessee shall be
responsible for all Additional Charges and all other amounts due under this
Lease for any period prior to the Term.
3.5 LATE CHARGE. LESSEE HEREBY ACKNOWLEDGES THAT LATE PAYMENT BY
LESSEE TO LESSOR OF RENT (INCLUDING WITHOUT LIMITATION MINIMUM RENT AND
ADDITIONAL CHARGES) WILL CAUSE LESSOR TO INCUR COSTS NOT CONTEMPLATED BY THIS
LEASE, THE EXACT AMOUNT OF WHICH WILL BE EXTREMELY DIFFICULT TO ASCERTAIN. SUCH
COSTS INCLUDE, BUT ARE NOT LIMITED TO, PROCESSING AND ACCOUNTING CHARGES.
ACCORDINGLY, IF ANY INSTALLMENT OF MINIMUM RENT OR ANY OTHER SUM DUE FROM LESSEE
SHALL NOT BE RECEIVED BY LESSOR WITHIN FIVE (5) BUSINESS DAYS AFTER SUCH AMOUNT
SHALL BE DUE, THEN WITHOUT ANY REQUIREMENT FOR NOTICE TO LESSEE, LESSEE SHALL
PAY TO LESSOR A LATE CHARGE EQUAL TO FIVE PERCENT (5%) OF SUCH OVERDUE AMOUNT.
THE PARTIES HEREBY AGREE THAT SUCH LATE CHARGE REPRESENTS A FAIR AND REASONABLE
ESTIMATE OF THE COSTS LESSOR WILL INCUR BY REASON OF LATE PAYMENT BY LESSEE.
ACCEPTANCE OF SUCH LATE CHARGE BY LESSOR SHALL IN NO EVENT CONSTITUTE A WAIVER
OF LESSEE'S DEFAULT OR BREACH WITH RESPECT TO ANY UNPAID OVERDUE AMOUNTS, NOR
PREVENT LESSOR FROM EXERCISING ANY OF THE OTHER RIGHTS AND REMEDIES GRANTED
UNDER THIS LEASE WITH RESPECT TO ANY SUCH UNPAID OVERDUE AMOUNTS.
ARTICLE IV
4.1 PAYMENT OF IMPOSITIONS. Subject to the provisions of
Paragraph 4.6, Lessee will pay, or cause to be paid, all Impositions coming due
prior to or during the Term, or which relate to any period within the Term or
prior to the Term, before any fine, penalty, interest or cost may be added for
non-payment (or earlier if required by any taxing authority), such payments to
be made directly to the taxing authorities where feasible, and will promptly
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furnish to Lessor copies of official receipts or other satisfactory proof
evidencing such payments. Lessee's obligation to pay Impositions shall be
deemed absolutely fixed upon the date such Impositions become a lien upon the
Leased Property or any part thereof. Lessee, at its expense, shall, to the
extent required or permitted by Legal Requirements, prepare and file all tax
returns and reports in respect of any Imposition as may be required by
governmental authorities. If any refund shall be due from any taxing
authority in respect of any Imposition, the same shall be paid over to or
retained by Lessee if no Event of Default shall have occurred hereunder and
be continuing, but if such Event of Default has occurred and is continuing
(I.E., it has not been cured), such refund shall be paid to Lessor and
utilized to cure any such continuing Event of Default. After fully curing
such Event of Default, any excess funds from such refund shall be paid by
Lessor to Lessee. Any such funds retained by Lessor, as provided above,
shall be applied as provided in Article XVI. Lessor and Lessee shall, upon
request of the other, provide such data as is maintained by the party to whom
the request is made with respect to the Leased Property as may be necessary
to prepare any required returns and reports. In the event governmental
authorities classify any property covered by this Lease as personal property,
Lessee shall file all personal property tax returns in such jurisdictions
where it must legally so file. Lessor, to the extent it possesses the same,
and Lessee, to the extent it possesses the same, will provide the other
party, upon request, with cost and depreciation records necessary for filing
returns for any property so classified as personal property. Where Lessor is
legally required to file personal property tax returns, Lessee will provide
to Lessor copies of assessment notices indicating a value in excess of the
reported value in sufficient time for Lessor to file a protest. Lessee may,
upon notice to Lessor, at Lessee's option and at Lessee's sole cost and
expense, protest, appeal or institute such proceedings as Lessee may deem
appropriate to effect a reduction of real estate or personal property
assessments and Lessor, at Lessee's sole cost and expense as aforesaid, shall
fully cooperate with Lessee in such protest, appeal, or other action,
provided that Lessee may not withhold payments pending such challenges except
under the conditions set forth in Article XII. Billings for reimbursement by
Lessee to Lessor of personal property taxes shall be accompanied by copies of
a bill therefor and payments thereof which identify the personal property
with respect to which such payments are made. Unless Lessee is notified by
Lessor otherwise, Lessee shall pay all Impositions directly to the
appropriate taxing or other authorities to which payments are due, and Lessee
shall provide Lessor written evidence and notice that all such payments have
been made. Without limiting any of the other indemnities set forth in this
Lease, Lessee hereby agrees to defend, indemnify, protect and hold harmless
Lessor in connection with any Impositions that relate to any time prior to or
during the Term, and Lessee acknowledges and agrees that it will not make
claims against, or otherwise look to, Lessor to reimburse Lessee for payments
made relating to any period prior to the Commencement Date.
4.2 NOTICE OF IMPOSITIONS. Lessor shall give prompt Notice to
Lessee for all Impositions payable by Lessee hereunder of which Lessor has
knowledge, but Lessor's failure to give any such Notice shall in no way diminish
Lessee's obligations hereunder to pay such Impositions, but such failure shall
obviate any default hereunder for a reasonable time after Lessee receives notice
(from any source) of any Imposition which it is obligated to pay. However,
notwithstanding the foregoing, it shall be Lessee's sole duty to inquire and
determine
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all of the Impositions for which it is liable as provided herein and shall
promptly pay such Impositions when due, and Lessor shall have no duty of
inquiry concerning Impositions.
4.3 UTILITY CHARGES. Lessee will pay or cause to be paid all
charges for electricity, power, gas, oil, water, sewer connection and all other
utilities used in or for the Leased Property during the Term.
4.4 INSURANCE PREMIUMS. Subject to the provisions of Paragraph
4.6, Lessee will pay or cause to be paid all premiums for the insurance coverage
required to be maintained pursuant to Article XIII during the Term.
4.5 PAYABLES. Lessee acknowledges and agrees that prior to the
Commencement Date, certain liabilities and other obligations were incurred
arising from the development, construction and operation of the Facilities for
which Lessee is and shall remain responsible and liable and Lessor shall have no
responsibility, liability or obligation whatsoever with respect to the same.
Therefore, Lessee agrees as part of this Lease to pay all liabilities and
obligations concerning the Facilities, whether arising before or after the
Commencement Date.
4.6 PRE-PAYMENT OF IMPOSITIONS AND INSURANCE PREMIUMS.
Notwithstanding the provisions of Paragraph 4.1 or 4.4, or any other provision
of this Lease to the contrary, Lessee agrees that as additional security for
Lessee's performance under this Article IV, on or prior to the commencement of
each Lease Year during the Term (the Initial Term as well as any Extended
Terms), Lessee shall pay all Impositions payable by Lessee under Paragraph 4.1
and all insurance premiums payable by Lessee under Paragraph 4.4 up to the first
day of the succeeding Lease Year, and shall furnish Lessor with evidence
satisfactory to Lessor that the same have been paid; provided, however, that (a)
to the extent that such Impositions payable by Lessee under Paragraph 4.1 cannot
be paid in full for any Lease Year for any reason outside of the control of
Lessee, then on or prior to the first day of such Lease Year, Lessee shall
deposit into the Deposit Account an amount sufficient, as estimated by Lessor in
its reasonable discretion, to pay all such Impositions payable up to the first
day of the succeeding Lease Year, and (b) Lessee may elect not to pay in full
all insurance premiums payable by Lessee under Paragraph 4.4 through the first
day of the succeeding Lease Year, in which event Lessee shall deposit into the
Deposit Account an amount sufficient, as estimated by Lessor in its reasonable
discretion, to pay for all additional amounts necessary to pay all such
insurance premiums up to the first day of the succeeding Lease Year.
Concurrently with each such deposit into the Deposit Account, Lessee shall give
Lessor written Notice thereof, specifying the amount of such deposit and
including a reasonably detailed breakdown of such amount. Pursuant to the
Pledge Agreement, Lessee shall grant to Lessor a security interest in, among
other things, all funds now or hereafter deposited in the Deposit Account
pursuant to this Paragraph 4.6, and such funds shall be pledged by Lessee to
Lessor as security for the payment of the Impositions payable under Paragraph
4.1 and the insurance premiums payable under Paragraph 4.4, and as otherwise
provided thereunder. The Pledge Agreement shall provide that Lessee shall be
entitled to withdraw and use funds in the Pledge Account for payment of
Impositions payable by Lessee under Paragraph 4.1 and for payment of insurance
premiums payable by Lessee under Paragraph 4.4, upon and subject to the terms
and conditions set forth under the Pledge Agreement. If at
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any time the funds deposited in the Deposit Account are or will be
insufficient to pay the Impositions payable by Lessee under Paragraph 4.1 for
the then applicable Lease Year, or to pay all insurance premiums payable by
Lessee under Paragraph 4.4 for the then applicable Lease Year, Lessor may
notify Lessee and Lessee shall immediately deposit an amount equal to the
deficiency in the Deposit Account. Upon the expiration of the Term of this
Lease, and provided that Lessee is not in default under this Lease, and that
no Rent or other payments are due to Lessor hereunder, Lessor shall cause all
funds held in the Deposit Account to be refunded to Lessee. Failure to make
any deposits required hereunder as and when due shall be a default under this
Lease.
ARTICLE V
5.1 NO TERMINATION, ABATEMENT, ETC. Subject to the provisions of
Paragraph 5.2, Lessee shall not be entitled to any abatement, deduction,
deferment or reduction of Rent, or set-off against the Rent, nor shall the
respective obligations of Lessor and Lessee be otherwise affected by reasons of
(a) any damage to, or destruction of, any Leased Property or any portion
thereof; (b) the lawful or unlawful prohibition of, or restriction upon,
Lessee's use of the Leased Property, or any portion thereof, the interference
with such use by any person, corporation, partnership or other entity, or by
reason of eviction by paramount title; (c) any claim which Lessee has or might
have against Lessor or by reason of any default or breach of any warranty by
Lessor under this Lease or any other agreement between Lessor and Lessee, or to
which Lessor and Lessee are parties; (d) any bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding-up
or other proceedings affecting Lessor or any assignee or transferee of Lessor;
or (e) for any other cause whether similar or dissimilar to any of the foregoing
other than a discharge of Lessee from any such obligations as a matter of law.
Lessee hereby specifically waives all rights, arising from any occurrence
whatsoever, which may now or hereafter be conferred upon it by law to (i)
modify, surrender or terminate this Lease or quit or surrender the Leased
Property or any portion thereof; or (ii) entitle Lessee to any abatement,
reduction, suspension or deferment of the Rent payable under this Lease. The
obligations of Lessor and Lessee hereunder shall be separate and independent
covenants and agreements and the Rent due under this Lease shall continue to be
payable in all events, irrespective of Lessor's performance or non-performance
under this Lease, unless the obligations to pay the same shall be terminated
pursuant to the express provisions of this Lease or by termination of this Lease
other than by reason of an Event of Default.
5.2 ABATEMENT PROCEDURES. In the event Lessee is entitled to an
abatement of Minimum Rent under Article XV (by reason of any Condemnation as
provided thereunder), the Lease shall not terminate (except as provided in
Article XV) but the Minimum Rent shall be abated in proportion to the reduced
capacity of the Leased Property for the use made of the same by Lessee at the
time of the Condemnation (I.E., the reduction in the number of students the
Leased Property can accommodate under standards existing immediately prior to
the Condemnation). If Lessor and Lessee are unable to agree upon the amount of
such abatement within thirty (30) days after any partial taking as provided
under Article XV, the matter shall be submitted by either party to a court of
competent jurisdiction for resolution, but Lessee
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during such resolution shall continue to perform its obligations hereunder,
including, but not limited to, payment of that portion of the Minimum Rent
which is not then in dispute.
ARTICLE VI
6.1 OWNERSHIP OF THE LEASED PROPERTY. Lessee acknowledges and
agrees that the Leased Property is the property of Lessor and that Lessee has
only the right to the exclusive possession and use of the Leased Property upon
the terms and conditions of this Lease.
6.2 LESSEE'S PERSONAL PROPERTY. Lessee may (and shall as provided
hereinbelow), at its expense, install, assemble or place on any parcels of the
Land or in any of the Leased Improvements, any items of Lessee's Personal
Property. Lessee shall provide and maintain during the entire Term all such
Lessee's Personal Property as shall be necessary in order to operate each of the
Facilities, (a) in a manner consistent with the standard of operation for such
Facility as of the Commencement Date of this Lease with respect to each such
Facility, (b) in compliance with accreditation requirements (if such Facility
has obtained accreditation), (c) as to the elementary school (that is,
kindergarten through grade four) located on the Paradise Valley Montessori
Property, in compliance with all requirements of the charter school legislation
for the State of Arizona and the requirements of the particular charter
applicable to such Facility, (d) in compliance with all other applicable Legal
Requirements and Insurance Requirements, and (e) otherwise in accordance with
customary practice in the industry for the Primary Intended Use. On or prior to
the commencement of each Lease Year during the Term, Lessee shall provide Lessor
with an updated list identifying in reasonable detail all of Lessee's Personal
Property located at, or used in connection with, the Leased Property listed by
the Facility or other location at which such Lessee's Personal Property is
located. Notwithstanding the foregoing, the parties acknowledge and agree that,
pursuant to those certain Security Agreements ("Security Agreements"), executed
by Lessee for the benefit of Lessor, in the form attached hereto as Exhibit "D"
(one of which relates to the Paradise Valley Montessori Property and the other
of which relates to the Paradise Valley Property), Lessee has granted to Lessor
a security interest in, among other things, all of Lessee's Personal Property
and all Consumable Inventory (defined in Paragraph 6.3 below). To the extent
that Lessor elects not to purchase Lessee's Personal Property pursuant to its
Purchase Option contained in Paragraph 6.4 below, Lessee shall remove the same
upon the expiration of the Term, and Lessee shall, within twenty (20) days
following the expiration of this Lease, at its sole cost and expense, repair any
damage to the Land or the Leased Improvements occasioned by the installation,
maintenance or removal thereof, and restore the Land or Leased Improvements to
its condition immediately prior to any such installation.
6.3 CONSUMABLE INVENTORY. Lessor and Lessee acknowledge that
certain inventory, including consumables, located at each of the Facilities as
of the Commencement Date ("Consumable Inventory") will be completely consumed or
otherwise disposed of during the course of Lessee's operation of each such
Facility. Lessee agrees that, at all times during the Term, Lessee shall
replace and restore the Consumable Inventory in accordance with normal business
practices, so that at all times during the Term there is sufficient Consumable
Inventory
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to fully equip such Facility for its operation and maintenance as may be
customary for educational facilities comparable to such Facility.
6.4 LESSOR'S PURCHASE OPTION. Without limiting Lessor's rights
and remedies under the Security Agreement or otherwise under this Lease, and as
a material consideration to Lessor's agreement to enter into this Lease, Lessee
hereby grants to Lessor the option ("Purchase Option") to purchase Lessee's
Personal Property and Consumable Inventory, in whole or in part, which Purchase
Option may be exercised by Lessor effective as of the expiration of the Term (or
the Extended Term, as the case may be), for a purchase price ("Option Purchase
Price") equal to the lower of (a) the book value thereof, as determined in
accordance with GAAP and based upon audited financial statements, as of the time
of Lessor's exercise of its Purchase Option; and (b) the fair market value
thereof, as of the time of Lessor's exercise of its Purchase Option. In the
event Lessor desires to exercise its Purchase Option granted under this
Paragraph 6.4, Lessor shall give Lessee written Notice ("Notice of Exercise")
not less than thirty (30) days prior to the expiration of the Term, which Notice
of Exercise shall identify with reasonable specificity all items of Lessee's
Personal Property and Consumable Inventory which Lessor desires to purchase
(collectively, the "Purchase Option Property") and Lessor's estimation of the
Option Purchase Price applicable thereto. Upon the termination of this Lease,
Lessee shall transfer and convey to Lessor all Purchase Option Property, by
execution and delivery of a bill of sale or other instrument acceptable to
Lessor, and, subject to the conditions set forth below, Lessor shall pay to
Lessee the Option Purchase Price. Lessor shall have the right to inspect the
Lessee's Personal Property and Consumable Inventory, and Lessee's books and
records concerning the same, for any purpose in connection with preparation of
the Notice of Exercise or otherwise in connection with Lessee's Purchase Option
granted hereunder, on at least one Business Day's prior notice during usual
business hours, and Lessee shall cooperate with Lessor in connection therewith.
Lessee shall have five (5) days after receipt of Lessor's Notice of Exercise
within which to give Lessor written notice of its objection to any items or
information, including without limitation Lessor's estimate of the Option
Purchase Price, contained on Lessor's Notice of Exercise. In the event that
Lessee notifies Lessor of any objection within such five (5) day period, and the
parties fail to resolve any disagreement regarding the Notice of Exercise by the
date of termination of this Lease, the conveyance of the Purchase Option
Property shall occur upon expiration of the Term as contemplated hereunder for a
purchase price equal to the book value thereof, as determined in accordance with
GAAP and based upon audited financial statements, and the parties shall
thereafter submit any disputes to an auctioneer or state certified party with at
least five years experience appraising personal property for resolution. Any
overpayment or deficiency between the book value and the Option Purchase Price
shall be paid to the party to whom the same is owing within thirty (30) days
after determination thereof. Without limiting the foregoing, Lessee agrees to
perform such other acts, and to execute, acknowledge and/or deliver subsequent
to the expiration or earlier termination of the Term, all such instruments,
documents and materials, as Lessor may reasonably request in order to effectuate
Lessor's exercise of the Purchase Option contemplated hereunder.
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ARTICLE VII
7.1 CONDITION OF LEASED PROPERTY. Lessee acknowledges receipt and
delivery of possession of the Leased Property and further acknowledges that
Lessee has examined and otherwise has knowledge of the condition of the Leased
Property prior to the execution and delivery of this Lease and has found the
same to be in good order and repair and satisfactory for it purposes hereunder.
Lessee represents and warrants that the Lessee's Personal Property includes all
equipment and property required under applicable federal and state law to
operate each of the Facilities. Lessee is leasing the Leased Property "AS-IS"
in its present condition. Lessee waives any claim or action against Lessor in
respect of the condition of the Leased Property. LESSOR MAKES NO WARRANTY OR
REPRESENTATIONS, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY OR ANY
PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR THE
MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH
RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY
HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT. WITHOUT LIMITING THE
FOREGOING, IT SHALL BE LESSEE'S RESPONSIBILITY TO DETERMINE THE AMOUNT OF
REIMBURSEMENT AND OTHER PAYMENTS THAT IT MAY BE ENTITLED RECEIVE FROM THE
FEDERAL, STATE OR LOCAL GOVERNMENTS AND LESSEE'S OBLIGATIONS UNDER THIS LEASE
SHALL NOT BE MODIFIED, CHANGED OR OTHERWISE BE REDUCED IN THE EVENT THAT LESSEE
HAS INCORRECTLY ANALYZED THE AMOUNTS TO BE PAID TO LESSEE BY ANY GOVERNMENT OR
AGENCY THEREOF.
7.2 USE OF THE LEASED PROPERTY.
7.2.1 Lessee covenants that it will obtain and, at all times
during the Term, maintain all charters (as to the elementary/middle school
Facility located on the Paradise Valley Montessori Property only), licenses,
permits and approvals necessary or desirable for the use and operation of the
Leased Property and each of the Facilities located thereon under applicable
federal, state and local law, and to use reasonable best efforts to obtain and
thereafter maintain the full accreditation of the Facilities. Lessee shall
provide to Lessor, at Lessor's request a copy of any report or survey conducted
by any federal, state or local government entity regarding any of the
Facilities, and any other such information or documents concerning the operation
of the Facilities.
7.2.2 After the Commencement Date and during the entire Term,
Lessee shall use or cause to be used the Leased Property as follows: (a) as to
the Paradise Valley Montessori Property, as a pre-school having all licenses,
permits and approvals necessary to operate a pre-school in the State of Arizona
and as an educational facility having all charters, licenses, permits and
approvals necessary to operate a charter school under the charter school
legislation for the State of Arizona and uses incidental to each of the
foregoing; and (b) as to the Paradise Valley Property, as an educational
facility having all licenses, permits and approvals necessary to operate a
private pre-school and elementary/middle school (serving kindergarten
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and certain higher grades) in the State of Arizona and uses incidental to the
foregoing (the particular such use to which the Leased Property is put at any
particular time is herein referred to as the "Primary Intended Use"). Lessee
shall not use the Leased Property or any portion thereof for any other use
without the prior written consent of Lessor, which consent may be withheld in
Lessor's sole and absolute discretion. No use shall be made of the Leased
Property, and no acts shall be done, which will cause the cancellation of any
insurance policy, or permit to be kept, used or sold in or about the Leased
Property any article which may be prohibited by law or by the standard form
of fire insurance policies, or any other insurance policies required to be
carried hereunder, or fire underwriter's regulations. Lessee shall, at its
sole cost, comply with all of the requirements pertaining to the Leased
Property or other improvements of any insurance board, association,
organization, or company necessary for the maintenance of insurance, as
herein provided, covering the Leased Property and Lessee's Personal Property.
7.2.3 Lessee covenants and agrees that during the Term (a) it
will operate continuously the Leased Property in accordance with its Primary
Intended Use and all applicable permits, licenses and approvals; (b) as to the
elementary/middle school located on the Paradise Valley Montessori Property, it
will obtain and maintain its charter to operate said school as a charter school;
and (c) it will apply for, use reasonable best efforts to obtain, and thereafter
maintain its accreditation as to the elementary/middle schools located on each
of the Leased properties.
7.2.4 Lessee covenants and agrees that all so-called
"classroom" teachers for all elementary school grades, commencing with
kindergarten and continuing through any higher grade served by the Facilities,
are, and at all times during the Term will be, certified under applicable state
law.
7.2.5 Lessee shall not commit or suffer to be committed any
waste on the Leased Property, or in the Facilities nor shall Lessee cause or
permit any nuisance thereon.
7.2.6 Lessee shall neither suffer nor permit the Leased
Property or any portion thereof, including Lessee's Personal Property, to be
used in such a manner as (i) might reasonably tend to impair Lessor's (or
Lessee's, as the case may be), title thereto or to any portion thereof; or (ii)
may reasonably make possible a claim or claims of adverse usage or adverse
possession by the public, as such, or of implied dedication of the Leased
Property or any portion thereof.
7.3 RADIUS RESTRICTION; RIGHT OF FIRST REFUSAL. Lessee
acknowledges that a fair return to Lessor on its investment in the Leased
Property is dependent, in part, on the concentration on the Leased Property
during the Term of the educational services and facilities provided by Lessee
and its Affiliates in the geographical area of the Leased Property.
Accordingly, as a material inducement to Lessor's agreement to enter into this
Lease, Lessee agrees as follows:
7.3.1 During the Term, neither Lessee nor any of its
Affiliates, directly or indirectly, shall operate, own, manage or have any
interest in or otherwise participate in or receive revenues from any other
facility or institution providing services similar to those
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provided in connection with the Facilities and the Primary Intended Use,
within a ten (10) mile radius outward from the outside boundary of the Leased
Property, without the prior consent of Lessor, which consent may be given or
withheld in Lessor's sole discretion; provided, however, that the foregoing
restriction shall not apply to those facilities owned by Lessee and listed on
Exhibit "E" attached hereto and incorporated herein. All distances shall be
measured on a straight line rather than on a driving distance basis. In the
event that any portion of such other facility or institution is located
within such restricted area the entire facility or institution shall be
deemed located within such restricted area.
7.3.2 Without limiting the provisions set forth in
subparagraph 7.3.1 above, Lessee agrees that concurrently with any request for
Lessor's consent to Lessee's (or any of its Affiliates') operation or investment
in any facility or institution as required under subparagraph 7.3.1, Lessee
shall notify Lessor of any financing that Lessee may desire in connection with
such facility. Prior to Lessee's committing to financing with any other lender
or investor, Lessee shall notify Lessor of the proposed terms of such financing,
and provide Lessor with a copy of any nonbinding term sheet or any other
information as may be reasonably requested by Lessor, and Lessor (or any of its
Affiliates) shall have the right (to be exercised not later than ten (10)
Business Days following the receipt by Lessor of the requested information) to
provide financing for the facility on the same terms and conditions as proposed
by such lender. In the event Lessor fails to timely exercise its right of first
refusal to provide financing on such terms and conditions, Lessor shall be
deemed to have waived such right, except that if the proposed transaction does
not occur within thirty (30) days after the date set forth in the information
provided to Lessor, or if the terms and conditions of such financing are
materially changed from those set forth on the information provided to Lessor,
this right of first refusal shall be deemed applicable to said transaction. It
is further understood that, in the event Lessor (or any of its Affiliates) does
not exercise its right of first refusal, this provision shall nevertheless be
applicable to any further or future transfer which is subject to subparagraph
7.3.1.
ARTICLE VIII
8.1 COMPLIANCE WITH LEGAL AND INSURANCE REQUIREMENTS, INSTRUMENTS,
ETC. Subject to Article XII relating to permitted contests, Lessee, at its sole
cost and expense, will promptly (a) comply with all applicable Legal
Requirements and Insurance Requirements in respect of the use, operation,
maintenance, repair, and restoration of the Leased Property, whether or not
compliance therewith shall require structural changes in any of the Leased
Improvements or interfere with the use and enjoyment of the Leased Property; and
(b) procure, maintain and comply with all charters, licenses, permits and other
approvals, if any, required for any use of the Leased Property and Lessee's
Personal Property then being made, and for the proper erection, installation,
operation, and maintenance of the Leased Property or any part thereof.
8.2 LEGAL REQUIREMENT COVENANTS. Lessee covenants and agrees that
the Leased Property and Lessee's Personal Property shall not be used for any
unlawful purpose. Lessee further warrants and represents that Lessee has
obtained all necessary governmental
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approvals and has given all necessary notices to allow Lessee to operate the
Leased Property for its Primary Intended Use. Lessee shall acquire and
maintain all charters, licenses, permits and approvals necessary or desirable
for the use and operation of the Leased Property in its customary manner for
the Primary Intended Use, and any other use conducted on the Leased Property
as may be permitted by Lessor from time-to-time hereunder. Lessee further
covenants and agrees that Lessee's use of the Leased Property and
maintenance, alteration and operation of the same, and all parts thereof,
shall at all times conform to all applicable federal, state and local laws,
ordinances, rules, and regulations unless the same are held by a court of
competent jurisdiction to be unlawful. Lessee, may, however, upon prior
written notice to Lessor, contest the legality or applicability of any such
law, ordinance, rule, or regulation, or any licensure or certification
decision if Lessee maintains such action in good faith, with due diligence,
without prejudice to Lessor's rights hereunder, and at Lessee's own expense.
If by the terms of any such law, ordinance, rule or regulation, compliance
therewith pending the prosecution of any such proceeding may legally be
delayed without the incurrence of any fine, charge or liability of any kind
against the Leased Property, including the Facilities, or Lessee's leasehold
interest therein and without subjecting Lessor to any liability, civil or
criminal, for failure so to comply therewith, Lessee may delay compliance
therewith until the final determination of such proceeding. If any lien,
charge or civil or criminal liability would be incurred by reason of any such
delay, Lessee, on the prior written consent of Lessor, may nonetheless
contest as aforesaid and delay as aforesaid provided that such delay would
not subject Lessor to criminal liability and Lessee both (a) furnishes to
Lessor security reasonably satisfactory to Lessor against any loss or injury
by reason of such contest or delay; and (b) prosecutes the contest
continuously, with due diligence and in good faith.
ARTICLE IX
9.1 MAINTENANCE AND REPAIR.
9.1.1 Lessee, at its sole cost and expense, will keep the
Leased Property and Lessee's Personal Property and all private roadways,
sidewalks and curbs appurtenant thereto and which are under Lessee's control in
good order and repair (whether or not the need for such repairs occurs as a
result of Lessee's use, any prior use, the elements or the age of the Leased
Property, or any portion thereof), and, except as otherwise provided in Article
XIV, with reasonable promptness, make all necessary and appropriate repairs
thereto of every kind and nature, whether interior or exterior, structural or
non-structural, ordinary or extraordinary, foreseen or unforeseen or arising by
reason of a condition existing prior to the Commencement Date (concealed or
otherwise). All repairs shall, to the extent reasonably achievable, be at least
equivalent in quality to the original work. Lessee will not take or omit to
take any action the taking or omission of which may materially or adversely
impair the value or the usefulness of the Leased Property or any part thereof
for its Primary Intended Use. Any repair work performed by Lessee shall be paid
for so that no lien (I.E., mechanics', materialmen's or other liens) shall
attach to the Leased Property, subject to the provisions of Article XII.
9.1.2 Lessor shall not under any circumstances be required in
connection with this Lease to build or rebuild any improvements on the Leased
Property, or to make any
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repairs, replacements, alterations, restorations, or renewals of any nature
or description to the Leased Property, whether ordinary or extraordinary,
structural or non-structural, foreseen or unforeseen, or to make any
expenditure whatsoever with respect thereto, or to maintain the Leased
Property in any way. Lessee hereby waives, to the extent permitted by law,
the right to make repairs at the expense of Lessor pursuant to any law in
effect at the time of the execution of this Lease or hereafter enacted.
Lessor shall have the right to give, record and post, as appropriate, notices
of non-responsibility (or similar notices) under any mechanics' or
materialmen's lien laws now or hereafter existing.
9.1.3 Lessee shall not make any modifications, alterations
or improvements to the Leased Improvements or any portion thereof, whether by
addition or deletion, without Lessor's prior written consent, which consent
may be given or withheld in Lessor's sole and absolute discretion; provided
that Lessor shall not unreasonably withhold its consent to any non-structural
modifications, alterations or improvements that do not constitute capital
improvements and that are otherwise made in compliance with this Lease, so
long as the total cost thereof does not exceed $50,000 and the total cost in
any twelve (12) month period does not exceed $100,000. Nothing contained in
this Lease and no action or inaction by Lessor shall be construed as (i)
constituting the consent or request of Lessor, express or implied, to any
contractor, sub-contractor, laborer, materialman, or vendor to or for the
performance of any labor or services or the furnishing of any materials or
other property for the construction, alteration, addition, repair, or
demolition of, or to the Leased Property or any part thereof; or (ii) giving
Lessee any right, power or permission to contract for or permit the
performance of any labor or services or the furnishing of any materials or
other property in such fashion as would permit the making of any claim
against Lessor in respect thereof or to make any agreement that may create,
or in any way be the basis for any right, title, interest, lien, claim, or
other encumbrance upon the estate of Lessor in the Leased Property, or any
portion thereof. Lessor shall have the right to give, record and post, as
appropriate, notices of non-responsibility (or similar notices) under any
mechanics' or materialmen's lien laws now or hereafter existing.
9.1.4 Lessee will, upon the expiration or prior termination
of the Term, vacate and surrender the Leased Property in the condition in which
the Leased Property was originally received from Lessor, except as repaired,
rebuilt, restored, altered or added to as permitted or required under this Lease
and except for ordinary wear and tear (subject to the obligation of Lessee to
maintain the Leased Property in good order and repair during the entire Term).
9.2 EXPENDITURES TO COMPLY WITH LAW. Without limiting Lessee's
other obligations, during the Term of this Lease, Lessee will, at its
expense, make whatever expenditures (including, but not limited to capital
and non-capital expenditures) that are required to conform the Leased
Property to such standards as may from time-to-time be required by federal,
state or local law or regulation, whether in connection with state
accreditation requirements, charter school legislation (if applicable) or any
other applicable programs or legislation, or capital improvements required by
any other governmental agency having jurisdiction over the Leased Property as
a condition of the continued operation of the Leased Property during the Term
(as extended) as an educational facility pursuant to present or future
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laws or governmental regulation. Lessor shall not unreasonably withhold its
consent to any expenditures or capital improvements made by Lessee pursuant
to this Paragraph 9.2 and otherwise made in compliance with this Lease.
9.3 ENCROACHMENTS, RESTRICTIONS, ETC. If any of the Leased
Improvements shall, at any time, encroach upon any property, street or
right-of-way adjacent to the Leased Property, or shall violate the agreements
or conditions contained in any lawful restrictive covenant or other agreement
affecting the Leased Property, or any part thereof, or shall impair the
rights of others under any easement or right-of-way to which the Leased
Property is subject, then promptly upon the request of Lessor at the behest
of any person affected by any such encroachment, violation or impairment,
Lessee shall, at its sole cost and expense, (and after Lessor's prior
approval) subject to Lessee's right to sue Lessor's predecessors in title
with respect thereto or to contest the existence of any such encroachment,
violation or impairment and, in such case, in the event of an adverse final
determination, either (i) obtain valid and effective waivers or settlements
of all claims, liabilities and damages resulting from each such encroachment,
violation or impairment, whether the same shall affect Lessor or the Leased
Property; or (ii) make such changes in the Leased Improvements, and take such
other actions, as Lessee in the good faith exercise of its judgment deems
reasonably practicable, to remove such encroachment, and to end such
violation or impairment, including, if necessary, the alteration of any of
the Leased Improvements, and in any event take all such actions as may be
necessary in order to be able to continue the operation of the Leased
Improvements for the Primary Intended Use substantially in the manner and to
the extent the Leased Improvements were operated prior to the assertion of
such violation, impairment or encroachment. Any such alteration shall be
made in conformity with the applicable requirements of Paragraph 6.2 and this
Article IX. Lessee's obligations under this Paragraph 9.3 shall be in
addition to and shall in no way discharge or diminish any obligation of any
insurer under any policy of title or other insurance.
ARTICLE X
10.1 LESSEE'S OBLIGATIONS FOR HAZARDOUS MATERIALS. Lessee shall,
at its sole cost and expense, take all actions as required to cause the
Leased Property including, but not limited to, the Land and all Leased
Improvements, to be free and clear of the presence of all Hazardous Materials
during the Term. In this connection, Lessee shall, upon its discovery, belief
or suspicion of the presence of Hazardous Materials on, in or under any part
of the Leased Property, including, but not limited to, the Land and all
Leased Improvements, immediately notify Lessor and, at no expense to Lessor,
cause any such Hazardous Materials to be removed immediately, in compliance
with all applicable laws and in a manner causing the least disruption of or
interference with the operation of Lessee's business. Lessee hereby agrees
to fully indemnify, protect, defend and hold harmless Lessor from any costs,
damages, claims, liability or loss of any kind or nature arising out of or in
any way in connection with the presence, suspected presence, removal or
remediation of Hazardous Materials in, on, or about the Leased Property, or
any part thereof. Lessee acknowledges that it has received and reviewed the
following environmental reports: (a) as to the Paradise Valley Montessori
Property, that certain environmental report, dated May 6, 1998, and prepared
by Asset Environmental Services, Inc.
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as Project No. A98-023, together with the reliance letter dated May 21, 1998
from Asset Environmental Services, Inc. to Lessor and the review thereof
performed by SECOR International Incorporated; and (b) as to the Paradise
Valley Property, that certain environmental report, dated May 8, 1998, and
prepared by Asset Environmental Services, Inc. as Project No. A98-027,
together with the reliance letter dated May 26, 1998 from Asset Environmental
Services, Inc. to Lessor and the review thereof performed by SECOR
International Incorporated (the "Environmental Reports"). Without limiting
Lessee's other obligations under this Lease, Lessee agrees, at Lessee's sole
cost, to fully comply with all recommendations set forth in the Environmental
Reports, as updated, promptly after the Commencement Date hereunder.
Lessee's obligations hereunder shall apply to all Hazardous Materials,
irrespective of whether the existence of such Hazardous Materials is known by
Lessor and no matter when they arose or were discovered and therefore will
include any Hazardous Materials that existed prior to, at, or after the
Commencement Date and during the Term.
10.2 DEFINITION OF HAZARDOUS MATERIALS. For purposes of this
Lease, "Hazardous Materials" shall include, but not be limited to, any
substance, material, waste, pollutant or contaminant, now or hereafter defined,
listed or regulated by the "Environmental Laws" (defined below) or any other
federal state or local law, regulation or order or by common law decision.
"Environmental Laws" means and includes any law, ordinance, regulation or
requirement now or hereinafter in effect relating to land use, air, soil,
surface water, groundwater (including the protection, cleanup, removal,
remediation or damage thereof), human health and safety or any other
environmental matter, including, without limitation, the following laws as the
same may be amended from time to time: Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. Section 9601, et
seq.; Federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq.; Clean Water Act, 33 U.S.C. Section 1251, et seq.; Toxic Substances
Control Act, 15 U.S.C. Section 2601, et seq.; Refuse Act, 33 U.S.C. Section
407; Occupational Safety and Health Act, 29 U.S.C. Section 651, et seq.; Clean
Air Act, 42 U.S.C. Section 7401, et seq.; and any and all similar state and
local laws and ordinances and the regulations now or hereafter adopted,
published and/or promulgated pursuant thereto.
ARTICLE XI
11.1 NO LIENS. Subject to the provisions of Article XII relating
to permitted contests, Lessee will not directly or indirectly, voluntarily or by
operation of law, create or allow to remain and will promptly discharge at its
expense any lien, mortgage, encumbrance, attachment, title retention agreement,
or claim upon the Leased Property.
ARTICLE XII
12. PERMITTED CONTESTS. Lessee shall have the right to contest the amount
or validity of any Imposition or any Legal Requirement or Insurance Requirement
or any lien, attachment, levy, encumbrance, charge or claim ("Claims") not
otherwise permitted by Article XI, by appropriate legal proceedings in good
faith and with due diligence, and to delay payment if legally permitted;
provided this shall not be deemed or construed in any way as relieving Lessee's
covenants to pay or its covenants to cause to be paid any such charges in the
manner
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as in this Lease provided and further provided that, such legal proceedings
(and delay in payment) shall not cause the sale of the Leased Property, or
any part thereof, to satisfy the same or cause Lessor or Lessee to be in
default under any mortgage or deed of trust encumbering the Leased Property
or any interest therein or otherwise threaten to cause loss or damage to
Lessor or the Leased Property. Upon the request of Lessor, Lessee shall
provide to Lessor reasonable security satisfactory to Lessor to assure the
payment of all Claims which may be assessed against the Leased Property,
together with interest and penalties, if any, thereon. Lessor agrees to join
in any such proceedings if the same be required to legally prosecute such
contest of the validity of such Claims; provided, however, that Lessor shall
not thereby be subjected to any liability for the payment of any costs or
expenses in connection with any proceedings brought by Lessee; and Lessee
covenants to indemnify and save harmless Lessor from any such costs or
expenses. In the event that Lessee fails to pay any Claims when due or, upon
Lessor's request, to provide the security therefor as provided in this
Article XII and to diligently prosecute any contest of the same or in the
event the same threatens to cause loss or damage to Lessor or the Leased
Property, Lessor may, upon thirty (30) days advance written Notice to Lessee,
pay such charges together with any interest and penalties and the same shall
be repayable by Lessee to Lessor at the next Payment Date provided for in
this Lease. Provided, however, that should Lessor reasonably determine that
the giving of such Notice would risk loss to the Leased Property or otherwise
threaten to cause loss or damage to Lessor, then Lessor shall give such
written Notice as is practical under the circumstances. Lessee shall be
entitled to any refund of any Claims and such charges and penalties or
interest thereon which have been paid by Lessee or paid by Lessor and for
which Lessor has been fully reimbursed.
ARTICLE XIII
13.1 GENERAL INSURANCE REQUIREMENTS. Subject to the provisions of
Paragraph 13.8, during the Term, Lessee shall at all times keep the Leased
Property, and all property located in or on the Leased Property, including
Lessee's Personal Property, insured with the kinds and amounts of insurance
described below. This insurance shall be written by companies authorized to do
insurance business in the state in which the Leased Property is located, having
an A.M. Best rating of A X or higher or otherwise approved by Lessor in its sole
discretion. The policies must name Lessor as loss payee and additional named
insured, shall contain a provision that such insurance may not be canceled or
amended without at least thirty (30) days' notice to Lessor and shall be payable
to Lessor as provided in Article XIV. In addition, upon Lessor's written
request, the policies shall name as mortgagee, loss payee and additional insured
the holder ("Facility Mortgagee") of any mortgage, deed of trust or other
security agreement and any other Encumbrance placed on the Leased Property in
accordance with the provisions of Article XXXIII, as well as any other entity
interested in the Leased Property ("Facility Mortgage") by way of a standard
form of mortgagee's loss payable endorsement. Evidence of insurance shall be
deposited with Lessor and, if requested, with any Facility Mortgagee(s). If any
provision of any Facility Mortgage requires deposits of premiums for insurance
to be made with such Facility Mortgagee, or, pursuant to written direction by
Lessor upon the occurrence of any Event of Default hereunder (and irrespective
of whether such Event of Default is continuing or has been cured), Lessee shall
make such deposits directly with such Facility Mortgagee or with Lessor, as
required. The policies on the Leased Property, including the
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Leased Improvements, Fixtures and Lessee's Personal Property, shall insure
against the following risks:
13.1.1 Loss or damage by fire, vandalism and malicious
mischief, extended coverage perils commonly known as "All Risk," and all
physical loss perils normally included in such All Risk insurance, including,
but not limited to, sprinkler leakage, in an amount not less than one hundred
percent (100%) of the then full replacement cost thereof (as defined below in
Paragraph 13.2);
13.1.2 Loss or damage by explosion of steam boilers, pressure
vessels or similar apparatus, now or hereafter installed in the any of the
Facilities, if any, in such amounts with respect to any one accident as may be
reasonably requested by Lessor from time-to-time;
13.1.3 Loss of rental under a rental value insurance policy
covering risk of loss during the first twelve (12) months of reconstruction
necessitated by the occurrence of any of the hazards described in Paragraph
13.1.1 or 13.1.2 in an amount sufficient to prevent Lessor from becoming a
co-insurer.
13.1.4 Claims for personal injury or property damage under a
policy of comprehensive general public liability insurance with amounts not less
than One Million Dollars ($1,000,000.00) per occurrence, and with an annual
aggregate of Three Million Dollars ($3,000,000.00);
13.1.5 Flood (if the Leased Property is located in whole or in
part within a flood plain area, as designated by any governmental or other
responsible agency and if such insurance is available pursuant to applicable
law) and such other hazards and in such amounts as may be customary for
comparable properties in the area; and
13.1.6 Any other kinds of insurance, and in such amounts, as
Lessor may reasonably require from time to time to the extent available in the
state where the Leased Property is located.
13.2 REPLACEMENT COST. The term "full replacement cost" as used
herein, shall mean the full actual replacement cost of the Leased Property as
determined from time-to-time upon the request of Lessor, including an increased
cost of construction endorsement, less exclusions provided in the standard form
of fire insurance policy in the state where the Leased Property is located.
Lessor and Lessee agree that as of the Commencement Date the full replacement
cost shall be deemed to be $1,200,000.00 as to the Paradise Valley Montessori
Property, and $2,000,000.00 as to the Paradise Valley Property.
13.3 ADDITIONAL INSURANCE. In addition to the insurance described
above, Lessee shall maintain such additional insurance as may be reasonably
required from time-to-time by Lessor or any Facility Mortgagee (to the extent
available in the state where the Leased Property is located) and shall further
at all times maintain adequate worker's compensation
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insurance coverage for all persons employed by Lessee on the Leased Property.
Such worker's compensation insurance shall be in accordance with the
requirements of applicable federal, state and local law.
13.4 WAIVER OF SUBROGATION. All insurance policies carried by
either party covering the Leased Property, the Fixtures, the Facilities, or
Lessee's Personal Property including without limitations, contents, fire and
casualty insurance, shall expressly waive any right of subrogation on the part
of the insurer against the other party. The parties hereto agree that their
policies will include such waiver clause or endorsement so long as the same are
obtainable without extra cost, and in the event of such an extra charge the
other party, at its election, may pay the same, but shall not be obligated to do
so. Upon written request, each party shall provide the other party with a copy
of each insurance policy with the waiver clause or endorsement attached.
13.5 FORM SATISFACTORY, ETC. All of the policies of insurance
referred to in this Article XIII shall be written in a form reasonably
satisfactory to Lessor and by insurance companies having an A.M. Best rating of
A X or higher or otherwise approved by Lessor in its sole discretion. Subject
to the foregoing, Lessor agrees that it will not unreasonably withhold its
approval as to the form of the policies of insurance or as to the insurance
companies selected by Lessee. Lessee shall pay all of the premiums therefor,
and deliver such policies or certificates thereof to Lessor prior to their
effective date (and, with respect to any renewal policy, prior to the expiration
of the existing policy), and in the event of the failure of Lessee either to
effect such insurance as herein called for or to pay the premiums therefor, or
to deliver such policies or certificates thereof to Lessor at the times
required, Lessor shall be entitled, but shall have no obligation, to effect such
insurance and pay the premiums therefor, which premiums shall be repayable by
Lessee to Lessor upon written demand therefor, and failure to repay the same
shall constitute an Event of Default within the meaning of Paragraph 16.1(c).
Each insurer mentioned in this Article XIII shall agree, by endorsement on the
policy or policies issued by it, or by independent instrument furnished to
Lessor, that will give to Lessor (and to any Facility Mortgagee, if required by
the same) thirty (30) days written notice before the policy or policies in
questions shall be altered, allowed to expire or cancel.
13.6 INCREASE IN LIMITS. In the event that Lessor or a Facility
Mortgagee shall at any reasonable time deem, in the reasonable exercise of its
discretion, the limits of the personal injury or property damage public
liability insurance then carried to be insufficient, Lessee shall thereafter
carry the insurance with increased limits until further change pursuant to the
provisions of this Paragraph.
13.7 BLANKET POLICY. Notwithstanding anything to the contrary
contained in this Article XIII, Lessee's obligations to carry the insurance
provided for herein may be brought within the coverage of a so-called blanket
policy or policies of insurance carried and maintained by Lessee; provided,
however, that the coverage afforded Lessor will not be reduced or diminished or
otherwise be different from that which would exist under a separate policy
meeting all other requirements of this Lease by reason of the use of such
blanket policy of insurance, and provided further that the requirements of this
Article XIII are otherwise satisfied.
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13.8 NO SEPARATE INSURANCE. Lessee shall not on Lessee's own
initiative or pursuant to the request or requirement of any third party take out
separate insurance concurrent in form or contributing in the event of loss with
that required in this Article, to be furnished or which may reasonably be
required to be furnished, by Lessee or increase the amount of any then existing
insurance by securing any additional policy or additional policies, unless all
parties having an insurable interest in the subject matter of the insurance,
including in all cases Lessor and all Facility Mortgagees, are included therein
as additional insureds, and the loss is payable under said insurance in the same
manner as losses are payable under the Lease. Lessee shall immediately notify
Lessor of the taking out of any such separate insurance or of the increasing of
any of the amount of the then existing insurance.
13.9 CONTINUOUS COVERAGE. Lessee shall assure that there is no gap
in the insurance coverage provided in connection with the Facilities at or after
the Commencement Date, and therefore, the insurance provided by Lessee shall be
continuous, with the types and amounts of coverage, described herein to be
applicable on the Commencement Date. To the extent there is not full, complete
and continuous coverage for all issues, no matter when arising, claimed or
occurring, Lessee shall, at its sole cost, obtain such insurance.
ARTICLE XIV
14.1 INSURANCE PROCEEDS. All proceeds payable by reason of any
loss of or damage to the Leased Property, or any portion thereof, which is
insured under any policy of insurance required by Article XIII of the Lease,
where the total proceeds paid by the insurer are less than $150,000.00, shall be
paid to Lessee and applied to the reconstruction or repair, as the case may be,
of any damage to or destruction of the Leased Property, or any portion thereof.
All proceeds payable by reason of any loss of or damage to the Leased Property,
or any portion thereof, which is insured under any policy of insurance required
by Article XIII of this Lease where the total proceeds paid by the insurer are
equal to or in excess of $150,000.00 shall be paid to Lessor and held by Lessor
in trust (subject to the provisions of Paragraph 14.7) and shall be made
available for reconstruction or repair, as the case may be, of any damage to or
destruction of the Leased Property, or any portion thereof, and shall be paid
out by Lessor from time-to-time for the reasonable costs of such reconstruction
or repair. Any excess proceeds of insurance remaining after the completion of
the restoration or reconstruction of the Leased Property shall go to Lessee,
provided the Lease is in force and there exists no uncured Event of Default;
otherwise such excess shall be paid to Lessor for application as set forth in
Article XVI hereof. In the event neither Lessor nor Lessee is required or
elects to repair and restore, and the Lease is terminated pursuant to Article
XVI, all such insurance proceeds shall be retained by Lessor. All salvage
resulting from any risk covered by insurance shall belong to Lessor except that
any salvage relating to Lessee's Personal Property shall belong to Lessee.
14.2 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION COVERED
BY INSURANCE PROCEEDS.
14.2.1 If during the Term, the Leased Property, or any portion
thereof, is totally or partially destroyed by a risk covered by the insurance
described in Article
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XIII and whether or not the Facility located thereon is rendered Unsuitable
for Its Primary Intended Use, Lessee shall restore the Leased Property to
substantially the same condition as existed immediately before the damage or
destruction.
14.2.2 If the cost of the repair or restoration exceeds the
amount of proceeds received by Lessee or Lessor from the insurance required
under Article XIII, Lessee shall be obligated to restore the Leased Property and
pay the extra cost therefor, provided that, prior to commencing the repair and
restoration, Lessee shall either (i) contribute any excess amount needed to
restore the Leased Property, or (ii) provide Lessor with satisfactory evidence
that such funds are, and throughout the entire period of reconstruction will be,
available. If Lessee contributes such excess in cash, such excess shall be paid
by Lessee to Lessor to be held in trust, together with any insurance proceeds,
for application to the cost of repair and restoration.
14.3 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION NOT
COVERED BY INSURANCE. If during the Term, the Leased Property, or any portion
thereof, is damaged or destroyed irrespective of the extent of the damage from a
risk not covered by the insurance described in Article XIII, whether or not such
damage or renders the Facility located thereon Unsuitable for Its Primary
Intended Use, Lessee shall restore the Leased Property to substantially the same
condition it was in immediately before such damage or destruction and such
damage or destruction shall not terminate this Lease.
14.4 LESSEE'S PERSONAL PROPERTY. Subject to Lessor's rights
pursuant to the Security Agreement, all insurance proceeds payable by reason of
any loss of or damage to any of Lessee's Personal Property shall be paid to
Lessee, and Lessee shall hold such insurance proceeds in trust to pay the cost
of repairing or replacing damaged Lessee's Personal Property. Any proceeds in
excess of the cost of repairing or replacing any such Lessee's Personal Property
shall belong to Lessee.
14.5 RESTORATION OF LESSEE'S PROPERTY. Without limiting Lessee's
obligation to restore the Leased Property as provided in Paragraphs 14.2 and
14.3, Lessee shall also pay the cost to restore all Alterations and other
improvements made by Lessee which Lessee elects to restore, including Lessee's
Personal Property to the extent that Lessee's Personal Property is necessary to
the operation of either of the Facilities for its Primary Intended Use in
accordance with applicable Legal Requirements.
14.6 NO ABATEMENT OF RENT. This Lease shall remain in full force
and effect and Lessee's obligation to make rental payments and to pay all other
charges required by this Lease shall remain unabated during any period required
for repair and restoration.
14.7 WAIVER. Lessee hereby waives any statutory rights of
termination which may arise by reason of any damage to or destruction of the
Leased Property, or any portion thereof, which Lessor is obligated to restore or
may restore under any of the provisions of this Lease.
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ARTICLE XV
15. CONDEMNATION.
15.1 DEFINITIONS.
15.1.1 "Condemnation" means (a) the exercise of any
governmental power, whether by legal proceedings or otherwise, by a Condemnor;
(b) a voluntary sale or transfer by Lessor to any Condemnor, either under threat
of Condemnation or while legal proceedings for Condemnation are pending.
15.1.2 "Date of Taking" means the date the Condemnor has the
right to possession of the property being condemned.
15.1.3 "Award" means all compensation, sums or anything of
value awarded, paid or received on a total or partial Condemnation.
15.1.4 "Condemnor" means any public or quasi-public authority,
or private corporation or individual, having the power of Condemnation.
15.2 PARTIES' RIGHTS AND OBLIGATIONS. If during the Term there is
any taking of all or any part of the Leased Property or any interest in this
Lease by Condemnation, the rights and obligations of the parties shall be
determined by this Article XV.
15.3 TOTAL CONDEMNATION. If title to the fee of the whole of the
Paradise Valley Montessori Property or the Paradise Valley Property shall be
taken or condemned by any Condemnor, this Lease shall cease and terminate as to
the Paradise Valley Montessori Property or the Paradise Valley Property, as
applicable, as of the Date of Condemnation by said Condemnor. If title to the
fee of less than the whole of the Paradise Valley Montessori Property or the
Paradise Valley Property shall be so taken or condemned, which nevertheless
renders the Facility located thereon Unsuitable for Its Primary Intended Use, as
reasonably determined by Lessor and Lessee, Lessee and Lessor shall each have
the option by written Notice to the other, at any time at or prior to the taking
of possession by, or the date of vesting of title in, such Condemnor, whichever
first occurs, to terminate this Lease as to the Paradise Valley Montessori
Property or the Paradise Valley Property, as applicable, as of the date of the
occurrence of such first event. If such Notice has timely been given, this
Lease shall thereupon cease and terminate as to the Leased Property affected
thereby. Upon the termination of the Lease as to all or any portion of the
Leased Property, all Minimum Rent, and Additional Charges paid or payable by
Lessee hereunder shall be apportioned as of the date the Lease terminates as to
such portion of the Leased Property.
15.4 ALLOCATION OF PORTION OF AWARD. The total Award made with
respect to all or any portion of the Leased Property or for loss of rent, or for
loss of business, whether or not beyond the Term of this Lease, or for the loss
of value of the leasehold (including the bonus value of the Lease) shall be
solely the property of and payable to Lessor and Lessee hereby
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assigns to Lessor any and all rights in such Award; provided, however, that
Lessee shall be entitled to make a separate claim for the taking of Lessee's
Personal Property and relocation expense, subject to Lessor's rights pursuant
to the Security Agreement, and as long as any such claim will not in any way
diminish Lessor's Award, or for any other loss that can be awarded to Lessee
separately from Lessor's claim and which will not in any respect whatsoever
diminish or threaten to diminish the total amounts to be awarded to Lessor,
as set forth above or otherwise. To the extent Lessee's claim may thereafter
reduce Lessor's claim, Lessee shall, and hereby does, assign its claim to
Lessor. In any Condemnation proceedings, each of the Lessor and Lessee shall
seek its own claim in conformity herewith, at its own expense.
15.5 PARTIAL TAKING. If title to the fee of less than the whole of
the Paradise Valley Montessori Property or the Paradise Valley Property shall be
so taken or condemned, and the Facility located thereon is still suitable for
its Primary Intended Use, as reasonably determined by Lessor and Lessee, or if
Lessee or Lessor shall be so entitled, but shall not elect to terminate this
Lease as provided in Paragraph 15.3 hereof, Lessee, at its own cost and expense
(subject to Lessor's contribution described below), shall with all reasonable
dispatch restore the untaken portion of any Leased Improvements on the Leased
Property affected by such Condemnation so that such Leased Improvements shall
constitute a complete architectural unit of the same general character and
condition (as nearly as may be possible under the circumstances) as the Leased
Improvements existed immediately prior to such Condemnation. Lessor shall
contribute to the cost of restoration that part of its Award specifically
allocated to such restoration, provided, however, the amount of such
contribution shall not exceed the cost of restoration. The Minimum Rent shall
be reduced as set forth in Paragraph 5.2.
15.6 TEMPORARY TAKING. Lessee agrees that if, at any time after
the date hereof, the whole or any part of the Leased Property or of Lessee's
interest under this Lease, shall be Condemned by any Condemnor for its temporary
use or occupancy, this Lease shall not terminate by reason thereof, and Lessee
shall continue to pay, in the manner and at the times herein specified, the full
amounts of Minimum Rent and Additional Charges. Except only to the extent that
Lessee may be prevented from doing so pursuant to the terms of the order of the
Condemnor, Lessee shall also continue to perform and observe all of the other
terms, covenants, conditions and obligations hereof, on the part of the Lessee
to be performed and observed, as though such Condemnation had not occurred. In
the event of any such Condemnation as in this Paragraph 15.6 described, the
entire amount of any such Award made for such temporary use, whether paid by way
of damages, rent or otherwise, shall be paid to Lessee to the extent
attributable to any period within the Initial Term (as extended by any already
exercised options to extend) and except as otherwise provided hereunder.
Notwithstanding the foregoing, in the event that any temporary use or occupancy
covered under this Paragraph 15.6 renders any portion of either of the
Facilities located on the Leased Property Unsuitable for its Primary Intended
Use for a period in excess of twelve (12) calendar months, Lessee shall have the
right to elect a reduction in Minimum Rent as set forth in Paragraph 5.2
commencing on the twelve (12) month anniversary of any such use or occupancy and
continuing so long as such temporary use or occupancy continues, in which event
any Award made for such temporary use or occupancy shall be paid to Lessor to
the extent attributable to the period that Minimum Rent is so abated. Lessee
covenants that upon the termination of any such period of temporary use or
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occupancy as set forth in this Paragraph 15.6, it will, at its sole cost and
expense, restore the Leased Property affected by such taking or condemnation as
nearly as may be reasonably possible, to the condition in which the same was
immediately prior to the Condemnation, unless such period of temporary use or
occupancy shall extend beyond the expiration of the Term, in which case Lessee
shall not be required to make such restoration, and in such case, Lessee shall
contribute to the cost of such restoration that portion of its entire Award
which is specifically allocated to such restoration in the judgment or order of
the court, if any.
ARTICLE XVI
16.1 EVENTS OF DEFAULT. In addition to any other "Event of
Default" provided for under Paragraphs 1.3.3 or otherwise under this Lease or
any other documents executed concurrently herewith, any one or more of the
following events shall be an "Event of Default":
(a) if any payment of the Rent payable by Lessee under this
Lease is not paid as and when the same becomes due and payable, and such failure
shall continue for more than five (5) Business Days; or
(b) if Lessee fails to observe or perform any term, covenant
or condition of this Lease other than those described under Paragraphs 1.3.3,
16.1(a) and 16.1(c) through and including 16.1(n) of this Lease, and such
failure is not cured by Lessee within a period of thirty (30) days after Notice
thereof from Lessor, unless such failure cannot with due diligence be cured
within a period of thirty (30) days, in which case such failure shall not be
deemed an Event of Default if Lessee proceeds promptly, continuously and with
due diligence to cure the failure and diligently completes the curing thereof
within ninety (90) days; or
(c) if Lessee commits an "Event of Default" under any of the
Other Leases. Without limiting the foregoing, and subject to the provisions of
Paragraph 16.4, if Lessee commits an "Event of Default" under this Lease, Lessee
shall thereby be in default (and shall therefore have committed an "Event of
Default") under all of the Other Leases; or
(d) if Lessee commits an "Event of Default" under any of the
Related Leases. Without limiting the foregoing, and subject to the provisions
of Paragraph 16.4, if Lessee commits an "Event of Default" under this Lease,
Lessee shall thereby be in default (and shall therefore have committed an "Event
of Default") under all of the Related Leases; or
(e) if Lessee commits an "Event of Default" under any of the
Security Documents; or
(f) if Lessee defaults under its obligations under Paragraph
7 of the Paradise Valley Montessori Purchase Agreement; or
(g) if Lessee does any of the following:
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(i) admit in writing its inability to pay its debts
generally as they become due;
(ii) file a petition in bankruptcy or a petition to
take advantage of any insolvency law;
(iii) make an assignment for the benefit of
creditors;
(iv) consent to the appointment of a receiver of
itself or of the whole or any substantial part of its property; or
(v) file a petition or answer seeking
reorganization or arrangement under the Federal bankruptcy laws or any other
applicable law or statute of the United States of America or any state thereof;
or
(h) if Lessee, on a petition in bankruptcy filed against it,
is adjudicated a bankrupt or an order for relief thereunder is entered against
it or a court of competent jurisdiction shall enter an order or decree
appointing, without the consent of Lessee, a receiver for Lessee or of the whole
or substantially all of its property or any one or more of the Facilities, or
approving a petition filed against Lessee seeking reorganization or arrangement
of Lessee under the Federal bankruptcy laws or other applicable law or statute
of the United States of America or any state thereof, and such judgment, order
or decree shall not be vacated or set aside within sixty (60) days from the date
of the entry thereof; or
(i) if Lessee shall be liquidated or dissolved, or shall
begin proceedings toward such liquidation or dissolution, or shall, in any
manner, permit the sale or divestiture of substantially all of its assets; or
(j) subject to the provisions of Article XII hereof, if the
estate or interest of Lessee in the Leased Property or any part thereof be
levied upon or attached in a proceeding and the same shall not be vacated or
discharged within the later of ninety (90) days after commencement thereof or
thirty (30) days after Notice thereof from Lessor, or a mechanic's or similar
lien is filed with respect to the Leased Property and is not released or bonded
around for a period exceeding sixty (60) days after Lessee first has knowledge
of the same; or
(k) if Lessee voluntarily ceases operations at any one or
more of the Facilities for a period in excess of two (2) days, other than by
reason of regularly-scheduled school holidays, school vacations or breaks
between sessions; or
(l) if any of Lessee's representations or warranties
expressly set forth in this Lease (or financial statements provided to Lessor)
proves to have been untrue when made; or
(m) if Lessee attempts to assign or sublease, in violation of
the provisions of this Lease; or
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(n) if Lessee ceases to operate any of the Facilities in
accordance with its Primary Intended Use, or ceases to maintain in effect any
charter (if applicable), license, permit, certificate or approval necessary or
otherwise required to operate each Facility in accordance with its Primary
Intended Use.
Subject to the provisions of Paragraph 16.4 below, upon the occurrence
of an Event of Default, in addition to all of Lessor's other remedies, Lessor
may terminate this Lease by giving Lessee not less than ten (10) Business Days
Notice of such termination and upon the expiration of the time fixed in such
Notice, the Term shall terminate and all rights of Lessee under this Lease shall
cease.
In the event litigation is commenced with respect to any alleged
default under this Lease, the prevailing party in such litigation shall receive,
in addition to its damages incurred, such sum as the court shall determine as
its reasonable attorneys' fees, and all costs and expenses incurred in
connection therewith, including reasonable attorneys' fees and costs incurred on
appeal.
16.2 CERTAIN REMEDIES. Lessor shall have all remedies and rights
provided under this Lease and/or otherwise available in law and equity as a
result of an Event of Default or Lessee's other breach under this Lease,
including, to the extent permitted by Arizona law, the right to appoint a
receiver as a matter of strict right without regard to the solvency of
Lessee, for the purpose of procuring the Leased Property, preventing waste,
protecting and otherwise enforcing the provisions of this Lease and for any
and all other purposes for which a receiver is allowed under the laws of the
State of Arizona. Without limiting the foregoing, and subject to the
provisions of Paragraph 16.4, if an Event of Default occurs (and the event
giving rise to such Event of Default has not been cured within the curative
period, if any, relating thereto as set forth in this Lease) whether or not
this Lease has been terminated pursuant to Paragraph 16.1, Lessee shall, to
the extent permitted by law, and if required by Lessor to so do, immediately
surrender to Lessor the Leased Property pursuant to the provisions of
Paragraph 16.1 and quit the same and Lessor may enter upon and repossess the
Leased Property, in person, by agent or by a court-appointed receiver, by
reasonable force, summary proceedings, ejectment or otherwise, and may remove
Lessee and all other persons and any and all personal property from the
Leased Property subject to rights of any residents (and their property) and
to any requirements of law. Without limiting all other rights and remedies
of Lessor under this Lease and under law, and subject to the provisions of
Paragraph 16.4, Lessor shall have the right to accelerate all Rent (including
Minimum Rent) and therefore, upon Lessee's default, at Lessor's option, all
such Rent shall become immediately due and payable in accordance with
Paragraph 16.3, below. Further, without limiting all other rights and
remedies of Lessor under this Lease and under law, Lessor shall be entitled
to recover from Lessee, and Lessee shall therefore be liable for, all costs
of recovering possession (including without limitation all costs associated
with any receiver) and renovating the Leased Property for a new lessee and
all other costs of re-leasing, including, but not limited to, broker's
commissions and attorneys' fees, except as limited by Paragraph 16.3 below.
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16.3 DAMAGES. Neither (i) the termination of this Lease pursuant
to Paragraphs 16.1 or 16.4, (ii) the repossession of the Leased Property;
(iii) the failure of Lessor to relet the Leased Property; nor (iv) the
reletting of all or any portion thereof, shall relieve Lessee of its
liability and obligations hereunder, all of which shall survive any such
termination, repossession or reletting (except for proceeds received on
subletting). In the event of any such termination, Lessee shall forthwith
pay to Lessor all Rent due and payable with respect to the Leased Property to
and including the date of such termination.
(a) Lessor shall not be deemed to have terminated this
Lease unless Lessor delivers written Notice to Lessee of such election. If
Lessor voluntarily elects to terminate this Lease upon an Event of Default, then
in addition to all remedies available to Lessor, Lessor may recover the sum of:
(i) the worth at the time of award of the unpaid
Rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by
which the unpaid Rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Lessee proves could
have been reasonably avoided;
(iii) the worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such rental loss that Lessee proves could be reasonably
avoided; and
(iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom.
The "worth at the time of award" of the amounts
referred to in subparagraphs (i) and (ii) above is computed by allowing interest
at the Overdue Rate. The worth at the time of award of the amount referred to
in subparagraph (iii) is computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
(b) Without limiting Lessor's other remedies provided
herein and provided by law, Lessor may continue the Lease in effect after
Lessee's breach and abandonment and recover Rent as it becomes due, provided
that, in such event, Lessee has the right to sublet or assign subject only to
reasonable conditions imposed by Lessor. Accordingly, without termination of
Lessee's right to possession of the Leased Property, Lessor may demand and
recover each installment of Minimum Rent and other sums payable by Lessee to
Lessor under the Lease as the same becomes due and payable, which Minimum Rent
and other sums shall bear interest at the maximum interest rate permitted in
accordance with the laws of the State of Arizona (or the Overdue Rate, whichever
is lower), from the date when due until paid, and Lessor may enforce, by action
or otherwise, any other term or covenant of this Lease. If Lessor
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elects to recover each installment of Rent as it becomes due, then Lessor may
file any number of lawsuits for the recovery of the amounts due hereunder.
16.4 REMEDIES RELATING TO OPERATION OF THE PARADISE VALLEY
MONTESSORI PROPERTY AS A CHARTER SCHOOL. Notwithstanding any other provision of
this Lease to the contrary, if an Event of Default occurs hereunder as a result
of Lessee having ceased to operate the elementary/middle school located on the
Paradise Valley Montessori Property as a charter school, and IF AND ONLY IF
Lessee ceased to operate such Facility as a charter school solely and
exclusively because (i) the State of Arizona has enacted new legislation or
regulations, or has modified or revoked the existing legislation or regulations,
governing charter schools in the State of Arizona, in such a way which would
render it impossible for Lessee to then operate the Facility located on the
Paradise Valley Montessori Property as a charter school, or (ii) the Arizona
State Board of Charter Schools or other governmental agency having jurisdiction
has revoked Lessee's Charter of the Facility located on the Paradise Valley
Montessori Property for reasons entirely unrelated to any acts or omissions of
Lessee, then ONLY upon the occurrence of such event, and so long as Lessee is
not otherwise in default of its obligations under this Lease in any respect, nor
has any event occurred which, but for the passage of time or the giving of
notice or both, would constitute a default under this Lease by Lessee, Lessor's
sole remedies under this Lease in connection with an Event of Default
specifically described above in this Section 16.4 only shall be as follows:
(a) Lessor shall not be entitled to declare an Event of
Default under the Related Leases and the Other Leases, or any of them, solely on
the basis of the Event of Default hereunder arising from such cessation; and
(b) Lessee shall have twenty (20) days after the occurrence
of such Event of Default to present to Lessor a written proposal setting forth
with reasonable specificity a plan for one or more new uses for the Paradise
Valley Montessori Property. Lessor shall have twenty (20) days following
receipt of any such proposal from Lessee in which to give or withhold its
consent to any proposed new use for the Paradise Valley Montessori Property. If
and only if Lessor consents in writing to a new use for the Paradise Valley
Montessori Property shall Lessee be entitled to change the use of the Paradise
Valley Montessori Property to a use other than that set forth in Section 7.2
hereof; provided, however, that the parties hereby specifically acknowledge
their agreement that Lessor shall be under no obligation to agree to any
proposed new use and that Lessor may give or withhold its consent to any
proposed new use in Lessor's sole and absolute discretion, it being understood
that Lessee's use of the Paradise Valley Montessori Property as a pre-school and
a charter elementary/middle school is of material importance to Lessor's
willingness to purchase the Paradise Valley Montessori Property and enter into
this Lease of the Paradise Valley Montessori Property with Lessee. Lessor's
failure to respond to a proposal for a new use by Lessee within the twenty (20)
day period shall be construed as a denial of consent.
(c) In the event that Lessor does not consent to Lessee's
proposed new use for the Paradise Valley Montessori Property within the twenty
(20) day period, for any reason whatsoever, then Lessor may terminate this Lease
as to the Paradise Valley Montessori
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Property only, by giving Lessee not less than ten (10) Business Days Notice
of such termination. Upon expiration of the time fixed in such Notice, the
Term shall terminate as to the Paradise Valley Montessori Property only,
Lessee shall vacate the Paradise Valley Montessori Property immediately and
all rights of Lessee in and to the Paradise Valley Montessori Property shall
cease. In connection with any such termination of this Lease as to the
Paradise Valley Montessori Property only, Lessor shall have all rights and
remedies otherwise afforded to Lessor under Sections 16.2, 16.3 and otherwise
under this Lease, at law or in equity. Lessee hereby agrees to execute an
amendment to this Lease and any other documents reasonably required by Lessor
to evidence and memorialize the termination of this Lease as to the Paradise
Valley Montessori Property only.
Notwithstanding any provision in this Lease or any of the Related
Leases to the contrary, neither the occurrence of an Event of Default under the
circumstances set forth in this Section 16.4, nor the termination of this Lease
as to the Paradise Valley Montessori Property as provided for in this Section
16.4, shall affect the right or ability of Lessee to exercise the option to
extend this Lease and any of the Related Leases.
Lessor and Lessee specifically agree that the foregoing provisions of
this Paragraph 16.4 shall not impair, restrict or limit in any way Lessor's
right to declare an Event of Default under this Lease as to all the Leased
Property demised hereunder, or to declare an Event of Default under the Related
Leases and the Other Leases, or any of them, in the event that an Event of
Default under this Lease shall have been declared by Lessor for any reason other
than the specific Event of Default described above in this Paragraph 16.4 (i)
and (ii).
LESSOR AND LESSEE SPECIFICALLY ACKNOWLEDGE AND AGREE THAT LESSOR HAS
ACQUIRED THE PARADISE VALLEY MONTESSORI PROPERTY AND AGREED TO ENTER INTO THIS
LEASE UPON AND SUBJECT TO THE CONDITION THAT THE PARADISE VALLEY MONTESSORI
PROPERTY BE OPERATED AS AN EDUCATIONAL FACILITY HAVING ALL CHARTERS, LICENSES,
PERMITS AND APPROVALS NECESSARY TO OPERATE A CHARTER SCHOOL UNDER THE CHARTER
SCHOOL LEGISLATION FOR THE STATE OF ARIZONA, AND THAT THIS CONDITION IS A
MATERIAL INDUCEMENT TO LESSOR ENTERING INTO THIS LEASE. LESSOR AND LESSEE
FURTHER ACKNOWLEDGE AND AGREE THAT THE REMEDIES OF LESSOR SET FORTH IN THIS
PARAGRAPH 16.4 HAVE BEEN SPECIFICALLY NEGOTIATED AND BARGAINED FOR AND ARE A
MATERIAL INDUCEMENT TO LESSOR IN ENTERING INTO THIS LEASE.
16.5 WAIVER. If this Lease is terminated pursuant to Paragraphs
16.1 or 16.4, Lessee waives, to the extent permitted by applicable law, the
benefit of any laws now or hereafter in force exempting property from liability
for rent or for debt.
16.6 APPLICATION OF FUNDS. Any payments received by Lessor under
any of the provisions of this Lease during the existence or continuance of any
Event of Default shall be applied to Lessee's obligations in the order which
Lessor may determine or as may be prescribed by the laws of the State of
Arizona.
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ARTICLE XVII
17. LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT. If Lessee fails to make any
payment or to perform any act required to be made or performed under this Lease,
and to cure the same within the relevant time periods, if any, provided under
this Lease, Lessor, after fifteen (15) days' Notice to and demand upon Lessee,
and without waiving or releasing any obligation of Lessee or default, may (but
shall be under no obligation to) at any time thereafter make such payment or
perform such act for the account and at the expense of Lessee, and may, to the
extent permitted by law, enter upon the Leased Property, in person, by agent or
by court-appointed receiver, for such purpose and take all such action thereon
as, in Lessor's opinion, may be necessary or appropriate therefor. Provided,
however, that should Lessor reasonably determine that the giving of such Notice
would risk loss to the Leased Property, or cause damage to Lessor, then Lessor
shall give such written Notice as is practical under the circumstances. No such
entry shall be deemed an eviction of Lessee. In exercising any remedy under
this Article XVII, Lessor shall use its good faith efforts not to violate any
rights of students, teachers or administrators who may be on the premises at the
Facilities. All sums so paid by Lessor and all costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses, in each case) so
incurred, together with a late charge thereon (to the extent permitted by law)
at the Overdue Rate from the date on which sums or expenses are paid or incurred
by Lessor, shall be paid by Lessee to Lessor on demand. The obligations of
Lessee and rights of Lessor contained in this Article shall survive the
expiration or earlier termination of this Lease.
ARTICLE XVIII
18.1 OPTIONS TO EXTEND. Provided there exists no uncured Event of
Default under this Lease, or any of the Related Leases at the time Lessee
exercises any option to extend (in accordance with this Article XVIII), Lessee
will have the right to extend this Lease for two (2) periods of ten (10) years
each (each such additional term shall be referred to herein as an "Extended
Term"), commencing immediately following the end of the Initial Term or the
immediately preceding Extended Term, as the case may be. Notwithstanding
anything stated in this Paragraph 18.1 or elsewhere in this Lease, Lessee shall
not be entitled to exercise its option to extend this Lease for any Extended
Term (and any such option to extend shall automatically expire and terminate)
unless Lessee concurrently exercises its option to extend each of the Related
Leases for the same period, as provided in each of the Related Leases; and any
attempt to exercise Lessee's option to extend this Lease without Lessee
exercising its options under all of the Related Leases shall be null and void.
The Lease during any Extended Term shall be on the same terms and conditions as
during the Initial Term, except that the Minimum Rent shall be determined as set
forth in Paragraph 18.2 below. In the event Lessee desires to exercise any
option to extend granted in this Article XVIII, Lessee shall give Landlord
written notice ("Notice to Extend") not less than two hundred ten (210) days
prior to the expiration of the Initial Term or the immediately preceding
Extended Term, as the case may be. If Lessee fails to give Landlord any such
notice, then such option to extend and all future options to extend granted in
this Article XVIII shall be null and void and of no further force or effect.
18.2 MINIMUM RENT DURING EXTENDED TERMS. The Minimum Rent at the
commencement of each Extended Term shall be determined as set forth below:
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(a) The Minimum Rent at the commencement of the first
Extended Term shall be the higher of: (i) the annual Minimum Rent at the rate
paid during the twelve (12) month period immediately preceding the first
Extended Term, increased by two percent (2%); (ii) the annual Minimum Rent at
the rate that was payable as of the Commencement Date of this Lease, multiplied
by a fraction, the numerator of which shall be the C.P.I. for the first calendar
month of the first Extended Term and the denominator of which shall be the
C.P.I. for the calendar month in which the Commencement Date of the Initial Term
occurs; and (iii) the Fair Market Rent, as determined below.
(b) The Minimum Rent at the commencement of the second
Extended Term shall be the higher of: (i) the annual Minimum Rent at the rate
paid during the twelve (12) month period immediately preceding the second
Extended Term, increased by two percent (2%); (ii) the annual Minimum Rent at
the rate paid during the first twelve (12) months of the first Extended Term
multiplied by a fraction, the numerator of which shall be the C.P.I. for the
first calendar month of the second Extended Term and the denominator of which
shall be C.P.I. for the first calendar month of the first Extended Term; and
(iii) the Fair Market Rent, as determined below.
(c) If Lessor and Lessee cannot agree on the Fair Market
Rent within thirty (30) days after the date of any Notice to Extend, each party
shall, by notice to the other, appoint a disinterested and licensed M.A.I. Real
Estate Appraiser with at least five years of experience appraising educational
facilities to determine the Fair Market Rent. If any party should fail to
appoint an appraiser within ten (10) days after notice, the appraiser selected
by the other party shall determine the Fair Market Rent. In determining the
Fair Market Rent, each appraiser shall give appropriate consideration to, among
other things, generally applicable minimum rent for tenancies of property
comparable to the Leased Property in the area in which the Leased Property is
located.
(d) If the two appraisers selected pursuant to Paragraph
18.2(c) above, cannot agree upon the Fair Market Rent within forty-five (45)
days, they shall immediately give written notice of such inability ("Notice of
Disagreement") to both Lessor and Lessee setting forth the Fair Market Rent
determinations of each of the appraisers. If the determinations of each of the
two appraisers of the Fair Market Rent at the commencement of such Extended Term
differ by less than ten percent (10%) of the lower determination, the Fair
Market Rent shall be fixed at an amount equal to the average of the two
determinations.
(e) If the determinations of each of the two appraisers
selected pursuant to Paragraph 18.2(c), above, differ by ten percent (10%) or
more of the lower determination with respect to the Fair Market Rent to be paid
at the commencement of such Extended Term, then within thirty (30) days after
the giving of the Notice of Disagreement, the two appraisers shall appoint a
third disinterested and licensed M.A.I. Real Estate Appraiser with at least 5
years of experience appraising educational facilities. If the parties cannot
then agree on the Fair Market Rent, the third appraiser shall determine the Fair
Market Rent, and in so doing, shall give appropriate consideration to those
items described in Paragraph 18.2(c). The third appraiser shall not select a
Fair Market Rent either (i) higher than the highest of the two
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appraisals made pursuant to Paragraph 18.2(c); or (ii) lower than the lowest
of the two appraisals made pursuant to Paragraph 18.2(c), above. If the
first two appraisers cannot agree on the selection of a third appraiser
within such thirty (30) days, or if the first two appraisers fail to provide
a Notice of Disagreement (as stated above in Paragraph 18.2(d), above, then
the Fair Market Rent shall be determined by a third appraiser selected by the
American Arbitration Association (or such other organization at Lessor's
election) upon application by Lessor.
(f) During the time before the determination of the Fair
Market Rent, Lessee shall pay Minimum Rent at the rate paid immediately
preceding such Extended Term, increased by two percent (2%); provided, however,
that, if the Fair Market Rent is determined to be higher than such amount, the
Minimum Rent owed by Lessee at the Fair Market Rent shall be effective
retroactively as of the first day of such Extended Term. If, after the Minimum
Rent for an Extended Term is adjusted and applied retroactively as of the first
day of such Extended Term, it is determined that additional Minimum Rent is due
Lessor, the aggregate amount of any such additional Minimum Rent shall be paid
to Lessor within thirty (30) days of the determination of the Fair Market Rent
for such Extended Term.
(g) Each of the parties shall pay the fees of the appraiser
that it selects pursuant to Paragraph 18.2(c), above, and shall equally share
the cost of the third appraiser, if necessary, and shall equally share the cost
of arbitration (excluding attorneys' fees), if necessary.
ARTICLE XIX
19. HOLDING OVER. If Lessee shall for any reason remain in possession of
the Leased Property after the expiration of the Term or earlier termination of
the Term hereof, such possession shall be as a month-to-month tenant during
which time Lessee shall pay as rental each month, one and one-half times the
aggregate of (i) one-twelfth of the aggregate Minimum Rent payable with respect
to the last Lease Year of the Term; (ii) all Additional Charges accruing during
the month; and (iii) all other sums payable by Lessee pursuant to the provisions
of this Lease. During such period of month-to-month tenancy, Lessee shall be
obligated to perform and observe all of the terms, covenants and conditions of
this Lease, but shall have no rights hereunder other than the right, to the
extent given by law to month-to-month tenancies, to continue its occupancy and
use of the Leased Property. Nothing contained herein shall constitute the
consent, express or implied, of Lessor to the holding over of Lessee after the
expiration or earlier termination of this Lease.
ARTICLE XX
20. RISK OF LOSS. During the Term of this Lease, the risk of loss or of
decrease in the enjoyment and beneficial use of the Leased Property in
consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures
(to the extent caused by or through Lessee), attachments, levies or executions
(other than those caused by or through Lessor) is assumed by Lessee, and Lessor
shall in no event be answerable or accountable therefor, nor shall any of the
events mentioned in this Paragraph entitle Lessee to any abatement of Rent
except as specifically provided in this
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Lease, or any right to terminate this Lease, except as provided in Articles
XIV or XV, above. Without limiting the foregoing, Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or
any other person in or about the Leased Property, whether such damage or
injury is caused by or results from fire, steam, electricity, gas, water or
rain, or from the breakage, leakage, obstruction or other defects of pipes,
fire sprinklers, wires, appliances, plumbing, air conditioning, or lighting
fixtures, or from any other cause, whether the said injury or damage results
from conditions arising upon the Leased Property, or upon other portions of
the Land, or any part thereof, or from other sources or places, and
regardless of whether the cause of such damage or injury or the means of
repairing the same is accessible or not. Lessor shall not be liable for any
damages arising from any act or neglect of Lessee, or any other party named
above. Lessor shall, however, remain liable for any damages arising from
Lessor's own willful misconduct.
ARTICLE XXI
21. INDEMNIFICATION. Notwithstanding the existence of any insurance
provided for in Article XIII, and without regard to the policy limits of any
such insurance, Lessee will protect, indemnify, hold harmless and defend Lessor
from and against all liabilities, obligations, claims, demands, damages,
penalties, causes of action, costs, and expenses (including, without limitation,
actual reasonable attorneys' fees and expenses), to the extent permitted by law,
imposed upon or incurred by or asserted against Lessor by reason of any of the
following: (a) any accident, injury to or death of persons or loss of or damage
to property occurring on or about the Leased Property or adjoining sidewalks,
including without limitation any claims of malpractice, whether occurring prior
to or after the Commencement Date; (b) any third party claims of any kind
relating to the Leased Property, the Facilities or the operation thereof,
whether sounding in contract or tort, and whether arising directly or indirectly
from the acts or omissions of Lessor, Lessee, or any of Lessee's teachers,
administrators, students, employees, agents, invitees, guests, permittees or
trespassers; (c) any occupancy, use, misuse, non-use, condition, maintenance, or
repair by Lessee of the Leased Property; (d) any Impositions (which are the
obligations of Lessee to pay pursuant to the applicable provisions of this
Lease, which include any Impositions arising prior to the Commencement Date);
(e) any failure on the part of Lessee to perform or comply with any of the terms
of this Lease; (f) the non-performance of any of the terms and provisions of any
and all existing and future subleases of the Leased Property to be performed by
the landlord (Lessee) thereunder; (g) any Hazardous Materials, as defined in
Paragraph 10.2, above that now or hereafter during the Term may be located in,
on or around, or may potentially affect, any part of the Land or Leased
Improvements; (h) any and all other matters pertaining to the Leased Property or
the operation of the Facilities after the date of this Lease or otherwise during
the Term, including without limitation compliance with or failure to comply with
the provisions of the Fair Housing Amendments Act of 1988, as amended from time
to time, to the extent applicable; and (i) any liability relating to the
construction or development of the Facilities, or any patent or latent defects
in the physical plant of the Facilities, whether arising in connection with
events occurring prior to or after the Commencement Date, including without
limitation compliance with or failure to comply with the provisions of the
federal Americans with Disabilities Act, as amended from time to time.
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Any amounts which become payable by Lessee under this Paragraph shall be paid
within ten (10) days of the date the same becomes due and if not timely paid,
shall bear a late charge (to the extent permitted by law) at the Overdue Rate
from the date of such determination to the date of payment. Lessee, at its
expense, shall contest, resist and defend any such claim, action or
proceeding asserted or instituted against Lessor or may compromise or
otherwise dispose of the same as Lessee sees fit, at Lessee's sole cost, but
after consultation with and approval by Lessor. Nothing herein shall be
construed as indemnifying Lessor against its willful misconduct. Lessee's
liability for a breach of the provisions of this article arising during the
Term hereof shall survive any termination of this Lease.
ARTICLE XXII
22. SUBLETTING AND ASSIGNMENT. Lessee may not assign, sublease or
sublet, encumber, appropriate, pledge or otherwise transfer, the Lease or the
leasehold or other interest in the Leased Property without the prior written
consent of Lessor, which consent may be given or withheld in Lessor's sole
discretion. Upon Lessor's consent, (a) in the case of any subletting, the
sublessee shall comply with the provisions of Paragraph 22.2, and (b) in the
case of any assignment, any such assignee shall assume in writing and agree
to keep and perform all of the terms of this Lease on the part of Lessee to
be kept and performed and shall be, and become, jointly and severally liable
with Lessee for the performance thereof. In the case of either an assignment
or a subletting, (i) an original counterpart of each sublease and assignment
and assumption, duly executed by Lessee and such sublessee or assignee, as
the case may be, in form and substance satisfactory to Lessor, shall be
delivered promptly to Lessor, and (ii) Lessee shall remain primarily liable,
as principal rather than as surety, for the prompt payment of the Rent and
for the performance and observance of all of the covenants and conditions to
be performed by Lessee hereunder.
22.1 ATTORNMENT. Lessee shall insert in each sublease permitted
under Paragraph 22 provisions to that effect that (i) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and
the rights of Lessor hereunder; (ii) in the event this Lease shall terminate
before the expiration of such sublease, the sublessee thereunder will, at
Lessor's option, attorn to Lessor and waive any right the sublessee may have
to terminate the sublease or to surrender possession thereunder, as a result
of the termination of this Lease; and (iii) in the event the sublessee
receives a written Notice from Lessor or Lessor's assignees, if any, stating
that Lessee is in default under this Lease, the sublessee shall thereafter be
obligated to pay all rentals accruing under said sublease directly to the
party giving such Notice, or as such party may direct. All rents received
from the sublessee by Lessor or Lessor's assignees, if any, as the case may
be, shall be credited against amounts owing by Lessee under this Lease.
22.2 SUBLEASE LIMITATION. Anything contained in this Lease to
the contrary notwithstanding, Lessee shall not sublet the Leased Property on
any basis such that the rental to be paid by the sublessee thereunder would
be based, in whole or in part, on either (i) the income or profits derived by
the business activities of the sublessee; or (ii) any other formula such that
any portion of the sublease rental received by Lessor would fail to qualify
as "rents
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from real property" within the meaning of Paragraph 856(d) of the Code, or
any similar or successor provision thereto.
ARTICLE XXIII
23. OFFICER'S CERTIFICATES AND FINANCIAL STATEMENTS.
(a) At any time from time-to-time upon not less than
twenty (20) days Notice by Lessor, Lessee will furnish to Lessor an Officer's
Certificate certifying that this Lease is unmodified and in full force and
effect (or that this Lease is in full force and effect as modified and
setting forth the modifications), the date to which the Rent has been paid
and such other information concerning this Lease as may be reasonably
requested by Lessor. Any such certificate furnished pursuant to this
Paragraph may be relied upon by Lessor and any prospective purchaser or
lender of the Leased Property.
(b) Within one hundred twenty (120) days after the end
of each Fiscal Year, Lessee agrees to provide to Lessor consolidating
financials for the Facilities for such Fiscal Year, together with an
Officer's Certificate certifying that all information thereon is true and
correct.
(c) Within one hundred twenty (120) days after the end
of each Fiscal Year, Lessee agrees to provide to Lessor audited annual
financial statements and the Annual Report Form 10-K of Lessee.
(d) In addition to all other obligations to provide
financial information contained in the Lease, Lessee will furnish the
following statements to Lessor:
(i) within one hundred twenty (120) days after the
end of each Lease Year, an Officer's Certificate stating that to the best of
the signer's knowledge and belief after making reasonable inquiry, Lessee is
not in default in the performance or observance of any of the terms of this
Lease, or if Lessee shall be in default to its knowledge, specifying all such
defaults, the nature thereof, and the steps being taken to remedy the same,
and
(ii) with reasonable promptness, such other
information respecting the financial condition and affairs of Lessee as
Lessor may reasonably request from time-to-time.
ARTICLE XXIV
24. LESSOR'S RIGHT OF ENTRY. Lessee shall allow Lessor and its
authorized representatives access to the Leased Property on at least one
Business Day's prior notice during usual business hours, (i) to inspect the
Leased Property; or (ii) in the event that Lessee does not give Lessor Notice
to Extend as and when provided under Paragraph 18.1 above, or in any case
during the last six (6) months of the Term, to show the Leased Property to
prospective mortgagees or lessees, and otherwise to prepare the Leased
Property for the change of operation
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as of the expiration of the Term. Lessor shall not unreasonably interfere
with Lessee's operation of the Leased Property.
ARTICLE XXV
25.1 ASSIGNMENT OF INTANGIBLES. The date on which this Lease
either terminates pursuant to its terms or is terminated by either party
whether pursuant to a right granted to it hereunder or otherwise shall be
referred to as the "Closing Date" in this Article XXV. On the Closing Date,
this Lease shall be deemed and construed as an absolute assignment for
purposes of vesting in Lessor (or its designee) all of Lessee's right, title
and interest in and to the following intangible property which is now or
hereafter used in connection with the operation of the Leased Property (the
"Intangibles") and an assumption by Lessor (or its designee) of Lessee's
obligations under the Intangibles:
(a) service contracts for the benefit of the Leased
Property to which Lessee is a party, and which can be terminated without
penalty by Lessee or within thirty (30) or fewer days' notice;
(b) any state, federal or other third-party payor
programs (excluding the right to any reimbursement for periods on or prior to
the Closing Date) entered in connection with the Leased Property to the
extent assignable by Lessee;
(c) all licenses, permits, accreditations, charters and
certificates of occupancy issued by any federal, state, municipal or
quasi-governmental authority for the use, maintenance or operation of the
Leased Property, running to or in favor of Lessee;
(d) all documents, charts, personnel records, property
manuals, records and lists maintained with respect to the Leased Property,
books, records, files and other business records attributable to the business
or operations of the Leased Property;
(e) all existing agreements with or relating to students
at the Leased Property (excluding the right to any payments for periods prior
to the Closing Date, as hereinafter defined);
(f) all assignable indemnities, guaranties and
warranties in favor of Lessee with respect to the Leased Property, the
Lessee's Personal Property and/or the Consumable Inventory;
(g) all other assignable intangible property not
enumerated herein which is now or hereafter used in connection with the
operation of the Leased Property as an educational facility; and
(h) The business of the Lessee as conducted at the
Leased Property as a going concern, including but not limited to the name of
the school and any other tradenames associated therewith, and all telephone
numbers presently in use therein.
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25.2 ADJUSTMENTS AND PRORATIONS. Lessor shall be responsible for
and pay all accrued expenses with respect to the Leased Property accruing on
or after 12:01 a.m. on the day after the Closing Date (the "Adjustment Date")
and shall be entitled to receive and retain all revenues from the Leased
Property accruing on or after the Adjustment Date. Within fifteen (15)
business days after the Closing Date, the following adjustments and
prorations shall be determined as of the Adjustment Date:
(a) All Impositions. To the extent the actual amount of
such Impositions is not available on the Closing Date for the tax year in
which the Adjustment Date occurs, the proration of such taxes shall be
estimated at the Closing Date based upon reasonable information available to
the parties, including information disclosed by the local tax office or other
public information, and an adjustment shall be made when actual figures are
published or otherwise become available.
(b) Lessee will terminate the employment of all
employees on the Closing Date. The obligation for wages and the obligation,
if any, to pay to employees of the Leased Property accrued vacation and sick
leave pay or employer severance pay or other accrued benefits which may be
payable as the result of any termination of any employee on or prior to the
Closing Date for the period prior to the Closing Date shall remain the
Lessee's obligation and shall be satisfied by Lessee as of the Closing Date.
(c) Lessor shall receive a credit equal to any tuition
or other payments received with respect to students at the Leased Property to
the extent attributable to periods following the Closing Date.
(d) The present insurance coverage on the Leased
Property shall be terminated as of the Closing Date and there shall be no
proration of insurance premiums.
(e) All other income from, and expenses of, the Leased
Property (other than mortgage interest, principal and trustee fees),
including but not limited to public utility charges and deposits, maintenance
charges and service charges shall be prorated between Lessee and Lessor as of
the Adjustment Date. Lessee shall, if possible, obtain final utility meter
readings as of the Closing Date. To the extent that information for any such
proration is not available on the Closing Date, Lessee and Lessor shall
effect such proration within thirty (30) days after the Closing Date.
(f) Lessee shall receive a credit equal to (i) any
pre-paid Rent, Impositions, insurance premiums or other amounts; (ii) any
sums held in the Deposit Account for Impositions, Rent or other amounts; and
(iii) any other sums being held by Lessor or any Facility Mortgagee for the
benefit of Lessee, which sums shall continue to be held in accordance with
the applicable provisions of this Lease, which provisions shall remain in
effect solely for the purposes of determining the disposition of such funds
being held in escrow.
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25.3 TRANSFER OF OPERATIONS.
25.3.1 All necessary arrangements shall be made to provide
possession of the Leased Property to Lessor on the Closing Date, at which
time of possession Lessee shall deliver to Lessor all records and other
personal information concerning all students enrolled at the Leased Property
at any time prior to or during the Term and other relevant records used or
developed in connection with the business conducted at the Leased Property.
Such transfer and delivery shall be in accordance with all applicable laws,
rules and regulations concerning the transfer of student records.
25.3.2 Lessee shall provide Lessor with an accounting of
all funds belonging to students or employees at the Leased Property which are
held by Lessee in a custodial capacity. Such accounting shall set forth the
names of the parties for whom such funds are held, the amounts held on behalf
of each such party and the Lessee's warranty that, to the actual current
knowledge of Lessee, the accounting is true, correct and complete.
Additionally, Lessee in accordance with all applicable rules and regulations,
shall make all necessary arrangements to transfer such funds to a bank
account designated by Lessor, and Lessor shall in writing acknowledge receipt
of and expressly assume all the Lessee's financial and custodial obligations
with respect thereto. Notwithstanding the foregoing, Lessee will indemnify,
defend and hold Lessor harmless from all liabilities, claims and demands,
including reasonable attorney's fees, in the event the amount of funds, if
any, transferred to Lessor's bank account as provided above, did not
represent the full amount of the funds then or thereafter shown to have been
delivered to Lessee as custodian that remain undisbursed for the benefit of
the parties for whom such funds were deposited, or with respect to any
matters relating to any such funds which accrue during the Term of this Lease.
25.3.3 All cash, check and cash equivalent at the Leased
Property and deposits in bank accounts (other than the trust accounts
referenced in subparagraph 25.3.2 above) relating to the Leased Property on
the Closing Date shall remain Lessee's property after the Closing Date. All
accounts receivable, loans receivable and other receivables of Lessee,
whether derived from operation of the Leased Property or otherwise, shall
remain the property of Lessee after the Closing Date. Lessee shall retain
full responsibility for the collection thereof. Lessor shall assume
responsibility for the billing and collection of payment on account of
services rendered by it on and after the Closing Date. In order to
facilitate Lessee's collection efforts, Lessee agrees to deliver to Lessor,
within a reasonable time after the Closing Date, a schedule identifying all
outstanding balances owing for the month prior to the Closing Date and Lessor
agrees to apply any payments received which are specifically designated as
being applicable to services rendered prior to the Closing Date to reduce
such pre-Closing balances by promptly remitting said payments to Lessee. In
the event payments specifically indicate that they relate to services
rendered post-Closing, such payments shall be retained by Lessor. In the
event no designation is made, such payments shall be applied one-half to
Lessee's accounts receivable and one-half to Lessor's accounts receivable.
Lessor shall cooperate with Lessee in Lessee's collection of its preclosing
accounts receivable. Lessor shall have no liability for uncollectible
receivables and shall not be obligated to bear any expense as a result of
such activities on behalf of Lessee. Lessor shall remit to Lessee or its
assignee those portions of any
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payments received by Lessor arising out of any federal, state or local
government payment or reimbursement programs to the extent the same relate to
any period ending on or prior to the Closing Date.
25.3.4 If, following the Closing Date, Lessor receives
payment from any state or federal agency or third-party provider which
represents reimbursement with respect to services provided at the Leased
Property prior to the Adjustment Date, Lessor agrees that it shall remit such
payments to Lessee. Payments by Lessor to Lessee shall be accompanied by a
copy of the appropriate remittance.
25.3.5 In addition to the obligations required to be
performed hereunder by Lessee and Lessor at the Closing Date, Lessee and
Lessor agree to perform such other acts, and to execute, acknowledge, and/or
deliver subsequent to the Closing Date such other instruments, documents and
materials, as the other may reasonably request in order to effectuate the
consummation of the transaction contemplated herein.
25.3.6 Lessor shall have the right to offset against any
monies due Lessee pursuant to the terms of this Article XXV, any amounts due
by Lessee to Lessor pursuant to this Lease or due by Lessee to any third
party for taxes, utilities, unemployment insurance premiums, payroll
obligations or any service for which a comparable service and provider is not
reasonably available in the applicable geographical area.
25.3.7 If the termination of this Lease is a result of an
Event of Default, then to the extent any monies are due to Lessee pursuant to
this Article XXV, such sums shall be applied by Lessor to any damages
suffered by Lessor as a result of Lessee's Event of Default.
25.4 INDEMNIFICATION. Lessee for itself, its successors and
assigns hereby indemnifies and agrees to defend and hold Lessor and its
successors and assigns harmless from any and all claims, demands,
obligations, losses, liabilities, damages, recoveries and deficiencies
(including interest, penalties and reasonable attorney's fees, costs and
expenses) which any of them may suffer as a result of the breach by Lessee in
the performance of any of its commitments, covenants, or obligations under
this Article XXV, or with respect to any suits, arbitration proceedings,
administrative actions or investigations which relate to the use by Lessee of
the Leased Property during the Term of this Lease or any liability which may
arise from operation of the Leased Property as an educational facility during
the Term of this Lease. The rights of Lessor under this paragraph are
without prejudice to any other remedies not inconsistent herewith which
Lessor may have against Lessee pursuant to the terms of this Lease.
25.5 NO LIMITATION. The provisions of this Article XXV shall not
limit in any way Lessor's rights and remedies under the Security Agreement or
otherwise under this Lease.
ARTICLE XXVI
26. NO WAIVER. The waiver by Lessor or Lessee of any term, covenant or
condition in this Lease shall not be deemed to be a waiver of any other term,
covenant or condition or any
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subsequent waiver of the same or any other term, covenant or condition
contained in this Lease. The subsequent acceptance of rent hereunder by
Lessor or any payment by Lessee shall not be deemed to be a waiver of any
preceding default of any term, covenant or condition of this Lease, other
than the failure to pay the particular amount so received and accepted,
regardless of the knowledge of any preceding default at the time of the
receipt or acceptance.
ARTICLE XXVII
27. REMEDIES CUMULATIVE. To the extent permitted by law, each legal,
equitable or contractual right, power and remedy of each party now or
hereafter provided either in this Lease 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 each party
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.
ARTICLE XXVIII
28. ACCEPTANCE OF SURRENDER. No surrender to Lessor of this Lease or
of the Leased Property or any part thereof, or of any interest therein, shall
be valid or effective unless agreed to and accepted in writing by Lessor and
no act by Lessor or any representative or agent of Lessor, other than such a
written acceptance by Lessor, shall constitute an acceptance of any such
surrender.
ARTICLE XXIX
29. NO MERGER OF TITLE. There shall be no merger of this Lease or of
the leasehold estate created hereby by reason of the fact that the same
person, firm, corporation, or other entity may acquire, own or hold, directly
or indirectly, (a) this Lease or the leasehold estate created hereby or any
interest in this Lease or such leasehold estate; and (b) the fee estate in
the Leased Property.
ARTICLE XXX
30. CONVEYANCE BY LESSOR. If Lessor or any successor owner of the
Leased Property shall transfer or assign Lessor's title or interest in the
Leased Property or this Lease other than as security for a debt, then,
subject to the provisions of this Article XXX and provided the new owner has
agreed in writing for the benefit of Lessee to recognize this Lease and be
bound by all of the terms and conditions hereof, Lessor shall thereupon be
released from all future liabilities and obligations of Lessor under this
Lease arising or accruing from and after the date of such transfer or
assignment and all such future liabilities and obligations shall thereupon be
binding upon the new owner.
47
<PAGE>
ARTICLE XXXI
31. QUIET ENJOYMENT. So long as Lessee shall pay all Rent as the same
becomes due and shall comply with all of the terms of this Lease and perform
its obligations hereunder, and except for any claims, actions, liens or
encumbrances arising from the acts or omissions of Lessee or otherwise from
events occurring prior to the Commencement Date hereunder, Lessee shall
peaceably and quietly have, hold and enjoy the Leased Property for the Term
hereof, free of any claim or other action by Lessor or anyone claiming by,
through or under Lessor, but subject to all liens and encumbrances of record
as of the date hereof or hereafter consented to by Lessee. Except as
otherwise provided in this Lease, no failure by Lessor to comply with the
foregoing covenant or any covenant of this Lease shall give Lessee any right
to cancel or terminate this Lease or abate, reduce or made a deduction from
or offset against the Rent or any other sum payable under this Lease, or to
fail to perform any other obligation of Lessee hereunder.
ARTICLE XXXII
32. NOTICES. All notices, demands, requests, consents, approvals, and
other communications ("Notice" or "Notices") hereunder shall be in writing
and shall be either (a) personally served; (b) sent by facsimile transmittal;
or (c) sent by overnight courier (such as Federal Express, DHL, etc.). If
sent by facsimile, receipt shall be deemed effective upon confirmation of
transmittal thereof; and if sent via overnight courier, receipt shall be
deemed effective twenty-four (24) hours after the sending thereof. All
notices to be given pursuant to this Lease shall be given to the parties at
the following respective addresses.
(a) If to Lessee: The Tesseract Group, Inc.
3800 West 80th Street, Suite 1400
Minneapolis, Minnesota 55431
Attention: Mr. John T. Golle
with a copy to: Faegre & Benson
2500 Republic Plaza
370 Seventeenth Street
Denver, Colorado 80202-4004
Attention: Diane B. Davies, Esq.
(b) If to Lessor: EduCorp Properties, Inc.
c/o LTC Properties, Inc.
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
Attention: Mr. Christopher T. Ishikawa
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<PAGE>
with a copy to: EduCorp Properties, Inc.
c/o LTC Properties, Inc.
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
Attention: Pamela J. Privett, Esq.
and: Stern, Neubauer, Greenwald & Pauly
1299 Ocean Avenue, Tenth Floor
Santa Monica, CA 90401-1007
Attention: Dennis L. Greenwald, Esq.
ARTICLE XXXIII
33.1 LESSOR MAY GRANT LIENS. Lessor may, subject to the terms
and conditions set forth below in this Paragraph 33.1, from time-to-time,
directly or indirectly, create or otherwise cause to exist any lien or
encumbrance or any other change of title ("Encumbrance") upon the Leased
Property, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing. Any such Encumbrance
shall contain the right to prepay (whether or not subject to a prepayment
penalty) and shall provide that it is subject to the rights of Lessee under
this Lease, provided that any holder of an Encumbrance shall (a) give Lessee
the same notice, if any, given to Lessor of any default or acceleration of
any obligation underlying any such mortgage or any sale in foreclosure under
such mortgage; (b) permit Lessee to cure any such default on Lessor's behalf
within any applicable cure period, and Lessee shall be reimbursed by Lessor
or shall be entitled to offset against Minimum Rent payments next accruing or
coming due for any and all costs incurred in effecting such cure, including,
without limitation, out-of-pocket costs incurred to effect any such cure
(including reasonable attorneys' fees); (c) permit Lessee to appear and to
bid at any sale in foreclosure made with respect to, and/or any sale by
virtue of the exercise of the power of sale contained in, any such mortgage,
and (d) provide that in the event of foreclosure or other possession of the
Leased Property by the Mortgagee, that the Mortgagee (or other purchaser)
shall be bound by the terms and provisions of this Lease. Upon the
reasonable request of Lessor, Lessee shall execute an agreement to the effect
that this Lease shall be subject and subordinate to the lien of a new
mortgage on the Leased Property, and that in the event of any default or
foreclosure under such mortgage, Lessee shall attorn to the new mortgagee,
and as otherwise requested by Lessor on the condition that the mortgagee
execute a non-disturbance agreement recognizing this Lease and agreeing, for
itself and its successor and assigns, to comply with the provisions of this
Article XXXIII.
33.2 LESSEE'S RIGHT TO CURE. Subject to the provisions of
Paragraph 33.3, if Lessor breaches any covenant to be performed by it under
this Lease, Lessee, after Notice to and demand upon Lessor, without waiving
or releasing any obligation hereunder, and in addition to any other remedies
available to Lessee, may (but shall be under no obligation at any time
thereafter to) make such payment or perform such act for the account and at
the expense of Lessor. All sums so paid by Lessee and all costs and expenses
(including, without limitation, reasonable attorneys' fees) so incurred,
together with interest thereon from the date on which
49
<PAGE>
such sums or expenses are paid or incurred by Lessee, shall be paid by Lessor
to Lessee on demand, but may not be offset by Lessee against payments of Rent
hereunder.
33.3 BREACH BY LESSOR. It shall be a breach of this Lease if
Lessor fails to observe or perform any term, covenant or condition of this
Lease on its part to be performed, and such failure shall continue for a
period of thirty (30) days after Notice thereof from Lessee unless such
failure cannot with due diligence be cured within a period of thirty (30)
days, in which case such failure shall not be deemed to continue if Lessor,
within said thirty (30) day period, proceeds promptly, continuously and with
due diligence to cure the failure and diligently completes the curing
thereof. The time within which Lessor shall be obligated to cure any such
failure shall also be subject to extension of time due to the occurrence of
any Unavoidable Delay.
ARTICLE XXXIV
34. MISCELLANEOUS.
34.1 SURVIVAL OF OBLIGATIONS. Anything contained in this Lease
to the contrary notwithstanding, all claims against, and liabilities of,
Lessee or Lessor arising prior to, or in connection with any event occurring
prior to, the date of any expiration or termination of this Lease or the date
of Lessee's surrender of possession, whichever is later, shall survive such
termination or surrender of possession.
34.2 LATE CHARGES; INTEREST. If any interest rate provided for
in any provision of this Lease is based upon a rate in excess of the maximum
rate permitted by applicable law, the parties agree that such charges shall
be fixed at the maximum permissible rate.
34.3 LIMITS OF LESSOR'S LIABILITY. Lessee specifically agrees to
look solely to the assets of Lessor for recovery of any judgment against
Lessor, it being specifically agreed that no constituent shareholder, officer
or director of Lessor shall ever be personally liable for any such judgment
or the payment of any monetary obligation to Lessee. The provision contained
in the foregoing sentence is not intended to, and shall not, limit any right
that Lessee might otherwise have to obtain injunctive relief against Lessor
or Lessor's successors in interest, or any action not involving the personal
liability of Lessor (original or successor). Additionally, Lessor shall be
exonerated from any further liability under this Lease upon Lessor's transfer
or other divestiture of its ownership of the Leased Property, provided that
the assignee or grantee shall expressly assume in writing the obligations of
Lessor hereunder. Furthermore, in no event shall Lessor (original or
successor) ever be liable to Lessee for any indirect or consequential damages
suffered by Lessee from whatever cause.
34.4 PROHIBITED TRANSACTIONS. At all times during the Term of
this Lease, Lessee shall be prohibited from directly or indirectly engaging
in any of the following transactions (collectively, "Prohibited
Transactions"): (a) buying back any shares of corporate stock; (b) declaring
a dividend to shareholders of Lessee; and (c) repaying any loan or other
indebtedness to any current or former directors, officers, shareholders or
affiliates of Lessee;
50
<PAGE>
provided, however, that Lessee may engage in Prohibited Transactions during
any period that, and so long as, Lessee's debt to adjusted equity (measured
as total shareholders' equity determined in accordance with GAAP, less
goodwill) ratio is less than twenty-five percent (25%).
34.5 ADDENDUM, AMENDMENTS AND EXHIBITS. Any addendum, amendments
and exhibits attached to this Lease are hereby incorporated in this Lease and
made a part of this Lease.
34.6 HEADINGS. The headings and paragraph titles in this Lease
are not a part of this Lease and shall have no effect upon the construction
or interpretation of any part of this Lease.
34.7 TIME. Time is of the essence of this Lease and each and all
of its provisions.
34.8 DAYS. Unless otherwise expressly indicated herein, any
reference to "days" in this Lease shall be deemed to refer to calendar days.
34.9 RENT. Each and every monetary obligation under this Lease
shall be deemed to be "Rent" under this Lease and for all other purposes
under law.
34.10 APPLICABLE LAW. This Lease shall be governed by and
construed in accordance with the laws of the State of Arizona, but not
including its conflicts of laws rules; thus the law that will apply is the
law applicable to a transaction solely within the State of Arizona, including
parties solely domiciled in the State of Arizona.
34.11 SUCCESSORS AND ASSIGNS. The covenants and conditions
contained in this Lease shall, subject to the provisions regarding assignment
(Article XXII), apply to and bind the heirs, successors, executors,
administrators, and assigns of Lessor and Lessee.
34.12 RECORDATION. Lessor and Lessee shall execute with
appropriate acknowledgments and record in the Official Records of the county
where the Leased Property is located, that certain Short Form Lease in the
form and content of EXHIBIT "B" attached hereto. Lessor and Lessee shall
equally share the cost of recording the Memorandum of Lease.
34.13 PRIOR AND FUTURE AGREEMENTS. This Lease contains all of the
agreements of Lessor and Lessee with respect to any matter covered or
mentioned in this Lease, and no prior agreements or understanding pertaining
to any such matters shall be effective for any purpose. No provision of this
Lease may be amended or supplemented except by an agreement in writing signed
by both Lessor and Lessee or their respective successors in interest. This
Lease shall not be effective or binding on any party until fully executed by
both Lessor and Lessee.
51
<PAGE>
34.14 PARTIAL INVALIDITY. Any provision of this Lease which shall
be held by a court of competent jurisdiction to be invalid, void or illegal
shall in no way affect, impair or invalidate any other provision or term of
this Lease, and such other provision or terms shall remain in full force and
effect.
34.15 ATTORNEYS' FEES. In the event of any action or proceeding
brought by one party against the other under this Lease, the prevailing party
shall be entitled to recover its attorneys' fees in such action or proceeding
from the other party, including all attorneys' fees incurred in connection
with any appeals, and any post-judgment attorneys' fees incurred in efforts
to collect on any judgment.
34.16 AUTHORITY OF LESSOR AND LESSEE. Lessor and Lessee each
hereby represent and warrant that the individuals signing on its behalf are
duly authorized to execute and deliver this Lease on behalf of the
corporation, in accordance with the bylaws of the corporation, and that this
Lease is binding upon the corporation.
34.17 RELATIONSHIP OF THE PARTIES. Nothing contained in this
Lease shall be deemed or construed by Lessor or Lessee, nor by any third
party, as creating the relationship of principal and agent or a partnership,
or a joint venture by Lessor or Lessee, it being understood and agreed that
no provision contained in this Lease nor any acts of Lessor and Lessee shall
be deemed to create any relationship other than the relationship of landlord
and tenant.
34.18 COUNTERPARTS. This Lease may be executed in one or more
separate counterparts, each of which, once they are executed, shall be deemed
to be an original. Such counterparts shall be and constitute one and the
same instrument.
52
<PAGE>
34.19 BROKERS. Lessor warrants to Lessee that, other than Sperry
Van Ness, it has had no dealings with any real estate broker or agent in
connection with the negotiation of this Lease and it knows of no real estate
broker or agent who is entitled to a commission in connection with this
Lease. Lessee warrants to Lessor that, other than Stanford M. Baratz or
Baratz Financial, it has had no dealings with any real estate broker or agent
in connection with the negotiation of this Lease and it knows of no real
estate broker or agent who is entitled to a commission in connection with
this Lease. Lessor and Lessee hereby agree to indemnify the other and to hold
the other harmless from and against any and all costs, expenses, claims,
damages, suits, including attorneys' fees, in any way resulting from claims
or demands for commissions or other compensation from any real estate brokers
claiming through such party with respect to this Lease.
WHEREFORE, each of the parties has accepted and agreed by affixing their
respective authorized signatures below as of the date first above written.
<TABLE>
<CAPTION>
<S> <C>
"LESSEE" THE TESSERACT GROUP, INC.,
A MINNESOTA CORPORATION
By: /s/ Tony Verbeten
----------------------------------------
Name: Tony Verbeten
--------------------------------------
Its: Chief Financial Officer
---------------------------------------
"LESSOR" EDUCORP PROPERTIES, INC.,
A NEVADA CORPORATION
By:
----------------------------------------
Name:
--------------------------------------
Its:
---------------------------------------
</TABLE>
53
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF
PER SHARE EARNINGS (LOSS)
THE TESSERACT GROUP, INC.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding 8,574,000 7,489,000 7,477,000
Effect of dilutive stock options
based on the treasury stock method - 12,000 -
-------------- -------------- --------------
Weighted average common shares
outstanding used to compute net
earnings (loss) per share 8,574,000 7,501,000 7,477,000
-------------- -------------- --------------
-------------- -------------- --------------
Net earnings (loss) $ (3,437,000) $ 566,000 $(9,507,000)
-------------- -------------- --------------
-------------- -------------- --------------
Net earnings (loss) per share, basic $ (.40) $ .08 $ (1.27)
and diluted -------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Stock options and warrants have been excluded from loss per share
computations as their effects are antidilutive.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No.'s 33-47486, 33-59646, 33-87456 and 333-43719.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 5,543
<SECURITIES> 0
<RECEIVABLES> 3,268
<ALLOWANCES> (248)
<INVENTORY> 0
<CURRENT-ASSETS> 10,490
<PP&E> 20,929
<DEPRECIATION> (1,450)
<TOTAL-ASSETS> 49,263
<CURRENT-LIABILITIES> 7,221
<BONDS> 8,578
0
0
<COMMON> 96
<OTHER-SE> 32,653
<TOTAL-LIABILITY-AND-EQUITY> 49,263
<SALES> 0
<TOTAL-REVENUES> 15,294
<CGS> 0
<TOTAL-COSTS> 15,423
<OTHER-EXPENSES> 4,577
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> (3,437)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,437)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,437)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
