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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ___________
COMMISSION FILE NUMBER: 333-00400-LA
CHILDREN'S WONDERLAND, INC.
(Name of Small Business Issuer In Its Charter)
California 95-4455341
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
CHILDREN'S WONDERLAND, INC.
28310 Roadside Drive
Suite 220
Agoura, CA 91301
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (818) 865-1306
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
Which Registered
Common Stock, No Par Value NASDAQ
Warrants to Purchase Common Stock BOSTON STOCK EXCHANGE
Securities registered under section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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____
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $4,606,319.
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the Registrant, based upon the closing sales price of the
Common Stock on NASDAQ on September 12, 1996, was $33,013,898.
As of September 12, 1996 the number of shares of the registrant's
Common Stock issued and outstanding was 3,944,970 and the number of shares of
the registrant's Warrants to Purchase Common Stock issued and outstanding was
3,007,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the fiscal year
ended June 30, 1996, are incorporated by reference into Part III.
Transitional Small Business Disclosure Format (check one): Yes _ No X
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Description of Business . . . . . .. . . . . . . . . . . . . . . 3
2. Description of Property . . . . . . . . . . . . . . . . . . . . . 20
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 21
4. Submission of Matters to a Vote of Security Holders . . . . . . . 21
PART II
5. Market for Common Equity and Related Stockholder Matters . . . . 21
6. Management's Discussion and Analysis or Plan of Operation . . . . 22
7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 25
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 26
PART III
9. Directors, Executive Officers, Promoters and Control Persons
Compliance with Section 16(a) of the Exchange Act . . . . . . . 26
10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 26
11. Security Ownership of Certain Beneficial Owners and Management . 26
12. Certain Relationships and Related Transactions . . . . . . . . . 26
13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
RECENT EVENTS
After the conclusion of the Company's fiscal year covered by this Form
10-KSB, the following events occurred. In July 1996, the Company executed a
lease for a new center in Roseville, California. This center is being developed
by Pacific Realty Advisors, an unaffiliated real estate developer who developed
the Gold River (Sacramento), California center and with whom the Company is
holding discussions regarding potential additional sites for centers.
In August 1996, the Company announced that it has been selected to
operate two additional centers at Veterans Administration campuses in Richmond,
Virginia and Sepulveda, California. Each center is expected to have an
approximate capacity of 200 enrollees and occupy a stand-alone building of
approximately 13,000 square feet on the V.A. campus. In total, the Company has
been selected to operate five V.A. centers. The first of the Company's V.A.
centers is scheduled to commence operations in West Haven, Connecticut this
Fall.
In September 1996, the Company commenced operations of its newest
full-service intergenerational care center in Woodland Hills, California. The
new state-of-the-art center is located in the Warner Center Business Park, a
densely populated corporate business park housing the corporate headquarters and
regional operations of dozens of corporations such as Blue Cross of California,
Health Net, Well Point and Voit. The Business Park serves over 40,000 employees
and houses 10,000 residents. In total, the Company now operates thirteen
centers.
BUSINESS SUMMARY
Children's Wonderland, Inc. (the "Company" or "Children's Wonderland")
was incorporated in September, 1993 to own and operate full service family care
centers ("Centers") which provide developmentally appropriate educational
programs and activities for infants and toddlers (ages 6 weeks to 2 years),
preschoolers (ages 3 to 4), kindergartners, and the elderly (ages 60 to 85). The
Company also provides before and/or after school care for elementary school aged
children. In addition to this "intergenerational" program, the Company plans to
offer a mildly ill program at all newly constructed Centers which will provide
care for children whose parents must work when the child, due to minor illness,
cannot attend the usual child care program.
The Company's strategic objective is to address the dependent care
needs of the working family with its full service family care offering and to
target the emerging corporate market for participation in employer sponsored
family care benefit programs. The Company plans to operate full service, high
quality and innovative family day care centers that meet the needs of all
preschool and kindergarten children, as well as the needs of the elderly, in one
convenient location.
The Company was founded on the principle that the early childhood years
are the most important in shaping the personality and intelligence of the child.
Consequently, the Company is committed to meeting the emotional, social and
intellectual needs of the young child by offering well-balanced programs with
sufficient structure for security and health, yet enough freedom for creativity.
These same goals and commitments apply to the Company's elder care program which
is designed to enhance self esteem by providing an environment that fosters the
social and intellectual needs of the elderly.
As of June 30, 1996, the Company operated 12 Centers in geographic
areas which are demonstrating significant economic growth. These include the
west end of Los Angeles County, Ventura County, southern Orange County, and
Sacramento, California, as well as the greater Denver, Colorado area.
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The Company has entered into an agreement with a real estate developer
to propose the establishment of Centers at Veterans Administration ("VA") sites
across the country. Under this agreement, the Company and the developer will
seek the award of the right to operate a Center at a VA site. If the award is
granted by the VA, the developer will build the Center to the Company's
specifications and lease the Center to the Company. As of June 30, 1996 the
Company had been selected to operate three VA day care facilities. These sites
include West Haven and Newington, Connecticut and Bay Pines, Florida. (See
"Recent Events"). The VA operates approximately 160 sites in the United States.
The Company believes that the VA will be awarding additional contracts for child
care facilities in the future. Although the Company intends to seek contracts
for such sites as it deems appropriate, no assurance can be given that the VA
will award contracts for any of those sites or that the Company will be selected
by the VA for those sites.
The Company has two Centers currently under development or construction
in Roseville, California and the VA-based Center currently scheduled to open in
West Haven, Connecticut this Fall. The Company will not have any lease
obligations with respect to these centers until the construction is completed.
Additionally, the Company is in negotiations to lease or acquire other Centers,
but has not committed to leasing or acquiring any other Center.
The U.S. child care industry is highly fragmented with an estimated
80,000 licensed child care centers, of which 94% consists primarily of low
capacity home-based "cottage industry" operators with limited resources. The
size of the child care industry is currently $27 billion, and experts forecast
that this size will expand to $40.8 billion by the year 2000. Despite this
relatively large industry size and an expected annual growth rate of 14.6% --
the 8th fastest growing industry in the United States -- the top 7 chains
account for only 5.8% of the market and only 15-20% of the industry's annual
revenue.
This industry fragmentation, coupled with an increasing push for
stricter regulations and licensing requirements, provides significant growth
opportunities for well-managed and well-capitalized professional child care
providers with a solid business plan that meets the needs of the marketplace.
In May 1996, the Company completed an initial public offering of Common
Stocks and Warrants to Purchase Common Stock, raising $8,050,000 in gross
proceeds before deducting related fees and commissions. In the initial
underwriting, 1,750,000 units were sold and after exercise of the overallotment
allowance, an additional 262,500 units were sold.
Children's Wonderland believes it is among the first companies to
provide intergenerational care, which is the integration of elderly day care
with child day care centers. The elder care component of the Company's
intergenerational care commenced in June 1994 with the modification of the
Company's Oxnard, California Center. In September 1994, the elder care services
were inaugurated and, under the direction of the Company's Director of Elder
Care Services, the Company commenced developing detailed programs and materials
for elders. As of June 30, 1996 the Company operated three intergenerational
Centers. The Company has determined that several advantages exist in
intergenerational day care, including little competition and management and
operating requirements which are similar to child day care. In addition, as a
less costly alternative to nursing homes, intergenerational day care is expected
to appeal to working families and insurance providers.
The Company also believes it is one of the first companies to offer a
full service "Family Care" concept, whereby the total needs of the working
family can be addressed and matched with the needs of corporate employers.
Capitalizing on the nearly 30 years of experience of co-founder Debby S.
Bitticks, the Company plans to employ a number of strategies to achieve its
growth and profitability objectives. These include: (i) high quality,
developmentally appropriate educational programs; (ii) an infant/toddler
program, an elder care program and mildly ill child care that meets the needs of
the working family; (iii) larger, more efficient full service centers that will
accommodate approximately 200 enrollees; (iv) introducing The Family Resource
Center, a completely new concept in family care in which a therapist is
available at each Center to offer parenting and staff workshops and seminars;
and (v) competitive pricing.
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Additionally, management plans to expand its markets by establishing
five to eight centers within a given geographic region. This strategy will
enable the Company to leverage local marketing efforts and achieve cost
effective saturation while increasing community involvement and referrals. The
Company also intends to expand its future business through: the opening of
larger centers (approximately 200 enrollees each) strategically located in
corporate office parks; the acquisition of existing centers; pursuing locations
in newly planned commercial real estate developments as a feature for the
developer and prospective tenants; securing management agreements with
corporations, municipalities and religious organizations to operate and
administer on-site centers; and the implementation of innovative concepts such
as intergenerational day care and mildly-ill child care programs.
BUSINESS OVERVIEW
INDUSTRY BACKGROUND
Overview. The current population demographics, characterized by the
highest birth rates since the "baby boom" and the projected doubling of elders,
along with an unprecedented focus upon the critical importance and need for
quality family care by parents, employers and government alike, have combined to
create significant market opportunities for the Company.
Potential Intergenerational Market Opportunity
<TABLE>
<S> <C>
U.S. population (1990) 248,709,873
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Children under 5 yrs. 20,000,000
Elders over 65 yrs. 31,600,000
Total 51,600,000
Potential market as percentage of
U.S. population 21%
</TABLE>
Childcare. The U.S. child care industry serves over 12,000,000 infants,
toddlers, preschoolers and kindergarten aged children. According to the U.S.
Bureau of Labor Statistics, the child care industry is projected to be the 8th
fastest growing industry in the U.S. through the year 2000 (growing at better
than a 14.6% annual rate through 1995). The industry is generating approximately
$27 billion in revenue, a 374% increase from 1982.
Child care providers include home-based family child care, churches,
local YMCAs, government and employer sponsored groups and child care center
chains. The care provided ranges from basic "baby-sitting" (offered mainly by
home care providers) to well balanced educational programs and activities
tailored to the special developmental needs of the child. Approximately 60% of
these providers operate for profit. In addition to these organized and regulated
care providers, there is a significant number of providers that operate
informally and unlicensed.
However, as depicted below, the for-profit child care center segment of
the industry is highly fragmented, as the seven largest chain providers
represent only approximately 5.83% of the estimated 48,000 for-profit centers:
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SEVEN LARGEST FOR-PROFIT CENTERS AND THE COMPANY:
<TABLE>
<CAPTION>
Number of % of Total
Centers For-Profit Centers
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<S> <C> <C>
KinderCare Learning Centers............. 1,235 2.57%
La Petite Academy....................... 780 1.63%
Children's World Learning Centers....... 485 1.01%
Childtime Childcare, Inc................ 120 0.25%
Children's Discovery Centers............ 92 0.19%
Creative World Schools, Inc............. 48 0.10%
Tutor Time Learning Centers............. 39 0.08%
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Total................................ 2,799 5.83%
===== ====
Children's Wonderland, Inc.............. 12 0.02%
CHILD CARE CENTERS IN THE UNITED STATES:
Total child care centers................ 80,000
Number of for-profit centers............ 48,000
</TABLE>
In 1990, more than 4.2 million babies were born in the United States, the
highest number since 1961. These statistics translate into approximately 20
million children under the age of five in the United States. In addition, family
patterns have also been changing, with half of the children born today being the
first or only child in their families. This, combined with the shift to delayed
child-bearing, results in many couples with two well-established incomes to
spend on one or two children.
In addition to the increased births, the high level of demand for child
care is a direct result of work force trends, as more and more dual-wage working
families form. The participation of women in their childbearing years has
increased dramatically. Presently, more than 70% of mothers work full-time. Not
only are more mothers of young children working today, but they are returning to
work sooner after giving birth. In addition, evidence points to the desire of
part-time and non-working mothers to work full-time if they could obtain and
afford full-day child care. In 1992, 89% of women surveyed saw marriage and
children in their future before age 35 and, of those women, 97% planned to
resume work after giving birth.
Elder Care. Increasing numbers of employees are facing the issue of care
for their parents in retirement years. Major corporations are beginning to
recognize that the need for senior care may be as important to their employees
as child care. By the end of this century, it is estimated that there will be
over 34 million people over 65 years of age living in this country. In addition,
there are currently 6.2 million people over 80 years old. This total is expected
to double within 15 years. The integration of elderly day care with child day
care centers, known as intergenerational care, is a new concept which is only
beginning to be offered by care providers. Through the operation of its existing
intergenerational Centers, the Centers to be established at VA sites and new
Centers to be established, Children's Wonderland believes it is among the first
companies to provide intergenerational care. The management team of Children's
Wonderland possesses strong convictions as to the beneficial stimulative impacts
of intergenerational interaction between the elderly and young children. In
addition to intergenerational activities, the Centers' elder care programs
include recreation, cultural activities, physical activities and arts and
crafts. These programs are geared to those seniors that are not physically
handicapped, but are simply unable to care for themselves at home.
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The Company has determined that several advantages exist in
intergenerational day care including little competition, management and
operating requirements which are similar to child day care, and the potential
market as depicted above. In addition, as a less costly alternative to nursing
homes or psychiatric care for depression, intergenerational day care appeals to
working families and insurance providers.
The Company's philosophy is that for every person enrolled in an adult day
care center, two people get their lives back: the individual and the family
member care giver. Adult day care centers can serve as the cornerstone of
community-based, long-term care. Adult day centers are the fastest growing
component of community-based long-term care. As the elderly population
increases, adult day centers become a practical and appealing part of the
solution to long-term care needs. Adult day centers are designed to serve adults
experiencing a decrease in physical, mental and social functioning. The adult
day center environment recognizes and attends to emotional and intellectual
needs, as well as physical.
Older Americans used to be able to depend on family to take care of them.
Today, that solution often is not feasible. Most adult children do not have the
time or ability to meet the special needs of aging parents. For those reasons,
adult day care is becoming a necessity for many families. As the population
ages, adult day care becomes more critical. The average American life expectancy
is more than 75 years, up from 63 years in 1940. And due to continuing advances
in medicine, many experts believe that it will be close to 80 years by the year
2000.
As the fastest-growing segment of the population is over 75, adult day care
is the fastest-growing segment of long-term care in the United States. Another
reason adult day care is becoming very popular is the cost savings that it can
offer. Nursing homes cost up to $160.00 a day. Private care at home can easily
cost $100.00 a day or more for basic services. Properly trained, certified
nurses can charge as much as $50.00 an hour. Adult day-care centers, by
contrast, average between $40.00 and $60.00 per day.
As reported in The Wall Street Journal, the tip of a very disruptive
iceberg has surfaced in the workplace, and is changing people's lives and job
performance to a degree few had anticipated. Elder care is expected to have a
greater impact on the workplace than child care or any other work-family issue
so far. As the baby boom generation moves deeper into middle age, the need for
elder-care services is expected to increase dramatically.
About 22% of the work force expect to assume elder-care responsibility over
the next three to four years, compared with 15% to 16% who have the
responsibility now. By 2005, 37% of U.S. workers are expected to be aged 40 to
54, the prime time for caring for elderly parents. By 2020, more than one in
three employees are expected to be providing elder care.
In late 1993, employee calls concerning elder care from the work-family
referral service at U S West Inc., parent of U S West Communications, were
reported to exceed child care calls for the first time. Productivity losses from
elder care have been estimated at $2,500 per employed care-giver per year, based
on time missed from work and the cost of replacing care-givers who quit their
jobs altogether, resulting in an estimated $17 billion in annual lost output to
elder care in the United States.
Mildly-Ill Care. The Company believes mildly-ill care is an essential
service and competitive advantage in marketing to corporations. The Company's
new mildly-ill program is currently available at the Oxnard Center and is
expected to be available soon at the Woodland Hills and Gold River (Sacramento)
Centers. The program, which the Company plans to make available at all newly
constructed Centers, is a departure from the traditional program offerings at
most child care centers. Many working days are lost due to the need of parents
to remain home with mildly-ill children. The Company intends to market its new
mildly-ill program as a service to employers, which would permit employers to
buy spaces in advance for children of its employees in order to reduce the loss
caused by the parents' absence.
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Industry Trends. Employer provided family care assistance has
vastly expanded in the past few years. With pressure from working parents for
assistance and a general belief by companies that family care can favorably
impact productivity, absenteeism, tardiness, turnover and recruitment, many
employers have begun establishing programs which pay for a portion of the family
care center tuition. The American Business Collaboration for Quality Dependent
Care recently announced plans to spend more than $100 million over the next six
years to help employees provide care for children and aging relatives. In making
this announcement, the group, which consists of 21 blue chip corporations
including AT&T, IBM, Johnson & Johnson, Citicorp and Exxon, stressed that their
participation was based on bottom-line business considerations and the need to
retain a productive, committed and motivated work force.
Family care proposals figure prominently at both federal and state levels,
in good part as a result of opinion polls which reinforce the high level of
public support for child and elder care. Federal tax laws currently provide
various tax savings programs and incentives to taxpayers and their employers.
Under Sections 125 and 129 of the Internal Revenue Code, employers may establish
a Dependent Care Assistance Plan Program ("DECAP Program") for its employees. A
DECAP Program enables the employee to pay for family care services with pre-tax
income (up to $5,000 in annual benefits). Employees also may be eligible to
receive federal or state tax credits for a portion of their family care costs.
In addition, the federal government has provided funds for Head Start programs,
food programs and block grants in response to clear public concern over the
ability of America's parents to find and afford care for their dependents.
The Company believes that family care assistance, in a variety of forms,
will become the employee fringe benefit of the 1990's. The Company also believes
that it may even become as common in the employee benefits package as health
insurance and paid vacations. The trend in many companies is moving toward a
pro-family workplace. In fact, many employers have begun establishing DECAP
Programs as part of their standard benefits package. Under a DECAP Program
offered by Blue Cross of California, its employees are able to take advantage of
tax benefits when they use a Center.
With the foregoing in mind, the Company has observed a number of evolving
trends and issues that will shape the opportunities ahead and, in fact, form the
basis of the Company's operating plan. Among those observations are the
following:
- Shortage of Quality Full Service Family Care at Affordable Rates -
As indicated, there are numerous child care providers. However,
surveys show that the core issue to working parents is locating a
highly reputable provider where they can feel comfortable leaving
their child for the day and know that their child will get the best
possible care in a safe and warm environment. In addition, there is
a shortage of infant/toddler programs, mildly-ill care programs,
and day care for the elderly.
- Family Care is Now a "National Agenda" Issue - This issue is
getting the full attention of the federal government, which appears
to be addressing it as it does most issues - with substantial
spending on subsidized programs and tax incentives, and through
legislation such as the Family Support Act. In addition to pursuing
funding to subsidize the Company's own Centers, the Company
believes that by educating corporations about available tax
incentives, it can accelerate corporate subsidies of family care
services for their employees.
- Employers are Embracing Family Care as the Benefit of the 90s - As
more and more two-wage earner families form, "Corporate America" is
looking for a solution to what it sees as an employee productivity
and morale issue. Cooperative alliances with family care providers
are beginning to appear and clearly is a market opportunity of the
90s.
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- With All this Limelight Comes More Regulation - The need for
quality family care is increasing licensing requirements, operating
standards and other complexities that clearly favor the
professional provider over the family run provider.
- Absence of One Dominant Provider Affords Significant Growth
Potential - Fragmentation in the industry means that there are
significant growth opportunities for well-managed and
well-capitalized family care providers with a solid business plan
that meets the needs of the marketplace.
In preparation for expansion, the Company is targeting certain primary
areas for Center clusters. In each of those areas, the Company is engaged in
some phase of its development process ranging from either constructing a
facility, working with an area economic development agency or evaluating sites,
to discussions regarding purchasing existing centers. The Company has entered
into leases for new Centers in Roseville, California and West Haven,
Connecticut. Both of these Centers are under construction or development and the
Company will not have any lease obligations until the construction is completed.
Except for those leases, the Company does not have any other commitment to lease
or acquire any other Center. However, the Company is in negotiations to lease or
acquire numerous other centers, but has not committed to leasing or acquiring
any other center.
The Company is founded on two basic principles, the first being that
the early childhood years are the most important in shaping the personality and
intelligence of a child. The second is that more and more families are seeking
alternative solutions to enhancing the quality of life for their elder
dependents. Consequently, the Company is committed to meeting the emotional,
social and intellectual needs of these groups by offering a well-balanced
program with sufficient structure for security and health, yet enough freedom
for creativity.
OPERATIONS AND PROGRAMS
Facilities. As of June 30, 1996 the Company owned and operated twelve
child care Centers, with three additional facilities under construction or
development. The twelve Centers under operation, as of June 30, 1996, had a
state aggregate licensed capacity of 1,394 children/elders and a total
enrollment of 1,081. The licensed capacity of each of the Company's Centers can
fluctuate from time to time due to the Centers' configuration and changes in the
mix of enrollment. The Company's executive offices are located in Agoura,
California. The Company's child care Centers are located as follows:
Location Location
Agoura, California Woodland Hills, California**
Gold River (Sacramento), California Aurora, Colorado (3 Centers)
Lake Forest, California Edgewater, Colorado
Newbury Park, California Lakewood, Colorado
Newhall, California Westminister, Colorado
Oxnard, California West Haven, Connecticut*
Roseville, California*
- ---------------
*Center is under construction or development.
** Commenced operations in September 1996 (see "Recent Events").
Licensed capacity of the Company's Centers ranges from 70 to 190
enrollees as of June 30, 1996. Actual enrollments can be higher because some
children are enrolled on a part-time basis. The Centers generally operate at
between 60% and 100% of licensed capacity. The Company's current weekly charges
for full day service range from $79 to $135 per child, depending on the location
of the Center and the age of the child. Each Center is administered by a
Director who is responsible for the operation and maintenance of the Center.
Each Child Care Center Director is required to meet specific educational and
experience requirements for state licensing and Company requirements. Directors
are trained and supervised by the Company's Regional Directors, who visit the
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Centers on a weekly basis in order to monitor and review teaching, food
preparation and handling, sanitation, employee quality and other aspects of each
Center's operations. Most of the Centers also employ Assistant Directors.
Current Child Care Curriculum. Children's Wonderland believes in a
well-balanced program; one that offers sufficient structure for security, yet
enough freedom for creativity. The Company believes in the development of the
"whole child" and therefore its programs are designed to meet the emotional,
social, cognitive and physical needs of each person.
These programs are developmentally appropriate at all levels. The main
objective of each Center is to provide a safe, happy, developmentally
appropriate environment for children and elders so that parents and care givers
can feel confident that their loved ones are receiving the best possible care in
their absence.
Infants and Toddlers. At Children's Wonderland, management understands
that, except for the prenatal period of development, a human being's most rapid
growth and development takes place during the first twenty-four months of life
as an infant and toddler. Children who exist in a stimulating environment with
warm, responsive care givers experience peak development. Children's Wonderland
takes pride in providing a loving, interesting and safe atmosphere in which
infants and toddlers can grow and develop, and use all of their senses to
explore the world around them. The infant and toddler program is offered at most
of the Company's centers.
Pre-school. Each child is guided and encouraged, in a safe and
nurturing environment, to grow and develop at a speed which is comfortable for
him/her. The developmental objectives are similar, but the actual lesson plans
are designed to accommodate the extreme variances in the development between two
and five year olds. Learning centers grow in complexity throughout the year,
focusing on beginning math, language, science (discovery), music, dramatic play
and art. This curriculum employs anti-bias concepts. Portfolio assessments are
completed and shared with parents three times a year.
Kindergarten. The learning center concept is continued through
kindergarten, increasing in complexity as designed in the Company's curriculum.
Emphasis is placed on "hands-on" math skills and phonics based reading skills.
Upon completion of this program and with teachers' care and direction, the
kindergartners are well prepared for the challenges of first grade.
Flex-Care. This program is designed for parents with unpredictable
schedules. It allows parents to take advantage of a safe, caring environment
when unexpected appointments, errands or working hours are necessary.
Before and After School Care - Summer Day Camp. These programs provide
children with social, physical and creative activities in addition to summer
field trips, before and after school and during the summer. Before and after
school programs are offered at many of the Centers. The Summer Day Camp is
offered at all locations.
Mildly Ill. Many working hours are lost due to a parent's need to
remain home with a mildly-ill child. The Company, like most child day care
centers, has not in the past cared for visibly ill children, and only provided
limited care for children who may become mildly-ill while at a Center
(consisting of isolating the child and contacting the parent to pick up the
child). However, the Company has developed a mildly-ill program which departs
from the traditional program offerings at most child day care Centers.
Children's Wonderland's new program is designed to provide care for those
children whose parents must work when the child, due to minor illness, injuries,
or post operative conditions, cannot attend the usual child care program. Under
this new program, mildly-ill children and attending staff (one or two
individuals based on state licensing requirements) will be isolated from the
Center's other enrollees through the use of separate outside entrances,
classrooms and restroom facilities. As of June 30, 1996, this new program was
offered at the Oxnard, California Center and is planned to open soon at the Gold
River (Sacramento), California and Woodland Hills, California Centers. These
Centers have the capacity for nine mildly-ill children each. The Company plans
to include these new program facilities at all newly constructed Centers that it
will open, including the Roseville Center and the West Haven Center. Rates for
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mildly-ill day care will not substantially exceed those charged for "well"
enrollee care. These rates are expected to offset any anticipated increased cost
for the new mildly-ill care program.
The Family Resource Center. The Family Resource Center, a unique and
integral component of the services of the two D&D Centers, has been operating
since 1986 at the Agoura Center. Developed by Debby S. Bitticks (the Chief
Executive Officer of the Company) in conjunction with a family therapist
advisor, The Family Resource Center has been carefully developed to provide
essential psychological consulting, and educational and referral resources,
particularly for parents, and to assist parents and dependents in dealing with
developmental problems, illness, divorce or death. The Family Resource Center
functions at each of the Centers and is operated by a state licensed family
therapist advisor. In some cases, a single advisor will support more than one
Center.
Additionally, the Company utilizes The Family Resource Center as
another service to market to employers. Seminars and workshops have been
developed on relevant family care topics that help employees deal with the
stress and anxiety that frequently occur when managing work and family issues.
By providing a vehicle such as The Family Resource Center to assist its
employees with their family care issues, it is believed that the employer
benefits through higher productivity, better morale and reduced absenteeism.
The Family Resource Center contributes to the family care center
community as well as the community at large by addressing the important needs
and concerns of parents, families and staff. Parents often feel burdened by the
conflict between family and work responsibilities. In those cases, The Family
Resource Center provides stress reduction and psychological support, education
in child development, counseling to improve parenting skills, referrals for
serious problems and crisis intervention. Initial consultation session fees and
certain group educational sessions, available to all parents who have children
enrolled at a Center, are provided at no cost to the parent. Any additional
costs to the parents, as may be charged by the family therapist advisor for
supplemental consultation services, are based on customary family therapist fees
established in the local community.
By providing services to families, teachers and staff, The Family
Resource Center is one of the principal ways that the whole family (and the
community) can be integrated into the family care services provided by the
Company.
Intergenerational Centers. With respect to the elder care market,
increasing numbers of employees are facing the issue of care for their parents
in retirement years. By the end of this century, it is estimated that there will
be over 35 million people over 65 years of age living in the United States.
Intergenerational activities, in which children and elders share company twice a
day in small groups, are an important part of Children's Wonderland. In addition
to intergenerational activities, this program includes recreation, cultural
activities, physical activities and arts and crafts.
The Company operates intergenerational centers as a component of its
full service operation, housed within the same facility as child care. This
intergenerational service component is referred to as the Highland Club. As an
organization for adult support (ages 60 to 85), the Highland Club offers a daily
structured curriculum and activities specifically designed to meet the needs and
interests of each senior at a current rate of approximately $40 per day. Each
adult, who might otherwise spend time alone while his or her care giver is at
work or away, creates positive relationships which work to strengthen members'
dignity and sense of purpose. The program has three components: social - to
maintain the human touch; physical - to keep muscles toned; and mental - to
assist in memory retention. As a part of each day's program, the seniors
interact twice a day with the children at Children's Wonderland for events such
as arts and crafts, chair volleyball and cooking, in each case supervised by the
Company's professional staff.
The elder care component of the Company's intergenerational care
commenced in June 1994 with the modification of the Company's Oxnard Center. In
September 1994, the elder care services were inaugurated and under the direction
of the Company's Director of Elder Care Services, the Company commenced
developing detailed programs and materials for elders. The Company refined the
Highland Club concept at its Oxnard-based National Training Center during fiscal
year 1995, completing curriculum and operations manuals, standards of
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operation, and staff training programs. As of June 30, 1996 the Company operated
three intergenerational Centers. Two additional Highland Club programs are
scheduled to open in Fall 1996 (Woodland Hills, California and West Haven,
Connecticut) each with the capacity for approximately 16 elders. All newly
constructed Centers to be opened by the Company are designed as
intergenerational Centers which will have a capacity for 15 to 40 elders per
Center. Additionally, the Company plans to convert some of its acquired Centers
to intergenerational facilities depending on demographics of the community as
well as available square footage.
Veteran Administration Centers. In June 1994, the Company entered into
an agreement with a real estate developer ("Diversified Intergenerational Care")
to propose the establishment of Centers at Veterans Administration ("VA") sites
across the country. Under this agreement, the developer will notify the Company
of all VA sites at which the VA is seeking to award the right to operate a
Center and at which the developer desires to build a Center. If the Company
determines that a site is acceptable, the Company and the developer will seek
the award of the right to operate a Center at the specific VA site. If the award
is granted by the VA, the developer will build the Center to the Company's
specifications and lease the Center to the Company on a "triple net" basis for
one ten-year term with three five-year renewal options. The minimum initial rent
under each lease is $1.00 per square foot per month of all building improvements
(not including playground equipment) on each site, with rental adjustments on a
periodic basis based on the Consumer Price Index for that locality.
In 1995, the Company was selected to operate full service
intergenerational Centers on the campus of VA hospitals in West Haven and
Newington, Connecticut and Bay Pines, Florida (see "Recent Events"). Each
Center is expected to have an approximate capacity of 200 enrollees and occupy a
stand-alone building of approximately 13,000 square feet on the VA campuses.
The Company expects to open the West Haven Center during Fall 1996.
Although the Company expects the additional VA sites to be constructed during
1997, under the agreement with the developer of the VA sites, the developer is
responsible for construction of each facility.
The VA operates approximately 160 sites in the United States. The
Company believes that the VA will be awarding additional contracts for child
care facilities in the future. Although the Company intends to seek contracts
for such sites as it deems appropriate, no assurance can be given that the VA
will award contracts for any of those sites or that the Company will be selected
by the VA for those sites.
Corporate Programs. In its efforts to target the corporate market for
participation in family care benefit programs, the Company has developed a
marketing program that utilizes federal and state tax policies as a mechanism
for facilitating employer involvement in establishing a DECAP Program for its
employees. In some states, employers are also eligible for tax credits when
making these programs available to their employees. By using DECAP Programs as a
selling strategy, the Company is able to demonstrate significant dependent care
cost savings for employees while providing a solution for employers' problems
concerning employee absenteeism, turnover, and productivity. In November 1994,
Blue Cross of California began offering subsidies to its employees who use the
Centers. In addition to the subsidy, Blue Cross provides a DECAP Program for its
employees, which enables them to take advantage of tax benefits which reduce the
effective cost of the services. This provides a savings to both the employer and
the employee.
Medicaid Program. In August 1995, the State of Colorado approved the
Company to receive Medicaid reimbursement with respect to its elder care
services as a Home and Community Based Services provider for Adult Day Care.
This approval was provided under the Omnibus Budget Reconciliation Act of 1981.
Under this Act, Congress established a home and community-based Medicaid waivers
program to permit states to develop alternatives to institutional long-term care
services. Approximately a dozen states, including Colorado, currently have
Medicaid waiver programs in place.
Training. The Company is committed to providing continuous cost
effective training programs for its Center Directors and staff, and is planning
to provide video transmission and reception capabilities at selected Centers to
reduce travel costs and enhance the quality and frequency of such training.
Management believes that
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having such remote education services and a well trained staff will appeal to
the corporate marketplace and provide a competitive advantage.
The Company has established a National Training Center to train new
Center Directors, Regional Directors and staff on matters such as Center
operations, administrative procedures, marketing and other business issues, in
addition to education and curriculum content. The Company believes its emphasis
on training is important in its efforts to attract and retain the best
professionals in the industry. Management believes that a better trained staff,
more attuned to the issues and concerns of employees and care givers, will be
better prepared to market the Company's services and result in higher capacity
utilization than its competitors.
Potential Future Services and Products. The Company presently intends
in the future to offer access to a data base of family care issues through a
proposed site on the Internet World Wide Web. The Company also intends to create
and sell audio and video tapes and printed materials to care givers to provide
guidance and assistance on a variety of subjects of concern.
BUSINESS STRATEGY
The Company's key management possesses years of industry experience.
Over that time, management has developed programs directed at addressing the
needs of the entire family, especially dual working parents, and drawing in the
needs of their employers. Management believes that it has the proper balance and
depth of child care, elder care, and business backgrounds and is committed to
growth and profitability through providing high quality family care.
Management's goal is to build a national chain which competently
provides premium quality care to children and elders, breaking out of the
industry's norm of fragmented ownership where single operators own fewer than
five centers. By having a full service family care Center which includes infant
care, child care, mildly-ill care, elder care and a staff therapist under one
roof, the Company's goal is to achieve daily rates and margins above those
traditionally experienced in the child care industry.
The Company's strategy includes (i) operating five to eight large
(approximately 200 person capacity each) Centers situated in business parks
within a demographically attractive region and (ii) aggressively market the
centers to local employers. By concentrating in large, efficient Centers in
particular local markets, the Company expects to achieve significant operating
cost advantages (including marketing and training costs). The Company also
expects to increase the enrollments and the revenues at each Center through its
marketing programs and by offering infant and toddler programs, as well as elder
care, at each Center.
Family care services will include programs for children ranging in age
from six weeks to six years of age, elders ranging in age from 60 to 85 years of
age, and a mildly-ill program for children who, due to minor illness, cannot
attend the usual child care program. The Company will also provide before and/or
after school to elementary school aged children. The Company can thus address
the needs of all preschool, kindergarten and mildly-ill children as well as the
elderly in a family in one location, eliminating the need for a parent to
provide daily transportation to multiple sites. Centers will be strategically
located proximate to the parents' workplace and/or residential area. As an
additional service to the parents, children, elders and employers, each facility
will establish a "Family Resource Center" to provide psychological consultation,
education and referrals to help parents reconcile their working lives and family
responsibility and ease personal stress.
In addressing the needs of the entire family by providing a full
service, high quality and convenient family care environment, the Company views
its role as representing the extended home for children and the elderly. The
Company believes that this philosophy and the full service family care that it
will provide make the Company well positioned to take advantage of the dynamic
emerging trends in the industry. The Company's strategy includes the following
elements:
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Provide High Quality Care. The programs developed by Children's
Wonderland are geared to the special developmental needs of the children and the
elderly and are taught by dedicated and experienced teaching personnel in a
truly caring environment. These programs utilize the guidelines developed by the
National Association for the Education of Young Children ("NAEYC"), a voluntary
child care industry association that seeks to develop high quality programs for
the care and education of young children. By following these guidelines, the
Company believes that each Center will be able to obtain accreditation by the
NAEYC. As relatively few child care centers currently are accredited,
accreditation for the Centers should not only demonstrate the high quality care
offered by the Company, but also should provide the Company with a competitive
advantage for attracting employers and parents.
Design and Operate Large, Efficient Full Service Centers. New
facilities will accommodate approximately 200 enrollees versus 120 or less in
the typical child care chain center due to the Company's infant/toddler program,
which is estimated to constitute 25% of enrollments at any given Center, and its
elder care program. This will enable the Company to:
- "Keep the Family Together" by offering care for siblings from six
weeks to twelve years of age, as well as care for the elderly,
- Provide high quality full service family care and facilities at less
cost per enrollee by maintaining the same teacher/enrollee ratios
while being able to offer more programs and administrative services;
and
- Utilize both classrooms and teachers more efficiently.
Expand Geographic Regions. Five to eight Centers will be placed in
small geographic regions which will enable the Company to achieve the following
advantages:
- Ability to "leverage" local marketing effort and achieve cost
effective saturation; and
- Increased community involvement and referrals that can feed multiple
Centers.
Introduce Innovative Concept-The Family Resource Center. A completely
new concept in care is The Family Resource Center, in which a therapist is on
staff at each facility to offer parenting workshops, staff workshops, community
seminars and limited free advice to parents. This service should provide a
marketing advantage to the Company. The Company's management, based on its
nearly 30 years of experience, believes Children's Wonderland is the only family
care company known to it to be presently offering this type of program in a
single facility.
Address the Needs of the Working Families. A full curriculum of
developmentally appropriate care and special programs assures parents that their
children and elderly dependents are receiving an enriching experience. One
location for all of their preschool (infant through kindergarten) and elderly
dependents, extended hours, and locations convenient to places of employment,
will allow the parents to visit during the day and better coordinate work
schedules.
Implement Tight Management Controls. Through close supervision of the
Centers by regional management, the introduction of standardized operating
procedures and staff utilization tools and the application of cost effective
information systems technology, it is anticipated that the Centers can be
operated at maximum efficiency and profitability, which will facilitate fast
growth into new regions.
Competitive Pricing. Each Center adjusts the Company's standard prices
to conform to local economic issues, competitive pressures, and mix of current
attendance. The rates of local competitors and other economic conditions are
monitored by the Regional Directors assigned responsibility for their respective
Centers.
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MARKETING
The Company's marketing plan is carried out by the concerted efforts of
a Marketing Director and the Regional Directors who possess a specialized
understanding of their particular markets. Supplementing these full time
employees are a number of assistants as well as marketing consultants who
provide services with respect to telemarketing, advertising, public relations,
and business to business sales.
The Company's current marketing program for all Centers include direct
mail promotion and telephone book display advertising. Telemarketing programs,
promoting elder care services, also have been used. The Company's public
relations efforts have resulted in numerous newspaper articles on
intergenerational care, as well as two television news stories on the
intergenerational care programs at the Oxnard, California and Gold River
(Sacramento), California Centers. Additionally, the Company's Chief Executive
Officer appeared on a TV talk show discussing intergenerational care issues and
is often contacted by various media sources to discuss family care issues. In
February 1996, the Company commenced a marketing project with the Dun &
Bradstreet MarketPlace data base in conjunction with geographic information
system software to produce a business to business marketing program for the Gold
River Center. The Company also mailed an announcement of the opening of the Gold
River Center to homes within that Center's primary marketing territory. Similar
programs will be utilized for marketing the grand opening of the Woodland Hills
Center and the Company plans on utilizing these programs to market its other
Centers when necessary.
In June 1996, the Company launched a nationwide intergenerational
marketing program in conjunction with the Creative Children's Group, to air a
special episode of "Bloopy's Buddies" on PBS television. The Creative Children's
Group created "Bloopy's Buddies" as an innovative and educational children's
program. The program, a weekly half-hour series, is devoted to exercise,
nutrition, safety and resiliency issues. The Company has agreed to sponsor the
first series, which consists of thirteen programs - one of which is "Bloopy Goes
to Preschool" (at Children's Wonderland) which will be filmed at one of the
Company's Centers. The segment will educate children on what to expect their
first day of school and will include a visit to the Highland Club.
The strategic approach to sales and marketing at Children's Wonderland
will be directed toward several distinct customer bases. These are the corporate
employer, the parents of the children, the VA and the local community.
The Corporate Marketing Strategy. The Company intends to market to the
corporate employer both directly to the employer and indirectly through the
commercial real estate property developer.
Marketing Directly to Corporate Employers. The Company foresees
substantial prospective demand by corporate employers for family care services.
The specific benefits which the Company will emphasize to employers include:
- Having the facility located near the workplace, thus reducing
traffic problems, tardiness, absenteeism and reduction of employee
stress due to proximity to their dependents.
- Employer benefit of prepaid enrollment space, which ensures spaces
for their employees' dependents as a work fringe benefit.
- The benefit of having the flexibility to adjust the prepaid
enrollment space to the blend of ages of employees' children and
elder dependents.
- The benefit of an infant care program allowing a parent to return
to work earlier than otherwise after childbirth.
- The benefit of meeting special needs of the employer such as
extended hours during tax season or the holiday sales season.
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- The benefit of utilizing a DECAP Program to optimize the federal
and state tax deductions and credits available to the employer and
its employees.
Marketing to Developers. The Company intends to aggressively pursue
locations in newly planned commercial real estate developments. In
differentiating its approach from that of the competition, Children's Wonderland
will act as both a feature for prospective tenants in large commercial
developments, by offering on-site family care, as well as benefiting the
commercial developer itself through direct marketing efforts based on the
developer's tenant listing.
The Parent Marketing Strategy. The sales and marketing approach with
which Children's Wonderland will target parents utilizes a composite of
traditional advertising sources such as direct mailing, yellow pages listings,
newspapers and other germane print advertisements, as well as direct involvement
with the parents themselves. Both forms of marketing will emphasize the service
products offered by the Company, especially stressing those which are relatively
unique, such as The Family Resource Center.
Management believes that its marketing approach will help situate new
family care centers in locales where prospective demand is greatest. This
approach is expected to result in significantly higher levels of
pre-registrations prior to opening of new facilities. Since the location of
facilities will be critical to maximizing occupancy rates and the ultimate
success of Children's Wonderland, the Company is targeting two distinct types of
locations--Centers located in commercial areas which will be leased by the
Company and Centers located on-site at an employer's facility which will be
managed by the Company.
Veterans Administration Strategy. Through an agreement with a real
estate developer, the Company is seeking to establish Centers to be located on
VA property. As of June 30, 1996 the Company has been selected to operate three
VA Centers and will attempt to obtain contracts for many of the
approximately 160 sites that are expected to be awarded in the next several
years (see "Recent Events"). However, no assurance may be given that the
Company will be selected for any or all of these VA awards. The Company believes
that the establishment of these three Centers, and any other Centers pursuant to
contracts awarded by the VA, will enable the Company to "pre-sell" and provide a
base from which to further expand to new regions.
Market to Local Community. To achieve economies of scale in management,
operations and advertising and attain general awareness of the community social
characteristic, the Company will attempt to cluster its Centers within a
distinct geographic region, such as a county or city. This community-centric
approach should assist the Company in dealing with the local, specific needs of
each region.
To better address the needs of employers and their employees, the
Company will locate Centers in commercial areas proximate to high concentrations
of office buildings, and other large existing or prospective commercial retail
and research and development complexes. This type of location will permit the
Company to provide family care services to multiple employers in one commercial
area which is convenient to the employees.
The Company also will seek to establish a referral network with respect
to its elder care services. In elder care, 5% of referrals for elder care come
from: health care professionals (physicians, nurses, hospital discharge
planners), social service agencies, employers, and the Alzheimer's Association.
Approximately 19% of referrals are from friends, family, current or previous
clients, church members/ministers, mail carriers, and co-workers. Other
referrals result from traditional marketing such as newspapers, television,
radio, telephone books, billboards, and community functions. In September 1995,
the Company initiated a localized telemarketing program aimed at families with
elders located close to the Oxnard Center, which resulted in approximately 13%
of the families contacted inquiring about the Company's elder care services. The
Company believes that the telemarketing program proved effective during testing
in Oxnard, and currently plans on utilizing similar telemarketing efforts at its
other intergenerational sites.
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COMPETITION
Competition comes from many different forms of care providers. In terms
of pure numbers, the Company expects that it will encounter competition in most
markets primarily from single-unit (i.e., non-chain) family day care providers,
YMCA and church operated facilities, some of which may provide subsidies to its
enrollees. Based on a strategy to develop relatively large centers geared toward
the corporate market, the Company believes that it can compete more effectively
than these other providers.
Nevertheless, as the Company grows and enters new geographic regions,
it expects to encounter and compete with the larger child care chains, some of
which will be competing for the same corporate market as will the Company. Among
the child care center chains, there are only about a dozen for-profit companies
that operate more than twenty centers, and 90% of the for-profit firms in the
business have less than five centers. In the past, the majority of these chain
centers were located in city neighborhoods or suburban communities, but many new
centers are being located in or near office buildings or business parks that
house one or more companies. Entrepreneurs have been attracted by the fast
growth and fragmented nature of the industry. Many venture capital firms expect
to see additional large firms emerging in the future and are funding new
start-ups according to industry reports. Several years ago, many predicted that
the mid-size chains would be substantially acquired by the large chains, leaving
the industry with a few monoliths and numerous small independent operations.
This has not occurred, as mid-sized firms appear to be better positioned to cost
effectively concentrate their resources by setting up multiple centers in the
markets in which they choose to compete.
The seven largest chains and the number of centers they operate are:
<TABLE>
<CAPTION>
Number of For Profit
Name Centers Market Share
<S> <C> <C>
KinderCare Learning Centers.............. 1,235 2.57%
La Petite Academy........................ 780 1.63%
Children's World Learning Centers........ 485 1.01%
Childtime Childcare, Inc................. 120 0.25%
Children's Discovery Centers............. 92 0.19%
Creative World Schools, Inc.............. 48 0.10%
Tutor Time Learning Centers.............. 39 0.08%
----- -----
Total................................. 2,799 5.83%
===== =====
Children's Wonderland, Inc............... 12 0.02%
</TABLE>
While the Company believes it can compete favorably with those chains based on
its full service and intergenerational programs, each has substantially greater
financial and other resources than the Company. There can be no assurance that
the Company will not experience competitive pricing pressure that could
adversely affect its results of operations.
Many non-profit child care centers have lower occupancy costs for their
facilities than does the Company, and consequently charge less for their
services. However, it is anticipated that in those cases Children's Wonderland
will compete principally by offering trained personnel, professionally planned
educational and recreational programs, well equipped facilities and additional
services.
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GOVERNMENTAL REGULATION
Each Center must be licensed under applicable state or local licensing laws
and is subject to a variety of state and local regulations. Although these
regulations vary from jurisdiction to jurisdiction, governmental agencies
generally review the safety, fitness and adequacy of the buildings and
equipment, the ratio of staff to enrolled children, the dietary program, the
daily curriculum and compliance with health standards. In most jurisdictions,
these agencies conduct scheduled and unscheduled inspections of the Centers and
licenses must be renewed periodically. Repeated failures of a Center to comply
with applicable regulations can subject it to sanctions, which might include
probation or, in more serious cases, suspension or revocation of the Center's
license to operate. The Company believes that each of its Centers is in
substantial compliance with such requirements.
In the ordinary course of business, the Centers, like others in the day
care industry, from time to time have received statements of deficiency and,
occasionally, citations for failure to comply with various state regulatory
requirements. To date, such statements of deficiency and citations have not had
any material adverse effect on the Company or any of the Centers and no
statements of deficiency or citations are pending. Based on its operating
policies and compliance procedures, quality assurance programs and past
experience, the Company does not believe that any of the Centers is likely to
receive any statements of deficiency or citations which would, either
individually or in the aggregate, have a material adverse effect on the
Company's operations.
Federal regulations require compliance by the states with minimum standards
in order to qualify for participation in federal assistance programs, including
Medicaid, which are administered by the states. Under Section 422 of the Social
Security Act, the federal government provides assistance to states which have an
established plan for child-welfare services, including child care services.
Medicaid refers to the various state administered health programs for the
indigent that have been created by federal law. Subject to certain minimum
federal requirements, each state defines the extent and duration of the services
covered by its Medicaid program. Although there are certain federal requirements
governing the payment levels for Medicaid service, each state has its own
methodology for making payment for services provided to Medicaid recipients.
Typically, Medicaid payment rates are less than the Centers' established charges
for services provided to Medicaid patients. The Company estimates that less than
10% of its revenue is derived from various state public assistance programs. The
Company believes that a reduction in such programs should not have a material
adverse effect on its business.
To the best knowledge of the Company, no property leased by the Company has
been cited for violation of any environmental law and the Company is not aware
of any environmental problem related to the property leased by the Company for
which the government may order compliance with environmental laws. In the event
the government does order compliance with environmental laws, depending on the
terms of the lease with respect to the affected property, the Company may be
required to bear the costs of such compliance.
The Company is also subject to the Fair Labor Standards Act, which governs
such matters as minimum wages, overtime compensation and working conditions. A
significant portion of the Company's personnel are paid at rates related to the
federal minimum wage and, accordingly, increases in the minimum wage will
increase the Company's labor costs.
SUPPLIERS
The Company is not dependent on any single supplier of equipment or
supplies, and has not entered into any material, long term contracts with any
such supplier.
INSURANCE
The Company maintains comprehensive general liability insurance, which
provides coverage for both bodily injury and property damage and specific
coverage for child physical and sexual abuse. Although there can be no
assurance, the Company believes such insurance coverage is adequate. The Company
has not experienced
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difficulty in obtaining insurance coverage, but there can be no assurances that
adequate insurance coverage will be available in the future, or that the
Company's current coverage will protect it against all possible claims.
SEASONALITY
The Company's revenues will vary throughout the year. As is the case
throughout the childcare industry, the Company's first quarter (the summer
months of July, August and September) generally reflects the lowest revenues. To
address this matter, the Company is in the process of developing an enhanced
summer camp program which would bring in additional revenue during the summer
months and help with client retention. The fourth quarter generally reflects the
highest revenues for each year.
EMPLOYEES
As of June 30, 1996 the Company had 265 employees, 198 of whom were
full-time. The Company believes that its future success will depend in part on
its ability to attract and retain qualified employees. The Company believes that
its relations with its employees are good. The employees are not parties to any
collective bargaining agreements and the Company does not anticipate becoming a
party to any such agreements.
COMPANY DEVELOPMENT
Children's Wonderland was incorporated in California in September 1993 to
create a national chain of full service family care Centers, including child and
elder (intergenerational) day care.
In February 1994, the Company opened a Center in Newbury Park,
California. This Center, which was formerly operated by a national child care
chain, had been closed since August 1993. In May 1994, the Company acquired two
family care centers (the "D&D Centers") from subsidiaries of D&D Child
Development Corporation ("D&D") located in Agoura ("Agoura Center") and Oxnard,
California. In connection with that acquisition, the Company issued 105,443
shares and assumed D&D's or its subsidiaries' obligations of approximately
$671,000 in liabilities. Approximately 24,655 shares were used by D&D and its
subsidiaries to pay their creditors in full satisfaction of all outstanding
liabilities (other than the liabilities being assumed by the Company). The
remaining approximately 81,008 shares were issued by the Company to shareholders
of D&D and its subsidiaries at an issue price of $0.02 per share in
consideration of their consent to the sale of the D&D Centers.
In August 1994, the Company acquired an existing center located in Lake
Forest, California for $231,810 in cash and notes. In January 1995, the Company
acquired an existing center located in Newhall, California for $300,000 in cash
and notes, and entered into leases for five locations in the Denver, Colorado,
area. The locations in the Denver area were previously operated by an
unaffiliated entity, which had filed for bankruptcy. With respect to such five
locations, the Company purchased all of the furniture, fixtures and equipment
located therein out of the entity's bankruptcy for $40,000 in cash. In December
1995, the Company acquired an existing center located in Edgewater, Colorado for
$95,000 in cash and notes and in March 1996, the Company opened a Center in Gold
River (Sacramento), California.
These 12 Centers are in geographic areas which are demonstrating
significant economic growth. These include the west end of Los Angeles County,
Ventura County, southern Orange County and Sacramento, California, as well as
the greater Denver, Colorado area.
TRADEMARKS
The Company has the rights to federally registered trademarks or
service marks in the Children's Wonderland name and logo, as well as "The Family
Resource Center" and "Keeping The Family Together," which
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collectively reflect a philosophy which integrates the need of the child, the
parent and the family as a whole. This philosophy forms the cornerstone of what
the Company stands for and wishes to project. Additionally, "The Highland Club"
is currently in the process of federal registration and all necessary
documentation has been submitted to the United States Patent and Trademark
Office. The Company believes that these marks will highlight and better
distinguish its services from that of its competitors.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive offices are located in Agoura,
California, comprising approximately 3,808 square feet. The space is currently
leased at the rate of $3,884 per month until June 30, 1999. When the prior
lease expired on August 31, 1996, the Company entered into a new lease agreement
for an additional three years. The new lease provided for additional office
space which enabled the Company to relocate some of its management personnel
from the Field Office in Oxnard, California to the principal executive offices
so that they are able to work more closely with one another. The Company
believes that these facilities will satisfy its needs for at least the next
twelve months. In addition, the Company leases each of the fifteen facilities
that house (or upon completion of construction, will house) the Centers, such
leases being on a "triple net" basis on the terms described below:
<TABLE>
<CAPTION>
Current
Approx. Monthly
Address Sq. Ft. Cost Expiration
- ------- ------- ---- ----------
<C> <C> <C> <C>
27400 Canwood St., Agoura, California 14,500 $15,500 May, 2006
21772 Lake Forest Dr., Lake Forest, California 7,560 $10,584 July, 1999
107 Teardrop Court, Newbury Park, California 8,500 $6,300 December, 2003
700 Esplanade Dr., Oxnard, California 11,600 $11,000 January, 2014
25022 N. Hawkbyrn Ave., Newhall, California 3,800 $4,000 January, 2000
15250 E. 6th Ave., Aurora, Colorado 6,400 $3,920 February, 2000
3225 S. Wadsworth Blvd., Lakewood, Colorado 5,012 $2,924 February, 2000
9102 W. 88th Ave., Westminister, Colorado 5,320 $2,217 March, 2001
1400 Ironton, Aurora, Colorado 6,000 $2,100 February, 2000
18707 E. Hampden Ave., Aurora, Colorado 3,680 $2,300 April, 1999
5207 W. 26th Ave., Edgewater, Colorado 4,800 $3,050 October, 2003
2317 Gold Meadow Way, Gold River, California 11,600 $15,080 January, 2006
5855 DeSoto, Woodland Hills, California 12,247 $11,635 April, 2006
Roseville, California 11,600 $15,544(1) 10 years after commencement
950 Campbell Ave., West Haven, Connecticut 11,500 $16,500(1) 10 years after commencement
</TABLE>
- ----------------------
(1) These Centers are not currently open and lease obligations do not
commence until construction of these Centers is completed. The
anticipated openings are Fall 1996 for the West Haven Center and 1997
for the Roseville Center. The current monthly cost shown for these
Centers is the base monthly rental payable during the first year
following the commencement of the lease.
The Company also is in the process of negotiating leases for the
Centers to be opened at VA sites in Newington, Connecticut; Bay Pines, Florida;
Sepulveda, California, and Richmond, Virginia. Although the Company expects the
additional VA sites to be constructed during 1997, under the agreement with the
developer of the VA sites, the developer is responsible for the construction of
the facility.
20
<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings. It is
anticipated that from time to time it will be subject to claims, suits and
complaints that arise in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK MARKET AND OTHER INFORMATION
The Company's common stock and warrants are traded on the NASDAQ Small
Cap Market under the symbols CWIC and CWICW, respectively, and have been traded
on that market since May 7, 1996. Prior to such date, there was no public
trading market for the Company's equity securities.
The following table sets forth the high and low sales price of
a share of the Company's common stock as reported by NASDAQ from the inception
of trading on May 7, 1996 through the year ended June 30, 1996, which is the
Company's fiscal year end (the only period in which the Company's securities
were publicly traded).
<TABLE>
<CAPTION>
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
YEAR QUARTER HIGH LOW
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
<C> <C> <C> <C>
1996 06/30/96 9 3/4 6 1/2
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
</TABLE>
The following table sets forth the high and low sales price of
a warrant as reported by NASDAQ from the inception of trading on May 7, 1996
through the year ended June 30, 1996, which is the Company's fiscal year end
(the only period in which the Company's securities were publicly traded).
<TABLE>
<CAPTION>
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
YEAR QUARTER HIGH LOW
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
<C> <C> <C> <C>
1996 06/30/96 4 1/2 1 1/2
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
</TABLE>
The Company's common stock and warrants are also traded on the Boston
Stock Exchange under the symbols CWO and CWOWF, respectively, and have been
traded on that Exchange since September 9, 1996.
As of September 12, 1996, there were 89 holders of record of the
Company's common stock.
As of September 12, 1996 there were 9 holders of record of the
Company's warrants.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock to date. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition. It is the present intention of the Board
of Directors to retain all earnings, if any, for use in the Company's business
operations and, accordingly, the Board does not expect to declare or pay any
dividends in the foreseeable future.
21
<PAGE> 22
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company of New York, New York,
serves as transfer agent and registrar of the Company's common stock and
warrants.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
This Annual Report on Form 10-KSB contains forward-looking statements.
A forward-looking statement may contain words such as "will continue to be",
"will be", "continue to", "expect to", "anticipates that", "to be", or "can
impact". Management cautions that forward-looking statements are subject to
risks and uncertainties that could cause the Company's actual results to differ
materially from those projected in forward-looking statements.
OVERVIEW
Children's Wonderland was incorporated in September 1993 to create a
national child and elder day care (intergenerational) chain, which provides
developmentally appropriate educational programs and activities for children
ages six weeks to 6 years old, and nurturing, safe care for the special needs
of elders (generally over 60 years of age). The Company also provides before
and/or after school care for elementary school aged children.
The Company's initial public offering was completed in May 1996, thus
providing the Company with funds to take advantage of a perceived need for full
service, multi-location, elder/child day care. For fiscal year 1996, the Company
experienced substantial growth, with revenue increasing by 26% to $4,606,319, as
compared to $3,655,188 for the fiscal year ended June 30, 1995. Two Centers were
added during fiscal year 1996, which represents a 23% increase in occupied
Center square footage, a 14% increase in employees, and an approximate 30%
increase in state-licensed Center capacity as compared to fiscal year 1995.
In both fiscal years 1996 and 1995, the Company incurred losses as a
result of significant costs associated with the establishment of the corporate
infrastructure. These costs included the documentation of intergenerational
Center operating procedures and curriculum, hiring new management, creation of
standard Center purchase and long-term lease agreements, creation of prospective
site evaluation and selection criteria, establishment of a National Training
Center, and creation of regional sales and development functions. A significant
portion of these costs represent expenses required to break out of the child
care industry's norm of small, "mom and pop", backyard-based operations.
22
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth the percentage of Center revenue represented in
the Company's statement of operations for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
1995 1996
---------------- ---------------
<S> <C> <C>
Revenue 100.0% 100.0%
---------------- ---------------
Operating Expense
Payroll and Related Costs 60.0% 65.8%
Center Facilities Costs 20.7% 20.7%
General and Administrative 39.4% 37.1%
Development Costs 5.8% 8.0%
Other 6.8% 8.4%
Depreciation and Amortization 3.8% 7.4%
---------------- ---------------
Total 136.5% 147.4%
---------------- ---------------
Operating Loss (36.5%) (47.4%)
---------------- ---------------
Interest Expense, net 6.6% 7.8%
Other Non-Operating Costs 7.7% 4.6%
---------------- ---------------
Net Loss (50.9%) (59.9%)
================ ===============
</TABLE>
COMPARISON OF FISCAL YEAR 1995 TO 1996
Revenue. Revenue increased 26% to $4,606,319 for fiscal year 1996, as compared
to $3,655,188 in fiscal year 1995. The increase in revenue was attributed to the
timing of Center acquisitions as well as to an increase in the number of Centers
in operation and the related increase in Center capacity. The Company acquired
seven Centers at various times throughout fiscal year 1995; these Centers were
in operation for the entire fiscal year of 1996. Moreover, two additional
Centers were opened by the Company during fiscal year 1996; one Center was
acquired from a third party while the other Center represented a new Center
opening. The Company's state licensed, elder/child capacity for the ten Centers
in operation as of June 30, 1995 was 1,079 persons, compared to twelve centers
as of June 30, 1996 with a total capacity of 1,394. This represents a capacity
increase of approximately 30%. Management expects revenues to continue to
increase in the future as additional Centers are developed by the Company or
acquired from third parties. Management also expects revenues to increase as
enrollment levels are expected to rise at existing Centers due to site
improvements and enhanced marketing made possible from the initial public
offering funds.
Operating Expense - Payroll and Related Costs. Payroll costs related to Center
operations increased 38.2% to $3,030,776 for fiscal year 1996, as compared to
$2,193,704 in fiscal year 1995. The increase resulted from an approximate 32%
increase in the average number of employees from 183 for fiscal year 1995 to 240
for the current fiscal year. Center payroll expenses as a percent of Center
revenues increased due to the temporary need for proportionately higher staffing
levels at recently opened Centers in order to provide proper training to new
employees. State law for licensed day care facilities requires a specific ratio
of elders/children to teachers. Accordingly, Center payroll expense generally
fluctuates in relationship to attendance levels at each Center, and as such
payroll expenses are expected to continue to increase as attendance levels
increase.
Operating Expense - Center Facilities Costs. Facilities costs increased 26.1% to
$953,831 for fiscal year 1996, as compared to $756,704 for fiscal year 1995,
although the balance remained consistent as a percent of revenues.
23
<PAGE> 24
This expense category consists primarily of facilities rent expense. The
increase was due to the timing of Center acquisitions; the Company added seven
Center facilities, representing an approximate 52% increase in Center space,
under long term lease at various times during fiscal year 1995. Two additional
Centers were added during fiscal year 1996, representing an approximate 23%
increase in Center space. At June 30, 1996, center space consisted of 88,772
square feet as compared to 72,372 square feet as of June 30, 1995. Facilities
costs are expected to continue to increase as new Centers are added.
Operating Expense - General & Administrative. General & administrative costs
increased 18.6% to $1,709,279 for fiscal year 1996, as compared to $1,440,902
for fiscal year 1995; however, the balance actually decreased as a percent of
revenue, from 39.4% to 37.1% of revenue for fiscal years 1995 to 1996,
respectively. The majority of the balance relates to the continued development
of internal operating systems and management personnel, legal and consulting
fees related to the development of purchase and real estate agreements as well
as the Company's national development strategy, and other general expenses.
Although the Company intends to continue the development and refinement of such
items, management believes that total general and administrative expenses will
continue to decrease as a percent of revenue as additional Centers are opened
and revenues continue to increase.
Operating Expense - Development Costs. Development costs increased 73.5% to
$368,270 for fiscal year 1996, as compared to $212,257 for fiscal year 1995. The
increase was related to increased development efforts during the current fiscal
year. The Company acquired a new Center in Denver, Colorado in the second
quarter and opened a new Center in Gold River (Sacramento), California in the
third quarter of fiscal year 1996. In addition, new Centers in California and
Connecticut are expected to open in the first half of fiscal year 1997.
Operating Expense - Other. Other operating expenses increased 56.1% to $389,093
for fiscal year 1996, as compared to $249,317 for fiscal year 1995. This expense
category includes the cost of Center supplies, food, special activities, and
other Center related items. As such, this balance increases as total enrollment
increases. The balance remained relatively consistent as a percent of revenue,
increasing from 6.8% to 8.4% percent of revenue for fiscal years 1995 and 1996,
respectively.
Operating Expense - Depreciation & Amortization. Depreciation & amortization
increased 147.3% to $339,888 for fiscal year 1996, as compared to $137,420 for
fiscal year 1995. The increase is related to increased fixed assets balances and
capitalized acquisition and start up costs related to new Center additions
during the year and increased amortization expense related to two capital leases
entered into during the current year.
Operating Loss. Operating loss increased 63.6% to $2,184,818 for fiscal year
1996, as compared to $1,335,116 for fiscal year 1995. The increase in the
operating loss was related to increased Center payroll expenses as a percent of
Center revenues due to the temporary need for proportionately higher staffing
levels at recently opened Centers, increased development costs related to two
new Centers in California and Colorado, and increased depreciation and
amortization expenses related to the increased facilities, equipment, and
intangible assets related to goodwill and the start-up of Centers.
Interest Expense, Net. Net interest expense increased 48.2% to $360,294 for
fiscal year 1996, as compared to $243,067 for fiscal year 1995. The increase was
due to increased borrowings prior to the Company's initial public offering under
both short- and long-term debt agreements which were required to finance the
Company's cash requirements for both expansion and development as well as
current operations.
Other Non-Operating Costs. Other non-operating costs decreased 24.2% to $212,699
for fiscal year 1996, as compared to $280,743 for fiscal year 1995. In addition,
such costs decreased from 7.7% of revenue to 4.6% of revenue. This expense
includes costs related to acquisition activities and other items. The decrease
is due to the completion of acquisitions during fiscal year 1996. As the costs
related to completed acquisitions are capitalized rather than expensed, the
expense for the current year is less than that of the prior year.
24
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operating cash needs primarily
from vendor credit, the sale of equity securities, loans from certain
stockholders, the private placement of promissory notes and convertible
promissory notes and the delivery of promissory notes to the sellers of certain
acquired Centers. In May 1994, the Company raised $1,000,000 in gross proceeds
from a private placement of Common Stock and warrants to purchase Common Stock;
in September 1994, the Company completed a private placement of convertible
promissory notes totaling $806,000 in gross proceeds; in February 1995 and July
1995, a private placement of promissory notes generated a total of $275,000 in
gross proceeds. In addition, stockholders have provided $350,000 in loans and
$378,608 in long term notes were issued for the purchase of Centers. In
September 1995, the Company raised $531,800 in gross proceeds from a private
offering of Common Stock and warrants to purchase Common Stock. The Company
raised $1,000,000 in gross proceeds from the completion in January 1996 of the
private placement of its 6% Senior Convertible Preferred Stock and Warrants to
purchase Common Stock. In May 1996, the Company completed an initial public
offering of Common Stock and Warrants to purchase Common Stock. The offering
raised $8,050,000 in gross proceeds before deducting related fees and
commissions. Subsequent to fiscal year end, the Company negotiated a $100,000
line of credit with a bank. The credit line carries interest at 9.25% per annum.
No amounts have been drawn on such line as of June 30, 1996. In addition, the
Company negotiated a $400,000 multiple disbursements term promissory note
agreement with a bank. The agreement expires in August 2000 and carries interest
at the bank's prime lending rate (currently 8.25%) plus one percent per annum.
As of June 30, 1996 no amounts have been borrowed under this agreement.
At various times since July 1993, the Company has experienced severe
cash flow shortfalls from operations and as a result of its inability to secure
financing on a timely basis. During these times the Company used funds otherwise
payable to state and federal governments for payroll taxes to satisfy its
current obligations. Since September 1995, the Company has remained current in
its payments of payroll taxes, and in fiscal year 1996 the Company paid all
delinquent payroll taxes, along with related penalties and interest.
The Company's investing activities have been primarily related to
acquiring or constructing new Centers, renovating and upgrading existing
Centers, and costs associated with debt financing prior to the initial public
offering.
The Company's operating activities used $808,429 and $2,687,823 of cash
during fiscal years 1995 and 1996, respectively, primarily due to the start-up
of five Centers in the Denver, Colorado area in fiscal year 1995 and two
additional Centers, one each in Denver, Colorado and Gold River (Sacramento),
California during fiscal year 1996, the development of internal operating
systems, hiring of management, the engagement of consultants for the development
of elder and child care curriculum, and the use of consultants to formulate the
Company's national development strategy.
Funds available under the Company's new $100,000 line of credit and the
$400,000 term note, along with cash presently on hand, should be sufficient to
meet the Company's cash needs for at least the next twelve months, although
additional expansion, be it through acquisition or otherwise, will likely
require the Company to raise additional cash. Should additional financing not
become available, the Company believes that appropriate reductions in corporate
expense can be achieved to adequately provide liquidity for the next twelve
months. However, there can be no assurance that the Company will not need
additional funds in the future.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company are submitted as a separate
section of this Form 10-KSB on pages F-1 through F-18.
25
<PAGE> 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the fiscal year
ended June 30, 1996, which Proxy Statement will be filed with the Securities and
Exchange Commission on or about October 15, 1996.
ITEM 10. EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the fiscal year
ended June 30, 1996, which Proxy Statement will be filed with the Securities and
Exchange Commission on or about October 15, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the fiscal year
ended June 30, 1996, which Proxy Statement will be filed with the Securities and
Exchange Commission on or about October 15, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the fiscal year
ended June 30, 1996, which Proxy Statement will be filed with the Securities and
Exchange Commission on or about October 15, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation and Amendments thereto
of the Registrant. (1)
3.2 Bylaws of the Registrant(1)
4.1 Form of Warrant Agreement and Warrant Certificate(1)
4.2 Form of Underwriters Unit Purchase Option(1)
26
<PAGE> 27
4.3 Form of Common Stock Certificate(1)
10.1 Employment Agreement dated December 1, 1993 between the Registrant and
Debby S. Bitticks and amendment dated December 15, 1995(1)
10.2 Employment Agreement dated June 1, 1995 between the Registrant and
Robert M. Wilson.(1)
10.3 Amended 1993 Incentive Stock Option Plan (1)
10.4 Incentive Stock Option Agreement dated June 1, 1995 between the
Registrant and Kenneth W. Bitticks(1)
10.5 Incentive Stock Option Agreement dated June 1, 1995 between the
Registrant and Robert M. Wilson(1)
10.6 Agreement dated June 24, 1994 between the Registrant and Scott L.
Shafer and Bernard L. Ginsberg(1)
10.7 Agreement dated June 15, 1995 between Registrant and Brian T.
Fitzpatrick(1)
10.8 Asset Purchase Agreement dated December 27, 1993 between Registrant and
D&D Child Development Corporation(1)
10.9 Asset Purchase Agreement dated December 27, 1993 between Registrant and
Growth and Learning Center(1)
10.10 Asset Purchase Agreement dated December 27, 1993 between Registrant and
Children's Village of Oxnard, Inc.(1)
10.11 Credit Agreement dated November 30, 1993 between Registrant and Kenneth
W. Bitticks(1)
10.12 Amendment to Credit Agreement dated April 25, 1994 between Registrant
and Kenneth W. Bitticks(1)
10.13 Subscription Agreement dated November 30, 1993 between Registrant and
Debby S. Bitticks(1)
10.14 Subscription Agreement dated November 30, 1993 between Registrant and
Kenneth W. Bitticks(1)
10.15 Subscription Agreement dated November 30, 1993 between Registrant and
Brian T. Fitzpatrick(1)
10.16 Subscription Agreement dated November 30, 1993 between Registrant and
Stefan Harlan(1)
10.17 Subscription Agreement and Letter of Investment Intent dated April 29,
1994 between Registrant and Kenneth W. Bitticks and Debby S.
Bitticks(1)
10.18 Indemnity Agreement dated June 15, 1995 between Registrant and Kenneth
W. Bitticks and Debby S. Bitticks(1)
10.19 Security Agreement dated November 30, 1993 between Registrant and
Kenneth W. Bitticks(1)
10.20 Commercial Lease dated November 13, 1993 between Registrant and KASCO
for 27400 West Canwood Street, Agoura, California(1)
10.21 Lease Agreement dated December 17, 1993 between Registrant and Teardrop
Partners for 107 Teardrop Court, Thousand Oaks, California (Newbury
Park)(1)
10.22 Lease Agreement dated February 1, 1994 between Children's Village of
Oxnard, Inc. and Martin V. Smith, Trustee of the Martin V. Smith and
Martha K. Smith 1990 Smith Trust and Assignment and Addendum to
27
<PAGE> 28
Lease dated March 1, 1994 between Registrant, Martin V. Smith, Trustee
of the Martin V. Smith and Martha K. Smith Family Trust and Children's
Village of Oxnard for 700 Esplanade Drive, Oxnard, California(1)
10.23 Build-to-Suit Lease for a Child Care Center, Gold River, California
dated April 1995 between Registrant and Panattoni-Catlin Venture
(Sacramento)(1)
10.24 Office Lease dated March 13, 1995 between Registrant and Warner Center
Business Properties III, L.P. and First Amendment to Lease dated June
19, 1995 between Registrant and Warner Center Business Properties III,
L.P. for 5855 DeSoto, Woodland Hills, California(1)
10.25 Build-to-Suit Sublease for a Child Care Center, West Haven, Connecticut
dated June 16, 1995 between Registrant and Medical Marketing &
Management(1)
10.26 Form of Director and Officer Indemnification(1)
10.27 Commercial Lease dated May 31, 1996 between Registrant and KASCO for
27400 West Canwood Street, Agoura, California(2)
10.28 1996 Stock Option Plan(2)
24 Power of Attorney(2)
(1) Filed as an exhibit of the same number to the Company's Registration
Statement on Form SB-2 (Registration Number 333-00400-LA)
(2) Filed herewith.
(b) REPORTS ON FORM 8-K
During the fourth quarter of Fiscal Year 1996, the Company's Form 8-K dated
June 24, 1996 was filed with the Securities and Exchange Commission to announce
the execution of a new ten year lease between Registrant and KASCO for 27400
West Canwood Street, Agoura, California.
28
<PAGE> 29
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.
Children's Wonderland, Inc.
(Registrant)
Dated: September 27, 1996 By: /s/ Robert M. Wilson
--------------------
Robert M. Wilson
President and Chief Financial Officer
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.
Signature Title Date
- --------- ----- ----
/s/ Debby S. Bitticks Chief Executive Officer September 27, 1996
- --------------------- and Director
Debby S. Bitticks (Principal Executive Officer)
* Kenneth W. Bitticks Chairman and Director September 27, 1996
- ---------------------
Kenneth W. Bitticks
/s/ Robert M. Wilson President, Chief Financial September 27, 1996
- -------------------- Officer and Director
Robert M. Wilson (Principal Financial and
Accounting Officer)
* Michael L. Laney Director September 27, 1996
- ------------------
Michael L. Laney
* James W. Gott Director September 27, 1996
- ---------------
James W. Gott
* By: /s/ Robert M. Wilson
---------------------
Robert M. Wilson
Attorney-in-Fact
29
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Children's Wonderland, Inc.
(the "Company") as of June 30, 1995 and 1996, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1995 and 1996,
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Los Angeles, California
August 30, 1996
F-1
<PAGE> 31
CHILDREN'S WONDERLAND, INC.
BALANCE SHEETS
JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 65,072 $3,210,418
Accounts Receivable, net of allowance for
doubtful accounts of $29,473 and $42,676 as of
June 30, 1995 and 1996, respectively 70,783 64,667
Prepaid Expenses 57,223 104,979
---------- ----------
Total Current Assets 193,078 3,380,064
EQUIPMENT AND IMPROVEMENTS, NET (Notes 3 and 7) 241,666 429,325
CAPITALIZED LEASES (Net of accumulated amortization of
$141,825 and $227,991 as of June 30, 1995 and 1996,
respectively) (Note 6) 872,528 2,120,060
INTANGIBLE ASSETS, NET (Note 4) 593,253 633,415
DEPOSITS AND OTHER 178,355 433,650
---------- ----------
TOTAL ASSETS $2,078,880 $6,996,514
========== ==========
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 32
CHILDREN'S WONDERLAND, INC.
BALANCE SHEETS
JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1996
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable $ 336,937 $ 480,837
Accrued Expenses (Note 5) 889,558 434,665
Due to Stockholders (Note 10) 361,000 383,000
Current Portion of Long Term Debt (Note 7) 126,982 325,991
Current Portion of Capitalized Lease Obligation (Note 6) 125,000 283,103
----------- -----------
Total Current Liabilities 1,839,477 1,907,596
----------- -----------
LONG TERM DEBT, less current portion (Note 7) 1,485,567 468,261
----------- -----------
CAPITALIZED LEASE OBLIGATION, less current portion (Note 6) 934,858 2,083,483
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 2, 10, 11, and 12):
Common Stock, no par value;
20,000,000 shares authorized; 649,164 and 3,925,689 shares
issued and outstanding as of June 30, 1995 and 1996,
respectively 2,162,033 9,638,040
Accumulated Deficit (4,343,055) (7,100,866)
----------- -----------
Total Stockholders' Equity (Deficit) (2,181,022) 2,537,174
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 2,078,880 $ 6,996,514
=========== ===========
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 33
CHILDREN'S WONDERLAND, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
----------
June 30, 1995 June 30, 1996
------------- -------------
<S> <C> <C>
REVENUE $3,655,188 $4,606,319
---------- ----------
OPERATING EXPENSE:
Payroll and Related Costs 2,193,704 3,030,776
Center Facilities Costs 756,704 953,831
General & Administrative 1,440,902 1,709,279
Development Costs 212,257 368,270
Other 249,317 389,093
Depreciation & Amortization 137,420 339,888
---------- ----------
Total Operating Expense 4,990,304 6,791,137
---------- ----------
OPERATING LOSS 1,335,116 2,184,818
NON-OPERATING EXPENSE:
Interest Expense, net 243,067 360,294
Other Non-Operating Costs 280,743 212,699
---------- ----------
NET LOSS $1,858,926 $2,757,811
========== ==========
NET LOSS PER SHARE (Note 2) $ (2.03)
==========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 34
CHILDREN'S WONDERLAND, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6% Senior
Convertible Preferred Stock Common Stock
--------------------------- ------------
Number Number Accumulated
of Shares Amount of Shares Amount Deficit Total
--------- ------ --------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1994 633,755 $2,161,683 $(2,484,129) $ (322,446)
Issuance of Common Stock 19,812 450 450
Retirement of Common Stock (4,403) (100) (100)
Net loss (1,858,926) (1,858,926)
------- ---------- ----------- -----------
BALANCE, June 30, 1995 649,164 2,162,033 (4,343,055) (2,181,022)
Issuance of Convertible Preferred
Stock 1,000,000 $ 861,543 861,543
Issuance of Common Stock (net
of offering costs of $2,089,736) 2,241,144 6,495,064 6,495,064
Exercise of Warrants 5,000 25,000 25,000
Conversion of Convertible
Preferred Stock to Common
Stock (1,000,000) (861,543) 1,000,000 861,543 --
Conversion of Long Term Debt 30,381 94,400 94,400
Net Loss (2,757,811) (2,757,811)
---------- --------- --------- ---------- ----------- -----------
BALANCE, June 30, 1996 -- $ -- 3,925,689 $9,638,040 $(7,100,866) $ 2,537,174
========== ========= ========= ========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 35
CHILDREN'S WONDERLAND, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
----------
June 30, 1995 June 30, 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Loss $(1,858,926) $(2,757,811)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 137,420 339,888
Interest expense paid off with common stock 21,834
Changes in operating assets and liabilities:
Accounts receivable, net (40,079) 6,116
Prepaid expenses (17,554) (47,756)
Accounts payable 171,968 143,900
Accrued expenses 747,367 (454,893)
Deferred operating lease payments 28,081 56,823
Other 23,294 4,076
----------- -----------
Net cash used in operating activities (808,429) (2,687,823)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to intangible assets (159,970) (153,154)
Additions to equipment and improvements (165,027) (235,452)
Increase in deposits and other assets (115,533) (255,295)
----------- -----------
Net cash used in investing activities (440,530) (643,901)
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to stockholders 350,000 22,000
Long term debt borrowings 1,136,000 268,977
Long term debt repayments (57,859) (1,053,774)
Principal payments on capital leases (53,900)
Financing costs (116,000) (958,339)
Issuance of 6% senior convertible
preferred stock 861,543
Issuance of common stock 450 7,390,563
Repurchase of common stock (100)
----------- -----------
Net cash provided by financing activities 1,312,491 6,477,070
NET INCREASE IN CASH AND CASH EQUIVALENTS 63,532 3,145,346
CASH AND CASH EQUIVALENTS, Beginning of period 1,540 65,072
----------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 65,072 $ 3,210,418
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 186,193 $ 350,213
Cash paid during the period for income taxes -- --
</TABLE>
(continued)
See Notes to Financial Statements
F-6
<PAGE> 36
CHILDREN'S WONDERLAND, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
Non-cash Transactions:
In August 1994, the Company issued a $178,600 note in connection with the
purchase of a center in California. In January 1995, the Company issued a
$200,000 note in connection with the purchase of another center in California
(see Note 2).
In January 1995, the Company assumed a $21,218 note and issued a $40,000 note in
connection with the purchase of five centers in Colorado.
In December 1995, the Company assumed $23,998 in notes and issued a $61,002 note
in connection with the purchase of a center in Colorado.
In May 1996, the Company completed an initial public offering of common stock
and warrants to purchase common stock. In connection with the offering,
1,000,000 shares of outstanding 6% senior convertible preferred stock were
converted into 1,000,000 shares of common stock, and 41,298 shares of common
stock were issued to retire $94,400 of outstanding debt and $21,834 of accrued
interest. In addition, $892,333 of capitalized net financing costs were charged
to equity upon the successful completion of the offering.
In May 1996, the Company entered into a capital lease transaction related to
$150,000 of equipment at various centers.
In June 1996, the Company entered into a long term lease agreement for a center
facility in California; the lease term expires May 31, 2006. The lease has been
accounted for as a capital lease, and accordingly, an asset and an obligation in
the amount of $1,210,628, the net present value of the minimum lease payments
upon inception of the lease, was recorded in June 1996.
(concluded)
See Notes to Financial Statements
F-7
<PAGE> 37
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Children's Wonderland owns and operates full service intergenerational family
care centers. At June 30, 1996, the Company operated twelve centers located in
California and Colorado.
Basis of Presentation
The Company had a net loss of $1,858,926 and $2,757,811 for the years ended June
30, 1995 and 1996, respectively. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern and do not
reflect the liquidation value of assets and liabilities. In May 1996, the
Company successfully completed an initial public offering of common stock and
warrants to purchase common stock. The offering resulted in gross proceeds of
$8,050,000 before deducting underwriters' fees and other costs of the offering.
In addition, the Company negotiated a $100,000 line of credit and a $400,000
multiple disbursement term promissory note agreement with a bank (see Note 14)
subsequent to June 30, 1996. The Company plans to utilize the funds provided by
these sources for the purpose of opening new full service family day care
centers and renovating various existing centers in order to increase revenues
sufficient to cover overhead and generate positive cash flows.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenue upon the daily delivery of family day care
services. Prepaid tuition is deferred and recognized on a straight-line basis
over the term of the period in which the service is to be provided. Revenues are
derived from customers whose residence or place of employment is in close
proximity of the respective center. The Company has recorded an allowance for
doubtful accounts to cover the difference between recorded revenues and the
collections from customers. The allowance and provision for bad debts are
adjusted periodically based upon the Company's evaluation of historical
collection experience and other relevant factors.
Cash and Cash Equivalents
Cash and cash equivalents include checking and money market accounts with
original maturities of less than ninety days.
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized over their useful lives or the respective
lease terms, whichever are less.
Intangible Assets
Intangible assets represent cost in excess of net assets acquired of certain
purchased centers, costs incurred in connection with the finding and successful
acquisition of new centers, and costs incurred to effect the Company's debt
financing activities. The cost in excess of net assets acquired and acquisition
costs are amortized over a 15 year life on a straight-line basis. Capitalized
debt financing costs are amortized over the life of the respective debt
agreements on a straight-line basis. The Company assesses, on a periodic basis,
the recoverability of intangible assets by projecting non-discounted future cash
flows over the remaining amortization period.
F-8
<PAGE> 38
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Start-Up Centers
The Company considers newly built centers to be start-up centers. Due to the
seasonality of the school year, it may take up to one year for student
enrollment to ramp up to normal capacity levels. As certain fixed costs are
incurred regardless of enrollment levels, the Company believes that a start-up
center's operating results for its first year of operations are not indicative
of a normal operating level. As such, Company policy is to classify all
operating costs as development costs for a start-up center's first year of
operations.
Use of Estimates in the Preparation of the Financial Statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may be based upon amounts which differ from those estimates.
Fair Value of Financial Instruments
The recorded values of the Company's financial instruments approximate their
fair values as the interest rates are not significantly different than the
market interest rate. The fair value of convertible notes payable due to
stockholders and directors (see Notes 7 and 10) can not be determined due to
their related party nature.
Current Accounting Pronouncements
The FASB has issued SFAS No. 123, "Accounting for Stock-Based Compensation",
which encourages companies to account for stock compensation awards based on
their fair value at the date the awards are granted. This statement does not
require the application of the fair value method and allows the continuance of
the current accounting method, which requires accounting for stock compensation
awards based on their intrinsic value as of the grant date. However, SFAS No.
123 requires pro forma disclosure of net income as if the fair value based
method of accounting had been applied. SFAS No. 123 is effective for fiscal
years beginning after December 15, 1995. The Company has elected not to adopt
the fair value provisions of this statement.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
NOTE 2 - STOCKHOLDERS' EQUITY (DEFICIT)
On May 7, 1996, the Company completed an initial public offering of 1,750,000
units, each of which included one share of common stock and one warrant to
purchase an additional share of the Company's common stock for a price of $5.00
per share. The price to the public was $4.00 per unit. Additionally, the Company
closed on the underwriter's overallotment of an additional 262,500 units on May
24, 1996. In connection with the offering, 1,000,000 shares of outstanding 6%
senior convertible preferred stock were automatically converted into common
shares at a conversion rate of 1 to 1. The proceeds from the offering are to be
used for expansion of the Company, repayment of debt, and acquisition of
additional full service family day care centers.
F-9
<PAGE> 39
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 2 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Supplementary net loss per share has been computed assuming that shares issued
upon conversion of 6% senior convertible preferred stock and convertible debt
were outstanding from the time these convertible instruments were issued until
June 30, 1996 and after adjusting for interest expense related to the
convertible debt. Supplementary net loss per share for the year ended June 30,
1996 thus amounts to $1.35 per share.
Due to the significant amount of shares of common stock issued during fiscal
year 1996, net loss per share and supplementary net loss per share for the year
ended June 30, 1995 have not been presented as such information is not
indicative of the Company's performance on an on-going basis. The weighted
average number of common and common equivalent shares used in computing net loss
per share and supplementary net loss per share for the year ended June 30, 1996
amounted to 1,358,641 and 1,979,254, respectively. These amounts are
significantly less than the 3,925,689 number of shares actually outstanding as
of June 30, 1996 since the initial public offering was completed approximately
two months prior to fiscal year end.
NOTE 3 - EQUIPMENT AND IMPROVEMENTS, NET
Equipment and improvements consist of the following:
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1996 Useful Life
------------- ------------- -----------
<S> <C> <C> <C>
Furniture & Fixtures $260,443 $293,007 5 Years
Office Equipment 31,293 64,116 5 Years
Vehicles 46,524 44,675 5 Years
Leasehold Improvements 52,528 97,042 Life of Lease
Construction in Progress 9,195 163,525
-------- --------
399,983 662,365
Less Accumulated Depreciation 158,317 233,040
-------- --------
Equipment & Improvements, Net $241,666 $429,325
======== ========
</TABLE>
Depreciation expense was $42,491 and $75,125 for the years ended June 30, 1995
and 1996, respectively.
F-10
<PAGE> 40
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 4 - INTANGIBLE ASSETS, NET
Intangible assets consist of the following:
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1996
------------- -------------
<S> <C> <C>
Cost in excess of net assets acquired $472,630 $529,729
Capitalized financing costs 116,385 28,750
Capitalized acquisition costs 62,582 158,637
-------- --------
651,597 717,116
Less Accumulated Amortization 58,344 83,701
-------- --------
Intangible Assets, Net $593,253 $633,415
======== ========
</TABLE>
Amortization expense was $57,931 and $178,598 for the years ended June 30, 1995
and 1996, respectively.
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1996
------------- -------------
<S> <C> <C>
Accrued salaries and wages $172,289 $176,236
Accrued payroll taxes 526,983 144,619
Accrued audit and legal fees 10,000 50,000
Accrued interest 56,874 35,789
Accrued vacation 30,000 28,021
Accrued severance pay 87,644
Other 5,768
-------- --------
Accrued Expenses $889,558 $434,665
======== ========
</TABLE>
NOTE 6 - CAPITALIZED LEASE OBLIGATION
In September 1991, a predecessor company entered into a capital lease, which was
subsequently assumed by the Company, for land and a building related to one of
its centers. Upon inception, the lease was recorded as both an asset and an
obligation equal to the present value at the beginning of the lease term of the
minimum lease payments. The lease term is 22 years and 5 months, and the fair
value of the land at the inception of the lease was less than 25% of the total
fair value of the leased assets. As such, both land and the building are being
amortized as a single unit over the life of the lease. Amortization expense was
$36,998 and $71,076 for years ended June 30, 1995 and 1996, respectively, and is
included in operating expense - depreciation and amortization. Interest has been
imputed at 13% per annum.
F-11
<PAGE> 41
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 6 - CAPITALIZED LEASE OBLIGATION (CONTINUED)
In May 1996, the Company entered into an agreement to lease equipment related to
various centers. Upon inception, the lease was recorded as both an asset and an
obligation equal to the present value at the beginning of the lease term of the
minimum lease payments. The lease term is 2 years, and ownership of the
equipment reverts to the Company upon termination of the lease term. As such,
the leased equipment is being amortized over the respective useful lives of the
equipment, which is five years. Amortization expense was $5,000 for the year
ended June 30, 1996 and is included in operating expense - depreciation and
amortization. Interest has been imputed at 6.8% per annum, which is the interest
rate implicit in the lease.
In June 1996, the Company entered into a capital lease for land and several
buildings related to one of its centers. Upon inception, the lease was recorded
as both an asset and an obligation equal to the present value at the beginning
of the lease term of the minimum lease payments. The lease term is 10 years, and
the fair value of the land at the inception of the lease was less than 25% of
the total fair value of the leased assets. As such, both land and the buildings
are being amortized as single unit over the life of the lease. Amortization
expense was $10,089 for the year ended June 30, 1996 and is included in
operating expense - depreciation and amortization. Interest has been imputed at
9.25% per annum, which is the Company's incremental borrowing rate (see Note
14).
The following is a schedule by years of future minimum lease payments for the
capital leases together with the present value of the net minimum lease payments
as of June 30, 1996 (In the early years of the first lease, interest exceeds
scheduled payments):
<TABLE>
<CAPTION>
Year Ended
June 30,
--------
<S> <C>
1997 $ 398,460
1998 395,403
1999 342,848
2000 342,848
2001 342,848
Thereafter 2,739,079
----------
Total minimum lease payments 4,561,486
Less amount representing interest 2,194,900
----------
Present value of net minimum lease payments 2,366,586
Less current portion 283,103
----------
Long term portion $2,083,483
==========
</TABLE>
F-12
<PAGE> 42
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 7 - LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1996
------------- -------------
<S> <C> <C>
Convertible notes payable to individuals, interest at 12% per
annum, payable in quarterly installments of $7,883 through May
31, 1997, at which time the entire principal is due and
payable. As a result of the initial public offering, $458,850
of the outstanding principal was paid in cash and $94,400 was
converted into the Company's common stock at a weighted
average conversion rate of $2.00 per share. At June 30, 1996,
$210,000 was due to stockholders and directors $ 806,000 $252,750
Promissory notes payable to individuals, interest at 12% per
annum. Principal and interest are due and payable in full upon
the earlier of an underwritten public offering or February 28,
1998. Each $5,000 note is attached to 1,101 common stock
purchase warrants, each of which entitles the holder to
purchase one share of the Company's common stock for an amount
equal to one-half of the offering price under the underwritten
public offering, but not less than $2.00 per share. As a
result of the initial public offering, $220,000 of the
principal was paid in cash 230,000 10,000
Promissory notes payable to individuals, interest at 8% per
annum. Principal and interest payable in equal monthly
installments of $2,827 through January 2002, collateralized by
supplies and equipment 193,964 173,201
Promissory notes payable to individuals, interest at 8% per
annum. Principal and interest payable in equal monthly
installments of $2,525 through August 2002, collateralized by
supplies and equipment 164,859 147,104
Other notes payable with interest ranging from 7% to 14.9% per
annum 181,718 118,366
Deferred operating lease payments (see Note 8) 36,008 92,831
---------- --------
Total 1,612,549 794,252
Less current portion 126,982 325,991
---------- --------
Total long term debt $1,485,567 $468,261
========== ========
</TABLE>
F-13
<PAGE> 43
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 7 - LONG TERM DEBT (CONTINUED)
Assets with an approximate net book value of $575,000 and $535,000 as of June
30, 1995 and 1996, respectively, serve as collateral for certain long term debt.
Future annual minimum payments due on long term debt are as follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
--------
<S> <C>
1997 $325,991
1998 58,767
1999 59,204
2000 64,176
2001 64,751
Thereafter 221,363
--------
Total $794,252
========
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is obligated under several noncancelable operating leases for its
corporate office and center facilities. Rent expense, adjusted for known payment
escalations and rent abatements using the straight-line method, was $542,353 and
$720,271 for the years ended June 30, 1995 and 1996, respectively. Future annual
minimum lease payments for all noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
--------
<S> <C>
1997 $ 812,864
1998 866,904
1999 879,783
2000 603,158
2001 493,772
Thereafter 2,030,734
----------
Total $5,687,215
==========
</TABLE>
As of June 30, 1996, the Company has outstanding a $300,000 standby letter of
credit which was issued as security related to a long term lease agreement for a
center facility.
F-14
<PAGE> 44
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
At June 30, 1996, the Company has a net operating loss carryforward of
approximately $4,883,879 for federal income tax purposes expiring through 2011.
The Company also has a net operating loss carryforward of approximately
$4,955,715 for California income tax purposes expiring through 2011. The
Company's net deferred tax asset has been offset with a valuation allowance
because of uncertainty regarding the Company's ability to generate future
taxable income. Utilization of federal and state net operating loss
carryforwards are limited to $85,000 and $43,000 per year, respectively.
Components of the Company's net deferred income tax asset at June 30, 1995 and
1996 are as follows:
<TABLE>
<CAPTION>
June 30, 1995
-------------
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Deferred income tax assets:
Net operating loss carryforward $ 432,397 $ 59,773 $ 492,170
Accrued payroll expense 187,980 51,971 239,951
Other accrued expenses 58,706 16,230 74,936
Other 10,020 7,247 17,267
----------- --------- -----------
689,103 135,221 824,324
Deferred income tax liabilities:
Depreciation (4,949) (4,949)
----------- --------- -----------
Net deferred income tax assets 684,154 135,221 819,375
Valuation allowance (684,154) (135,221) (819,375)
----------- --------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== ========= ===========
<CAPTION>
June 30, 1996
-------------
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Deferred income tax assets:
Net operating loss carryforward $ 1,660,519 $ 465,837 $ 2,126,356
Accrued payroll expense 1,266 350 1,616
Other accrued expenses 9,525 2,634 12,161
Other 25,226 4,012 29,238
----------- --------- -----------
1,696,536 472,833 2,169,371
Deferred income tax liabilities:
Depreciation -- (3,790) (3,790)
----------- --------- -----------
Net deferred income tax assets 1,696,536 469,043 2,165,581
Valuation allowance (1,696,536) (469,043) (2,165,581)
----------- --------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== ========= ===========
</TABLE>
F-15
<PAGE> 45
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 10 - RELATED PARTIES
The lessor of one of the capitalized land and building leases (see Note 8) is
also a 1% stockholder.
At June 30, 1996, the Company owed $637,150 to certain stockholders and another
related party, including $35,789 representing accrued interest. Of this amount,
$383,000 represents advances from stockholders which are due and payable on
demand with interest rates ranging from 12% to 15% per annum, and the remaining
balance represents current debt payable to certain stockholders, with interest
rates ranging from 7% to 12% per annum.
NOTE 11 - STOCK OPTIONS AND WARRANTS
Options
On December 1, 1993, the Company's board of directors approved the 1993 Stock
Option Plan (the "Plan") authorizing the issuance of up to 210,000 non-qualified
options to purchase common stock at an exercise price of no less than 85% of the
last price at which shares of the Company's common stock were sold. Under the
Plan, the options vest as determined by the board of directors. All options
expire five years after date of grant or upon termination of employment.
<TABLE>
<CAPTION>
Range of Option
Shares Prices per Share
------ ----------------
<S> <C> <C>
Outstanding at June 30, 1995 142,400 $1.00 - $1.50
Options granted 53,300 $2.55
Options canceled 0
-------
Outstanding at June 30, 1996 195,700 $1.00 - $2.55
=======
</TABLE>
At June 30, 1996, options to purchase 177,534 shares are exercisable.
The Company has entered into an agreement with a real estate developer for the
establishment of intergenerational day care centers at VA sites across the
country. Pursuant to such agreement, the developer will receive options to
purchase 2,400 shares of the Company's common stock at an exercise price of
$1.50 per share for each additional center opened at a VA site. As of June 30,
1996, no options have been issued.
In addition to the Plan, the Company issued, in fiscal year 1995, 35,000 options
to purchase units, at $4.00 per unit, to various unrelated parties. Each unit
under option consists of 0.88 shares of the Company's common stock, plus a
warrant to purchase 0.44 additional shares of common stock for $2.00.
F-16
<PAGE> 46
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 11 - STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants
At June 30, 1996, warrants to purchase 3,007,500 shares of common stock at
exercise prices ranging from $2.00 to $9.08 per share are outstanding, including
the warrants attached to promissory notes (See Note 7). Of the 3,007,500
warrants, 2,012,500 warrants expire on April 30, 2001, 110,065 warrants expire
on May 5, 1997, and 60,536 warrants expire on February 28, 1998. The 2,012,500
warrants issued in connection with the Company's initial public offering (see
Note 2) are subject to redemption by the Company commencing in May 1997 at $0.05
per warrant upon 30 days' written notice, provided the closing bid price of the
Company's common stock exceeds $9.00 per share for 20 consecutive trading days
ending within five days of the date of the notice of redemption. Warrants held
by related parties amounted to 134,632 at an exercise price of $2.00 per share.
NOTE 12 - COMMON STOCK REVERSE SPLIT
On December 12, 1995 the Company's Board of Directors enacted a 0.440261 for one
reverse split of its shares of common stock. All outstanding warrants to
purchase shares of the Company's common stock were adjusted accordingly (see
Note 11). All references to shares and per share amounts have been restated to
reflect the reverse stock split.
NOTE 13 - ACQUISITIONS
In August 1994, the Company purchased the assets of a center for $231,810 in
cash and notes, and in January 1995, the Company purchased the assets of an
additional center for $300,000 in cash and notes. Results of operations of the
purchased centers are included in the Company's 1995 results of operations
subsequent to acquisition, and are included in the Company 1996 results of
operations for the entire period. Pro forma unaudited operating results for
fiscal year 1995 assuming the centers were purchased July 1, 1994 and adjusting
for amortization of excess purchase price and interest on notes payable, are as
follows (pro forma fiscal year 1996 is not shown as the operations of the
purchased centers are already included in actual results of operations):
<TABLE>
<CAPTION>
1995
(Unaudited)
-----------
<S> <C>
Revenue $ 3,881,187
Loss Before Extraordinary Gain (1,868,405)
Net Loss (1,868,405)
</TABLE>
Pro forma net loss per share for the year ended June 30, 1995 has not been
presented as such information is not indicative of the Company's performance on
an on-going basis due to the significant amount of shares issued during fiscal
year 1996 (see Note 2).
F-17
<PAGE> 47
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
NOTE 14 - SUBSEQUENT EVENTS
In July 1996, the Company entered into a five year agreement to lease certain
vehicles. The lease has been accounted for as a capital lease, and accordingly,
an asset and obligation in the amount of $116,924, the net present value of the
minimum lease payments upon inception of the lease, has been recorded in July
1996. Interest has been imputed at 9.25% per annum, which is the Company's
incremental borrowing rate. Monthly lease payments amount to $2,441.
In August 1996, the Company entered into a $100,000 revolving promissory note
agreement with a bank. The note is collateralized by the Company's assets and
matures in August 1997. Interest is charged at the bank's prime lending rate
(currently 8.25%) plus 1% per annum, and is payable in monthly installments
commencing September 1996.
In August 1996, the Company entered into a $400,000 multiple disbursements term
promissory note agreement with a bank. The Company must maintain a 20%
compensating balance, and the agreement is further collateralized by all of the
Company's assets. The borrowing agreement expires in August 2000. Interest is
charged at the bank's prime lending rate (currently 8.25%) plus 1% per annum,
and is payable in monthly installments commencing September 1996.
F-18
<PAGE> 1
EXHIBIT 10.27
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, May 31, 1996, is made by and between LEECO, Limited Partnership (a Nevada
Limited Partnership) ("LESSOR")
and CHILDRENS WONDERLAND, INC. (a California Corporation) ("LESSEE")
(collectively the "PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
and commonly known by the street address of 27400 Canwood St. - Agoura, Ca.
located in the County of Los Angeles, State of California and generally
described as (describe briefly the nature of the property) School Site
("PREMISES"). See Paragraph 2 for further provisions.)
1.3 TERM: (10) ten years and 0 months ("Original Term") commencing
June 1, 1996 ("COMMENCEMENT DATE") and ending May 31, 2006 ("EXPIRATION DATE").
See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: NA ("EARLY POSSESSION DATE"). (See
Paragraphs 3.2 and 3.3 for further provisions.)
1.5 BASE RENT: $ 15,500.00 per month ("BASE RENT"), payable on the
First day of each month commencing June 1, 1996 (See Paragraph 4 for further
provisions.)
[X] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $15,500.00 as Base Rent for the
period June 1, 1996 thru June 30, 1996.
1.7 SECURITY DEPOSIT: $150,000.00 ("SECURITY DEPOSIT"). (See
Paragraph 5 for further provisions.)
1.8 PERMITTED USE: School - child and or elder day care, education
and related uses (See Paragraph 6 for further provisions.)
1.9 INSURING PARTY: Lessee is the "INSURING PARTY" unless
otherwise stated herein. (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
NONE represents
[ ] Lessor exclusively ("LESSOR'S BROKER"); [ ] both Lessor and Lessee, and
NONE represents
[ ] Lessee exclusively ("LESSEE'S BROKER"); both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by NONE (GUARANTOR). (See Paragraph 37 for further
provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting
of Paragraphs 49 through 71 and Exhibits A, all of which constitute part of
this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all of
the terms convenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, in an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean
and free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, fire sprinkler system, lighting, air conditioning, heating
and loading doors, if any, in the Premises, other than those constructed by
Lessee, shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE.
Lessor warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or
to be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within six
(6) months following the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that
it has been advised by the Brokers to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and fire
sprinkler systems, security, environmental aspects, compliance with Applicable
Law, as defined in Paragraph 6.3) and the present and future suitability of the
Premises for Lessee's intended use, (b) that Lessee has made such investigation
as it deems necessary with reference to such matters and assumes all
responsibility therefor as the same relate to Lessee's occupancy of the
Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties
with respect to the said matters other than as set forth in this Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the
date set forth in Paragraph 1.1 Lessee was the owner or occupant of the
Premises. In such event, Lessee shall, at Lessee's sole cost and expense,
correct any non-compliance of the Premises with said warranties.
3. TERM
3.1 TERM. The Commencement Date, Expiration Date and Original
Term of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall not affect nor
advance the Expiration Date of the Original Term.
Initials ______
______
PAGE 1
<PAGE> 2
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 4.1, of, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10)
days period, Lessee's right to cancel this Lease shall terminate and be of no
further force or effect. Except as may be otherwise provided, and regardless of
when the term actually commences, if possession is not tendered to Lessee when
required by this Lease and Lessee does not terminate this Lease, as aforesaid,
the period free of the obligation to pay Base Rent, if any, that Lessee would
otherwise have enjoyed shall run from the date of delivery of possession and
continue for a period equal to what Lessee would otherwise have enjoyed under
the terms hereof, but minus any days of delay caused by the acts, changes or
omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other
rent or charges, as the same may be adjusted from time to time, to be received
by Lessor in lawful money of the United States, without offset or deduction, on
or before the day on which it is due under the terms of this Lease. Base Rent
and all other rent and charges for any period during the term hereof which is
for less than one (1) full calendar month shall be prorated based upon the
actual number of days of the calendar month involved. Payment of Base Rent and
other charges shall be made to Lessor at its address stated herein or to such
other persons or at such other addresses as Lessor may from time to time
designate in writing to Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Lessor shall not be required to keep all or
any part of the Security Deposit separate from its general accounts. Lessor
shall, at the expiration or earlier termination of the term hereof and after
Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to
the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of the
Premises in a manner that creates waste or a nuisance, or that disturbs owners
and/or occupants of, or causes damage to, neighboring premises or properties.
Lessor hereby agrees to not unreasonably withhold or delay its consent to any
written request by Lessee, Lessees assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall within five (5) business days give a written
notification of same, which notice shall include an explanation of Lessor's
reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment or the Premises, (ii) regulated or monitored by any
governmental authority, or (iii) a basis for liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in, on or about the Premises
which constitutes a Reportable Use (as hereinafter defined) of Hazardous
Substances without the express prior written consent of Lessor and compliance in
a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as
defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority.
Reportable Use shall also include Lessee's being responsible for the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Law requires that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but in compliance with all Applicable Law,
use any ordinary and customary materials reasonably required to be used by
Lessee in the normal course of Lessee's business permitted on the Premises, so
long as such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may (but without
any obligation to do so) condition its consent to the use or presence of any
Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving
Lessor such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefrom or therefor,
including, but not limited to, the installation (and removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance, or a condition involving or
resulting from same, has come to be located in, on, under or about the Premises,
other than as previously consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also immediately give Lessor
a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action or proceeding given to, or received from,
any governmental authority or private party, or persons entering or occupying
the Premises, concerning the presence, spill, release, discharge of, or exposure
to, any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in
this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently
and in a timely manner, comply with all "APPLICABLE LAW," which term is used in
this Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide Lessor
with copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as
defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any
time, in the case of an emergency, and otherwise at reasonable times, for the
purpose of inspecting the condition of the Premises and for verifying compliance
by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3),
and to employ experts and/or consultants in connection therewith and/or to
advise Lessor with respect to Lessee's activities, including but not limited to
the installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's
warranty as to condition), 2.3 (Lessor's warranty as to compliance with
covenants, etc.),
Initials [sig]
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[sig]
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PAGE 2
<PAGE> 3
7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, structural and non-structural (whether or not such portion of the
Premises requiring repairs, or the means of repairing the same, are reasonably
or readily accessible to Lessee, and 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
such portion of the Premises), including, without limiting the generality of
the foregoing, all equipment or facilities serving the Premises, such as
plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or
standpipe and hose or other automatic fire extinguishing system, including fire
alarm and/or smoke detection systems and equipment, fire hydrants, fixtures,
walls (interior and exterior), foundations, ceilings, roofs, floors, windows,
doors, plate glass, skylights, landscaping, driveways, parking lots, fences,
retaining walls, signs, sidewalks and parkways located in, on, about, or
adjacent to the Premises. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly,
at Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
contamination of, and for the maintenance, security and/or monitoring of the
Premises, the elements surrounding same, or neighboring properties, that was
caused or materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance and/or storage tank brought onto the Premises by or for
Lessee or under its control. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof
in good order, condition and state of repair. If Lessee occupies the Premises
for seven (7) years or more, Lessor may require Lessee to repaint the exterior
of the buildings on the Premises as reasonably required, but not more
frequently than once every seven (7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements
of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises),
2.3 (relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
non structural, all of which obligations are intended to be that of the Lessee
under Paragraph 7.1 hereof. It is the intention of the Parties that the terms
of this Lease govern the respective obligations of the Parties as to
maintenance and repair of the Premises. Lessee and Lessor expressly waive the
benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease with respect to, or which affords
Lessee the right to make repairs at the expense of Lessor or to terminate this
Lease by reason of any needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems (not phones and modems), lighting
fixtures, heating, ventilating, and air conditioning equipment, plumbing, and
fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean
Lessee's machinery and equipment that can be removed without doing material
damage to the Premises. The term "ALTERATIONS" shall mean any modification of
the improvements on the Premises from that which are provided by Lessor under
the terms of this Lease, other than Utility Installations or Trade Fixtures,
whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY
INSTALLATIONS" are defined as Alterations and/or Utility Installations made by
Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee
shall not make any Alterations or Utility Installations in, on, under or about
the Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof), as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during the term of this Lease as extended does not
exceed $25,000.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall
be presented to Lessor in written form with proposed detailed plans. All
consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by
subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's
acquiring all applicable permits required by governmental authorities, (ii) the
furnishing of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon, and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any Alterations
or Utility Installations by Lessee during the term of this Lease shall be done
in a good and workmanlike manner, with good and sufficient materials, and in
compliance with all Applicable Law. Lessee shall promptly upon completion
thereof furnish Lessor with as-built plans and specifications therefor. Lessor
may (but without obligation to do so) condition its consent to any requested
Alteration or Utility Installation that costs $10,000 or more upon Lessee's
providing Lessor with a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such Alteration or Utility Installation
and/or upon Lessee's posting an additional Security Deposit with Lessor under
Paragraph 36 hereof.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall
require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in
an amount equal to one and one-half times the amount of such contested lien
claim or demand, indemnifying Lessor against liability for the same, as
required by law for the holding of the Premises free from the effect of such
lien or claim. In addition, Lessor may require Lessee to pay Lessor's
attorney's fees and costs in participating in such action if Lessor shall
decide it is to its best interest to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their
removal or become the owner thereof as hereinafter provided in this Paragraph
7.4, all Alterations and Utility Additions made to the Premises by Lessee shall
be the property of and owned by Lessee, but considered a part of the Premises.
Lessor may, at any time and at its option, elect in writing to Lessee to be
the owner of all or any specified part of the Lessee Owned Alterations and
Utility Installations. Unless otherwise instructed per subparagraph 7.4(b)
hereof, all Lessee Owned Alterations and Utility Installations shall, at the
expiration or earlier termination of this Lease, become the property of Lessor
and remain upon and be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
their installation may have been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the end of the last day of the Lease term or any earlier
termination date, with all of the improvements, parts and surfaces thereof
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under this
Lease. Except as otherwise agreed or specified in writing by Lessor, the
Premises, as surrendered, shall include the Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Alterations and/or Utility Installations, as well as the removal
of any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all
as may then be required by Applicable Law and/or good service practice.
Lessee's Trade Fixtures shall remain the property of Lessee and shall be
removed by Lessee subject to its obligation to repair and restore the Premises
per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or
Lessee is the Insuring Party, Lessee shall pay for all insurance required under
this Paragraph 8. Premiums for policy periods commencing prior to or extending
beyond the Lease term shall be prorated to correspond to the Lease term.
Payment shall be made by Lessee to Lessor within ten (10) days following
receipt of an invoice for any amount due.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee and Lessor (as an additional insured) against
claims for bodily injury, personal injury and property damage based upon,
involving or arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not less than
$5,000,000 per occurrence with an "Additional Insured-Managers or Lessors of
Premises" Endorsement and contain the "Amendment of the Pollution Exclusion"
for damage caused by heat, smoke or fumes from a hostile fire. The policy
shall not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance required by this
Lease or as carried by Lessee shall not, however, limit the liability of Lessee
nor relieve Lessee of any obligation hereunder. All insurance to be carried by
Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring
Party, Lessor shall also maintain liability insurance described in Paragraph
8.2(a), above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.
Note - $4,000,000 of the $5,000,000 Liability Insurance Amount may be an
umbrella policy.
Initials ______
PAGE 3
<PAGE> 4
8.3 PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall
obtain and keep in force during the term of this Lease a policy or policies in
the name of Lessor, with loss payable to Lessor and to the holders of any
mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"),
insuring loss or damage to the Premises. The amount of such insurance shall be
equal to the full replacement cost of the Premises, as the same shall exist
from time to time, or the amount required by Lenders, but in no event more than
the commercially reasonable and available insurable value thereof if, by reason
of the unique nature or age of the improvements involved, such latter amount is
less than full replacement cost. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations shall be insured by Lessee
under Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage for any additional
costs resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or
replacement of any undamaged sections of the Premises required to be demolished
or removed by reason of the enforcement of any building, zoning, safety or land
use laws as the result of a covered cause of loss. Said policy or policies
shall also contain an agreed valuation provision in lieu of any coinsurance
clause, waiver of subrogation, and inflation guard protection causing an
increase in the annual property insurance coverage amount by a factor of not
less than the adjusted U.S. Department of Labor Consumer Price Index for All
Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall
not exceed $1,000 per occurrence, and Lessee shall be liable for such
deductible amount in the event of an Insured Loss, as defined in Paragraph
9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition,
obtain and keep in force during the term of this Lease a policy or policies in
the name of Lessor, with loss payable to Lessor and Lender(s), insuring the
loss of the full rental and other charges payable by Lessee to Lessor under
this Lease for one (1) year (including all real estate taxes, insurance costs,
and any scheduled rental increases). Said insurance shall provide that in the
event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall
contain an agreed valuation provision in lieu of any coinsurance clause, and
the amount of coverage shall be adjusted annually to reflect the projected
rental income, property taxes, insurance premium costs and other expenses, if
any, otherwise payable by Lessee, for the next twelve (12) month period.
Lessee shall be liable for any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any increase in
the premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring
Party, the Lessor shall not be required to insure Lessee Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease. If Lessee is the Insuring Party, the
policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and Utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be
full replacement cost coverage with a deductible of not to exceed $2,500 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property or the restoration of Lessee Owned
Alterations and Utility Installations. Lessee shall be the Insuring Party with
respect to the insurance required by this Paragraph 8.4 and shall provide
Lessor with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a Lender
having a lien on the Premises, as set forth in the most current issue of
"Best's Insurance Guide." Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies referred to in this Paragraph 8.
If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of such insurance with the insureds and loss payable
clauses as required by this Lease. No such policy shall be cancellable or
subject to modification except after thirty (30) days prior written notice to
Lessor. Lessee shall at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. If the Insuring Party shall fail to procure and maintain the insurance
required to be carried by the Insuring Party under this Paragraph 8, the other
Party may, but shall not be required to, procure and maintain the same, but at
Lessee's expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured
against under Paragraph 8. The effect of such releases and waivers of the
right to recover damages shall not be limited by the amount of insurance
carried or required, or by any deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely
manner of any obligation on Lessee's part to be performed under this Lease.
The foregoing shall include, but not be limited to, the defense or pursuit of
any claim or any action or proceeding involved therein, and whether or not (in
the case of claims made against Lessor) litigated and/or reduced to judgment,
and whether well founded or not. In case any action or proceeding be brought
against Lessor by reason of any of the foregoing matters, Lessee upon notice
from Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. 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 Premises, 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 Premises or upon other portions of the building of which the
Premises are a part, 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 any other tenant of Lessor. Notwithstanding Lessor's
negligence or breach of this Lease, Lessor shall under no circumstances be
liable for injury to Lessee's business or for any loss of income or profit
therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land
and Lessee Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations the repair cost of which damage or destruction is 50% or more of
the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence
or discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total cost
to repair of which is $10,000 or less, and, in such event, Lessor shall make
the insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, the shortage in proceeds was due
to the fact that, by reason of the unique nature of the improvements, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, the party responsible for making the repairs
shall complete them as soon as reasonably possible and this Lease shall remain
in full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If in such case Lessor
does not so elect, then this Lease shall terminate sixty (60) days following
the occurrence of the damage or destruction. Unless otherwise agreed, Lessee
shall in no event have any right to reimbursement from Lessor for
Initials
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<PAGE> 5
any funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damage due to flood or earthquake shall be subject to Paragraph
9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made available
for the repairs if made by either Party.
9.3 PARTIAL DAMAGE--UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs (including any destruction required by
any authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option
during said Exercise Period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at
Lessor's expense repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise such
option and provide such funds or assurance during said Exercise Period, then
Lessor may at Lessor's option terminate this Lease as of the expiration of said
sixty (60) day period following the occurrence of such damage by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any term or provision in the
grant of option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage--Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b), shall be abated
in proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and
other charges, if any, as aforesaid, all other obligations of Lessee hereunder
shall be performed by Lessee, and Lessee shall have no claim against Lessor for
any damage suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at any
time prior to the commencement of such repair or restoration, give written
notice to Lessor and to any Lenders of which Lessee has actual notice of
Lessee's election to terminate this Lease on a date not less than sixty (60)
days following the giving of such notice. If Lessee gives such notice to
Lessor and such Lenders and such repair or restoration is not commenced within
thirty (30) days after receipt of such notice, this Lease shall terminate as of
the date specified in said notice. If Lessor or a Lender commences the repair
or restoration of the Premises within thirty (30) days after receipt of such
notice, this Lease shall continue in full force and effect. "COMMENCE" as used
in this Paragraph shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefor (in which case
Lessee shall make the investigation and remediation thereof required by
Applicable Law and this Lease shall continue in full force and effect, but
subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option
either (i) investigate and remediate such Hazardous Substance Condition, if
required, as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) if the estimated
cost to investigate and remediate such condition exceeds twelve (12) times the
then monthly Base Rent or $100,000, whichever is greater, give written notice to
Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such Hazardous Substance Condition of Lessor's desire to terminate
this Lease as of the date sixty (60) days following the giving of such notice.
In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the investigation and remediation of such Hazardous Substance
Condition totally at Lessee's expense and without reimbursement from Lessor
except to the extent of an amount equal to twelve (12) times the then monthly
Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with
the funds required of Lessee or satisfactory assurance thereof within thirty
(30) following Lessee's said commitment. In such event this Lease shall
continue in full force and effect, and Lessor shall proceed to make such
investigation and remediation as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the
required funds or assurance thereof within the times specified above, this Lease
shall terminate as of the date specified in Lessor's notice of termination. If
a Hazardous Substance Condition occurs for which Lessee is not legally
responsible, there shall be abatement of Lessee's obligations under this Lease
to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed
twelve (12) months.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions
of any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property
Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term
of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at
least ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period
of time prior to or after the expiration or earlier termination of the term
hereof, Lessee's share of such taxes shall be equitably prorated to cover only
the period of time within the tax fiscal year this Lease is in effect, and
Lessor shall reimburse Lessee for any overpayment after such proration. If
Lessee shall fail to pay any Real Property Taxes required by this Lease to be
paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In order to insure payment when due and
before delinquency of any or all Real Property Taxes, Lessor reserves the right,
at Lessor's option, to estimate the current Real Property Taxes applicable to
the Premises, and to require such current year's Real Property Taxes to be paid
in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by
Lessee under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security
Deposit under Paragraph 5.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises, or in the real property of which the
Premises are a part, Lessor's right to rent or other income therefrom, and/or
Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall
also include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
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<PAGE> 6
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of
Lessor. If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Lessee's property or, at Lessor's option, as provided
in Paragraph 10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplies to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING. See also paragraph No. 51
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or
in the Premises without Lessor's prior written consent given under and subject
to the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or will result in a reduction of the Net Worth of Lessee,
as hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at
the time of the execution by Lessor of this Lease or at the time of the most
recent assignment to which Lessor has consented, or as it exists immediately
prior to said transaction or transactions constituting such reduction, at
whichever time said Net Worth of Lessee was or is greater, shall be considered
an assignment of this Lease by Lessee to which Lessor may reasonably withhold
its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net
worth of Lessee (excluding any guarantors) established under generally accepted
accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unconsented to assignment or subletting as a
noncurable Breach, Lessor shall have the right to either: (i) terminate this
Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"),
increase the monthly Base Rent to fair market rental value or one hundred ten
percent (110%) of the Base Rent then in effect, whichever is greater. Pending
determination of the new fair market rental value, if disputed by Lessee, Lessee
shall pay the amount set forth in Lessor's Notice, with any overpayment
credited against the next installment(s) of Base Rent coming due, and any
underpayment for the period retroactively to the effective date of the
adjustment being due and payable immediately upon the determination thereof.
Further, in the event of such Breach and market value adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value (without the Lease
being considered an encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest and best use and in
good condition), or one hundred ten percent (110%) of the price previously in
effect, whichever is greater, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption
by such assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent or performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute to any subsequent assignment or subletting by Lessee or to any
subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's
obligations under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or any one else responsible for the performance of the Lessee's
obligations under this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
limited to the intended use and/or required modification of the Premises, if
any, together with a non-refundable deposit of $1,000 or ten percent (10%) of
the current monthly Base Rent, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for consent.
Lessee agrees to provide Lessor with such other or additional information
and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment structure
of the rent payable under this Lease be adjusted to what is then the market
value and/or adjustment structure for property similar to the Premises as then
constituted.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not by
reason of this or any other assignment of such sublease to Lessor, nor by
reason of the collection of the rents from a sublessee, be deemed liable to
the sublessee for any failure of Lessee to perform and comply with any of
Lessee's obligations to such sublessee under such sublease. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a
written notice from Lessor stating that a Breach exists in the performance of
Lessee's obligations under this Lease, to pay to Lessor the rents and other
charges due and to become due under the sublease. Sublessee shall rely upon
any such statement and request from Lessor and shall pay such rents and other
charges to Lessor without any obligation or right to inquire as to whether such
Breach exists and notwithstanding any notice from or claim from Lessee to the
contrary. Lessee shall have no right or claim against said sublessee, or,
until the Breach has been cured, against Lessor, for any such rents and other
charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of
its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior Defaults or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any
part of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney
is consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in
said notice as rent due and payable to cure said Default. A "DEFAULT" is
defined as a failure by the Lessee to observe, comply with or perform any of
the terms, covenants, conditions or rules applicable to Lessee under this
Lease. A "BREACH"
Initials
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<PAGE> 7
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs
13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) or (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The
making by lessee of any general arrangement for the benefit of credits; (ii)
Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given
to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a guarantor, (ii) the termination of a
guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the
guaranty, or (v) a guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurance or security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the guarantors that existed at the
time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach of
this Lease by Lessee, as defined in Paragraph 13.1, with or without further
notice or demand, and without limiting Lessor in the exercise of any right or
remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at
the time of the 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 the 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 the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be 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%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful
detainer and a Breach of this Lease entitling Lessor to the remedies provided
for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section 1951.4) after
Lessee's Breach and abandonment and recover the rent as it becomes due,
provided Lessee has the right to sublet or assign, subject only to reasonable
limitations. See Paragraphs 12 and 36 for the limitations on assignment and
subletting which limitations Lessee and Lessor agree are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under the Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder 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, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5)
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 ten percent (10%)
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 such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after
such notice are reasonably required for its performance, then Lessor shall not
be in breach of this Lease if performance is commenced within such thirty (30)
day period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes
<PAGE> 8
title or possession, whichever first occurs if more than ten percent (10%) of
the floor area of the premises, or more than twenty-five percent (25%) of the
land area not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. Any award for the
taking of all or part of the Premises under the power of eminent domain or any
payment made under the threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution in value or the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its net
severance damages received, over and above the legal and other expenses incurred
by Lessor in the condemnation matter, repair any damage to the Premises caused
by such condemnation, except to the extent that Lessee has been reimbursed
therefor by the condemning authority. Lessee shall be responsible for the
payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKER'S FEE.
There are not Brokers involved in this transaction. Therefore most of this
paragraph has been eliminated except for 15.1 which is applicable.
15.1 Lessee and Lessor each represent and warrant to the other that it
has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said
transaction. Lessee and Lessor do each hereby agree to indemnify, protect,
defend and hold the other harmless from and against liability for compensation
or charges which may be claimed by any such unnamed broker, finder or other
similar party by reason of any dealings or actions of the indemnifying Party,
including any costs, expenses, attorneys' fees reasonably incurred with
respect thereto.
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises,
any part thereof, or the building of which the Premises are a part, Lessee and
all Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor, such financial statements of Lessee
and such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes
herein set forth.
17. LESSOR'S LIABILITY. The Term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants
under this Lease thereafter to be performed by the Lessor. Subject to the
foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS. This Lease contains all agreements between
the Parties with respect to any matter mentioned herein, and no other prior or
contemporaneous agreement or understanding shall be effective.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this
Lease shall be that Party's address for delivery or mailing of notice
purposes. Either Party may be written notice to the other specify a different
address for notice purposes, except that upon Lessee's taking possession of the
Premises, the Premises shall constitute Lessee's address for the purpose of
mailing or delivering notices to Lessee. A copy of all notices required or
permitted to be given to lessor hereunder shall be concurrently transmitted to
such party or parties at such addresses as Lessor may from time to time
hereafter designate by written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by
regular mail the notice shall be deemed given forty-eight (48) hours after the
same is addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery
of the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail.
If notice is received on a Sunday or legal holiday, it shall be deemed received
on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
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27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall
be subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving written assurance (a "NON-DISTURBANCE
AGREEMENT") from the Lender that Lessee's possession and this Lease, including
any options to extend the term hereof, will not be disturbed so long as Lessee
is not in Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) or Broker in any such proceeding, action, or appeal
thereon, shall be entitled to reasonable attorney's fees. Such fees may be
awarded in the same suit or recovered in a separate suit, whether or not such
action or proceeding is pursued to decision or judgment. The term, "PREVAILING
PARTY" shall include, without limitation, a Party or Broker who substantially
obtains or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting
of the Premises by Lessee shall not constitute an acknowledgement that no
Default or Breach by Lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate Association,
and each said Guarantor shall have the same obligations as Lessee under this
Lease, including but not limited to the obligation to provide the Tenancy
Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
OMIT - NO OPTIONS
<PAGE> 10
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for
the management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred
in connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. It shall
be adjudged that there was no legal obligation on the part of said Party to pay
such sum or any part thereof, said Party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions
of this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general
or limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority
45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Promises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.
Addendum to Lease dated May 31, 1996 between
LEECO, L.P. (Lessor) and Childrens Wonderland, Inc. (Lessee)
Regarding 27400 W. Canwood Street, Agoura, California
49. Dispute Resolution, Between Parties, Mediation, Arbitration, Court
Action.
49.1 Resolution by the Parties. It is our objective to establish
procedures to facilitate the informal and inexpensive resolution of any
disputes arising under this contract by mutual cooperation and without resort
to litigation.
(a) To accomplish this objective, we agree to follow the
procedures set forth below if and when a dispute arises under this contract;
(b) The complaining party shall write a description of the alleged
breach of contract and send it to the other party by certified or registered
mail. This letter shall explain the nature of the complaint and refer to the
relevant sections of the contract upon which the complaint is based. The
complaining party shall also set forth a proposed solution to the problem,
including a specific time frame within which the parties must act.
(c) The party receiving the letter must respond in writing within
ten (10) days with an explanation, including reference to the relevant parts
of the contract and a response to the proposed solution.
(d) Within ten (10) days of receipt of this response, the parties
must meet and discuss options for resolving the dispute. The complaining
party must initiate the scheduling of this resolution meeting.
(e) It is intended that the first three steps towards resolution
are to be taken by the parties themselves without the participation of legal
counsel. If, however, the parties are unable to reach agreement at the
resolution meeting, they may then seek to agree that mediators may participate
in a subsequent settlement conference.
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49.2 Mediation. A settlement conference must be held within thirty
(30) days of an unsuccessful resolution meeting. The settlement conference
will be held at the local office of Judicial Arbitration and Mediation
Services, Inc. (JAMS). The complaining party must contact JAMS to schedule
the conference. The parties may agree on a mediator from the JAMS panel. If
they are unable to agree, JAMS will provide a list of three available mediators
and each party may strike one. The remaining mediator will serve as the
mediator at the settlement conference.
49.3 Arbitration. If the dispute is not settled by other
prescribed resolution formats, the parties agree to submit the dispute to JAMS
for binding arbitration.
(a) The parties may agree on an arbitrator from the JAMS panel.
If they are unable to agree, JAMS will provide a list of three available
arbitrators and each party may strike one. The remaining arbitrator will serve
as the arbitrator at the settlement conference.
(b) The parties agree that arbitration must be initiated within
one year after the knowledge of claimed breach occurred and that the failure
to initiate arbitration within the one year period constitutes an absolute bar
to the institution of any new proceedings.
(c) The aggrieved party may initiate arbitration by sending
written notice of an intention to arbitrate by registered or certified mail to
all parties and to JAMS. The notice must contain a description of the dispute,
the amount involved, and the remedy sought.
(d) If and when a demand for arbitration is made by either party,
the parties agree to execute a Submission Agreement, provided by JAMS, setting
forth the rights of the parties if the case is arbitrated and the rules and
procedures to be followed at the arbitration hearing.
49.3 Court Action. Lessor retains the right to exclude any
unlawful detainer actions from Arbitration and may file a court action for
unlawful detainer.
50. Consumer Price Index Increase.
50.1 Upon each anniversary date starting June 1, 1997, the monthly
rent shall be adjusted by the increase, if any, in the Consumer Price Index of
the Bureau of Labor Statistics of the Department of Labor for All Urban
Consumers, (1982-84 = 100). "All Items", for the city nearest the location
of the building, herein referred to as "C.P.I.", since the date of this lease.
50.2 The monthly base rent payable shall be calculated as follows.
The base rent payable for the first month prior to the term of the option as
set forth in paragraph 25a of this lease, shall be multiplied by a fraction the
numerator of which shall be the C.P.I. of the calendar month during which the
adjustment is to take effect, and the denominator of which shall be the C.P.I.
for the calendar month in which the original lease term commences. The sum so
calculated shall constitute the new monthly base rent hereunder, but, in no
event, shall such new monthly base rent be less than the base rent payable for
the month immediately preceding the date for the rent adjustment.
50.3 In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency
or shall be discontinued, then the index most nearly the same as the C.P.I.
shall be used to make such calculations. Lessor shall have the sole right to
make the determination of what new index to use.
50.4 Lessee shall continue to pay the rent at the rate previously
in effect until the increase, if any, is determined. Within ten (10) days
following the date on which the increase is determined, Lessee shall make such
payment to Lessor as will bring the increased rental current, commencing with
the effective date of such increase through the date of any rental installments
then due. Thereafter the rental shall be paid at the increased rate.
50.5 At such time as the amount of any change in rental required by
this lease is known or determined, Lessor and Lessee shall execute an amendment
to this lease setting forth such change.
50.6 If the C.P.I. decreases, the rent shall remain at its present
level without any reduction.
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51. Additional Verbage to be added to Paragraph 12.1 in Main Lease.
51.1 Paragraph (a) to remain the same.
51.2 Paragraph (b) add to the end after the word "purpose."
The provisions of this Section 12.1(b) shall not
apply only for so long as Lessee and any approved
sub-lessees or assignors are publicly traded
corporations, on a recognized stock exchange.
51.3 Paragraph (c) add to the end after the word "applied."
At least annually, within 30 days of the earlier of
filing with the S.E.C. or delivery of a copy to the
shareholders of Lessee, Lessee shall provide to
Lessor a copy of Lessee's most recent audited
financial statement and if none, its most recent
financial statement, together with a copy of its Form
10-K and a copy of any other annual filings with
S.E.C. made by Lessee. Lessee, within 15 days of
filing the same shall provide Lessor with a copy of
any S.E.C. filings made by Lessee.
52. Sale of Premises by Lessor.
52.1 In the event of any sale of the property, Lessor shall be and
is hereby entirely free and relieved of all liability under any and all of its
covenants and obligations contained in or derived from this lease arising out
of any act, occurrence or omission occurring after the consummation of such
sale; and the purchaser, at such sale or any subsequent sale of the premises
shall be deemed, without any further agreement between the parties or their
successors in interest or between the parties and any such purchaser, to have
assumed and agreed to carry out any and all of the covenants and obligations of
the Lessor under this lease.
53. Partial Use of Site Only.
53.1 Lessor owns approximately nine (9) acres at the site. This
lease does not include the use of the whole nine (9) acres. The actual area
included in this lease is outlined in Exhibit A, attached hereto.
54. Premises and Building As Is.
54.1 Lessee is currently occupying the premises and is responsible
for the premises under a prior lease dated November 21, 1993. The Lessor is
not responsible for any additional work, improvements, clean-up, deferred
maintenance or repairs. Lessee hereby accepts the site and buildings "as is."
55. Additional Buildings.
55.1 Subject to all provisions of the lease, Lessee may install
additional buildings and a pool on site at Lessee's sole cost and expense.
Provided that the additional buildings are for Lessee's exclusive use and not
for use by third parties, whether by sublease or otherwise.
56. Option to Purchase Site.
56.1 Lessee is to have an option for the "first right of refusal"
to purchase the site if Lessor decides to sell the property to someone who
makes an offer when it is not formerly listed for sale.
56.2 In the event a third party makes an offer on the property,
Lessee is to have 48 hours to exercise this option and shall match or exceed
all of the terms of the offer.
56.3 If Lessor decides to list the property for sale, Lessee is to
have the right to negotiate a purchase price for fifteen (15) days before
Lessor lists the property for sale. If an agreement is not reached in the
fifteen (15) days, the Lessor has no further obligation to sell the property to
Lessee.
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57. Personal Property Taxes and Licensees.
57.1 Lessee is to pay for all personal property taxes and license
fees on all of the modular units on site.
58. Additional Tenants.
58.1 Lessor anticipates entering into a lease agreement with
Pacific Bell Mobil Services or such other entity for a cell antenna site on the
premises. The general area is hereby designated on "Exhibit A", attached
hereto.
58.2 Lessor hereby reserves the right to use or lease or sell any
of the areas not marked on "Exhibit A" for exclusive use of Children's
Wonderland Inc.
58.3 In the event that any additional tenants occupy the site, the
property taxes shall be pro-rated by the actual square footage of the land
used.
59. Access.
59.1 Lessor and any future tenants may require access through the
site. Said access area shall be designated on "Exhibit A" as "Access for
Others". This area shall not be for the exclusive use of any tenant or Lessor.
60. Pest Control and Weeds.
60.1 Lessee shall be responsible for and pay for all costs of pest
control and brushing removal or cutting of weeds. The pest control and
brushing is for the safety of everyone and protection of property. It shall be
done to meet all L.A. County Health Department & Fire Department requirements
and all other governmental laws, regulations and requirements. Furthermore, it
shall meet all insurance company requirements. All work shall be done in
conformity with the provisions of this lease.
61. Earthquake Protection.
61.1 Lessee agrees to have proper earthquake bracing installed on
all modular buildings (even though it may not be required by regulatory
authorities) by September 1, 1996. All work shall be done in conformity with
the provisions of this lease.
62. Ownership of Lessee's Improvements and Modulars. - After Insolvency or
abandonment
62.1 If this lease terminates as a result of Lessee's bankruptcy,
insolvency or abandonment of the premises, title to all improvements and
modulars and personal property of Lessee located at the Premises shall pass to
Lessor. Lessee shall fully cooperate with Lessor in executing any documents
necessary to transfer said title to Lessor. In the event the lease terminates
for any other reason, any personal property belonging to Lessee shall remain
the property of Lessee, and title to all improvements and modulars located at
the Premises shall pass to Lessor.
63. Brokers.
63.1 (Also, see Brokers paragraph 15)
63.2 Alan Satterlee, the General Partner of Lessor is a licensed
real estate agent with Exclusive Realtors. Neither Mr. Satterlee nor Exclusive
are acting as brokers or receiving any commission with respect to this lease.
64. Additional Security Deposit (Letter of Credit).
64.1 In addition to the cash security deposit made by Lessee,
Lessee, at its sole cost and expense, shall deliver to Lessor, within five (5)
business days after signing this lease, an irrevocable, unconditional letter of
credit in the amount of $300,000.00 from any institutional lender designated by
Lessor to secure Lessee's faithful performance of all terms, duties covenants
and conditions under this lease. The letter of credit shall be payable on
presentment, together with a sight draft from Lessor, at the offices of the
lender issuing the
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letter of credit ("Issuer") following any default by Lessee under the lease.
Lessor may not present the letter of credit to the issuer unless and until a
breach (as defined in Section 13 hereof) has occurred. The form of such letter
of credit shall be consistent with the provisions of this paragraph and provide
that upon the Lessor's presentment of such letter of credit to issuer, it shall
be equivalent of cash in the hands of Lessor and shall be payable to Lessor on
demand, regardless of the status of the lease. Lessee shall pay any and all
fees or charges to keep and maintain the letter of credit in full force and
effect.
64.2 Unless otherwise released by Lessor, the letter of credit
shall be for a period commencing on its issue, and continuing until six (6)
months after the lease termination date specified in paragraph 1.3. If Lessor
reasonably determines that it is appropriate or if for any reason the letter of
credit is not in effect, Lessor may request that a substitute letter of credit
be issued by a different bank. If Lessee exercises any options it may have to
renew the lease, the letter of credit shall remain in place until six (6)
months after the expiration of such additional term. Partial draws on the
letter of credit will be permitted in the event of any breach or default of
this lease.
64.3 Lessor, in its sole and absolute discretion, in the event of
any breach or default may draw against the letter of credit prior to using the
cash deposit to cure such breach or default. Prior to drawing upon the letter
of credit, Lessor shall give Lessee a 72 hour written notice by fax. A cure by
Lessor by drawing against the letter of credit shall not reinstate the lease or
otherwise prevent Lessor from exercising any rights it may have as a result of
such breach or default.
64.4 If for any reason, whether by draw by the Lessor, or
otherwise, Lessee shall fail to maintain the full amount of the letter of
credit available to Lessor, or if for any reason Lessee cannot provide a letter
of credit to Lessor, Lessee shall be in default under this lease and Lessor
shall have all rights available to it under the lease, unless Lessee shall, in
lieu of the letter of credit, pay to Lessor an additional cost security
deposit equal to the face amount of the letter of credit or the difference
between the face amount and the amount of the letter of credit available to
Lessor.
64.5 In the event of any termination of the lease, or demand for
return of the security, whether as a result of bankruptcy or otherwise, with
which the Lessor is required to comply, Lessor shall have the right to offset
and be entitled to withhold from the amounts Lessor is required to return, all
amounts due to it, including future damages as provided in the lease and or
California law.
65. Miscellaneous Provisions.
65.1 It is agreed that nothing contained in this lease shall be
deemed or construed as creating a partnership or joint venture between Lessor
and Lessee or between Lessor and any other party, or cause Lessor to be
responsible in any way for the debts or obligations of Lessee, or any other
party.
65.2 It is agreed that if any provision of this lease shall be
determined to be void by any court of competent jurisdiction, then such
determination shall not affect any other provision of this lease and all such
other provisions shall remain in full force and effect; and it is the intention
of the parties hereto that if any provision of this lease is capable of two
constructions, one of which would render the provision void and the other of
which would render the provision valid, then the provision shall have the
meaning which render it valid.
65.3 In the event Lessor hereunder shall be a corporation, the
parties executing this lease on behalf of Lessee hereby covenant and warrant
that Lessee is a duly qualified corporation and all steps have been taken prior
to the date hereof to qualify Lessee to do business in California; all
franchise and corporate taxes have been paid to date; and all future forms,
reports, and other documents necessary to comply with applicable laws will be
filed when due.
65.4 It is understood that there are no oral agreements between the
parties hereto affecting this lease, and this lease supersedes and cancels any
and all previous negotiations, arrangements, brochures, agreements and
understandings, if any, between the parties hereto of displayed by Lessor to
Lessee with respect to the subject matter thereof, and none thereof shall be
used to interpret or construe this lease.
Page 14
<PAGE> 15
65.5 This lease is and shall be considered to be the only agreement
between the parties hereto and their representatives and agents. All
negotiations and oral agreements of both parties have been merged into and are
included herein. There are no other representations or warranties between the
parties and all reliance with respect to representations is solely upon the
representations and agreements contained in this document.
65.6 The laws of the State of California shall govern the validity,
performance and enforcement of this lease. Should either party institute legal
suit or action for enforcement of any obligation contained herein is agreed
that the venue of such suit or action shall be in Los Angeles County,
California and Lessee expressly consents to Lessor's designating the venue of
any such suit or action. Although some of the printed provisions of this lease
was drawn by Lessor, this lease shall not be construed either for or against
Lessor or Lessee, but this lease shall be interpreted in accordance with the
general terms of the language in an effort to reach an equitable result.
65.7 Any provision, delay or stoppage due to strikes, lockouts,
labor disputes, acts of God, inability to obtain labor or motorists or
reasonable substitutes thereof, governmental restrictions, governmental
requisitions, governmental concepts, judicial orders, enemy of hostile
governmental action, civil commotion, fire or other casualty, and other causes
beyond the reasonable conditions of the party obligated to perform, shall
excuse the performance by such party for a period equal to any such
prevention, delay or stoppage, except the obligations imposed with regard to
rental and other charges to be paid by Lessee pursuant to this lease.
65.8 Lessee hereby expressly waives any and all right of redemption
granted by or under any present or future laws in the event of Lessee being
evicted or dispossessed for any cause, or in the event of Lessor obtaining
possession of the premises by reason of the violation of Lessee of any of the
covenants and conditions of this lease or otherwise. The rights given to
Lessor herein are in addition to any rights that may be given to Lessor by any
statute or otherwise.
66. Bonus Rental.
66.1 If Lessee receives rent or other consideration for any
assignment or sublease in excess of the Fixed Rent, or in case of the sublease
of a portion of the premises, in excess of such rent that is fairly allocable
to such portion, that the Lessee is subleasing said excess rent shall be paid
to Lessor.
67. Lessee Non-Interference on Future Development.
67.1 Lessee agrees not to protest or interfere with any future
plans of Lessor to develop, lease or subdivide any of the Lessor's property.
68. Existing Signs.
68.1 Lessor hereby consents to the continued use of existing signs.
However, Lessor makes no representations or warranty that the existing signage
is in compliance with all applicable laws and ordinances.
68.2 Lessor shall not be liable or responsible for any change in
existing signage required by any law, ordinance or governing entity. The cost
of any change shall be paid for by the Lessee.
69. Exclusive Use.
69.1 Lessor has leased to Lessee only a portion of the entire
property owned by Lessor, the balance of which is primarily undeveloped land
(the "Adjacent Property"). Except as specifically provided in this section,
nothing in this lease shall be construed in any manner so as to prevent the
lease or sale by Lessor of all or any portion of the Adjacent Property by
Lessor, its successors and assigns. In the event of any sale of all or a
portion of the Adjacent Property, the new owner shall not be bound by the
provisions of this lease and in particular this section.
69.2 Notwithstanding anything to the contrary contained elsewhere
in this Lease, Lessee shall have the exclusive right within the Premises and
the Adjacent Property to operate
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<PAGE> 16
a day care facility for children five (5) years old and younger, and/or a
swimming pool (individually referred to herein as an "Exclusive Use" and
collectively as the "Exclusive Uses"). From the date of execution of this
Lease through the end of the original term (as the same may be extended by any
option), Lessor will not (i) execute a lease (or any other rental agreement or
license) for space in the Adjacent Property with any other person or entity
which permits the Adjacent Property to be used for an Exclusive Use, or (ii)
permit the use of any space in the Adjacent Property for an Exclusive Use.
Notwithstanding the foregoing, Lessor may sell, lease, rent or license the
Adjacent Property for use as a private grade school for children five (5) years
old and older, and/or for a religious school for children of any age above
thirty months old and such uses shall not be deemed "Exclusive Uses".
69.3 Additionally, Lessor represents and warrants to Lessee that
Lessor has not entered into any lease, purchase agreement or similar agreement
allowing the use of any of the Adjacent Property for an Exclusive Use.
70. Previous Toxic Conditions.
70.1 Notwithstanding any other provisions of this lease, any toxic
condition proven, by Lessee, to exist on the site prior to the date Lessee or
Lessee's predecessors first leased the premises (July 1, 1986) shall be the
Landlord's responsibility and Landlord shall indemnify Lessee for any costs and
expenses associated with such toxic condition.
71. Lessee's Predecessors.
71.1 All obligations of Lessee, under this lease, shall include all
liabilities of predecessor entities of Lessee who have occupied any portion of
the premises at any time since July 1, 1986.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE
CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE
PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR
AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY. LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO
THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY
IS LOCATED IN A STATE OTHER THAN CALIFORNIA. AN ATTORNEY FROM THE
STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
<TABLE>
<S> <C>
Executed at Calabasas, California Executed at Agoura, California
on 6-24-96 on June 21, 1996
by LESSOR: Leeco, Limited Partnership by LESSEE: Childrens Wonderland, Inc.
By Alan Satterlee By Debby Bitticks
Name Printed: Alan Satterlee Name Printed: Debby Bitticks
Title: General Partner Title: CEO
By ___________________________________ By __________________________________________
Name Printed: ________________________ Name Printed: _______________________________
Title: _______________________________ Title: ______________________________________
Address: _____________________________ Address: ____________________________________
______________________________________ _____________________________________________
Tel.No.(__) ___ Fax No. (__) _________ Tel.No. (818) 865-1306 Fax No. (818) 865-8105
</TABLE>
NET
Page 16
<PAGE> 17
EXHIBIT A
FUTURE CELLULAR
ANTENNA SITE
AREA WITHIN REDLINE INDICATES THE SPACE
FOR THE EXCLUSIVE USE OF THE SCHOOL
15' minimum flat area to be used outside
the redline by others
SITE PLAN
Ventura Freeway
Owner/Applicant:
LEECO, L.P.
26560 Agoura Rd., Suite 101
Calabasas, California 91302
(818) 880-5366
CHILDRENS WONDERLAND, INC.
27400 W. Canwood Street
Agoura, California 91301
A.P.N. 2052-013-044
Liberty Canyon
Canwood Street
[MAP]
<PAGE> 1
EXHIBIT 10.28
1996 STOCK OPTION PLAN OF
CHILDREN'S WONDERLAND, INC.
Children's Wonderland, Inc., a corporation organized under the laws of
the State of California (the "Company"), hereby adopts this 1996 Stock Option
Plan (the "Plan"). The purposes of this Plan are as follows:
(1) To further the growth, development and financial success of the
Company by providing additional incentives to its Independent Directors,
Employees (as such terms are defined below) and consultants by assisting them to
become owners of capital stock of the Company and thus permitting them to
benefit directly from its growth, development and financial success.
(2) To enable the Company to obtain and retain the services of the type
of directors, employees and consultants considered essential to the long-range
success of the Company by providing and offering them an opportunity to become
owners of capital stock of the Company under options, including options that are
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended.
ARTICLE I
DEFINITIONS
1.1 General. Whenever the following terms are used in this Plan, they
shall have the meaning specified below unless the context clearly indicates to
the contrary. The masculine pronoun shall include the feminine and neuter, and
the singular shall include the plural, where the context so indicates.
1.2 Board. "Board" shall mean the Board of Directors of the Company.
1.3 Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.4 Committee. "Committee" shall mean the Compensation Committee of the
Board, appointed as provided in Section 6.1.
1.5 Company. "Company" shall mean Children's Wonderland, Inc. In
addition, "Company" shall mean any corporation assuming or issuing new employee
stock options in substitution for Options outstanding under the Plan, in a
transaction to which Section 424(a) of the Code applies.
1.6 Employee. "Employee" shall mean any employee (as defined in
accordance with the regulations and revenue rulings then applicable under
Section 3401(c) of the Code) of the Company or its subsidiaries, whether such
employee is so employed at the time this
<PAGE> 2
Plan is adopted or becomes so employed subsequent to the adoption of this Plan,
and includes employees who are directors or officers of the Company.
1.7 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
1.8 Incentive Stock Option. "Incentive Stock Option" shall mean an
Option which qualifies under Section 422 of the Code and which is designated as
an Incentive Stock Option by the Committee.
1.9 Independent Director. "Independent Director" shall mean a member of
the Board who is not an Employee of the Company.
1.10 Non-Qualified Option. "Non-Qualified Option" shall mean an Option
which is not an Incentive Stock Option and which is designated as a
Non-Qualified Option by the Committee.
1.11 Option. "Option" shall mean an option to purchase capital stock of
the Company granted under the Plan. "Options" include both Incentive Stock
Options and Non-Qualified Options.
1.12 Optionee. "Optionee" shall mean an Independent Director, Employee
or consultant to whom an Option is granted under the Plan.
1.13 Plan. "Plan" shall mean this 1996 Stock Option Plan of the
Company.
1.14 Secretary. "Secretary" shall mean the Secretary of the Company.
1.15 Securities Act. "Securities Act" shall mean the Securities Act of
1933, as amended.
1.16 Termination of Consultancy. "Termination of Consultancy" shall
mean the time when the engagement of Optionee, as a consultant to the Company or
a subsidiary, is terminated for any reason, with or without cause, including
without limitation, resignation, discharge, death or retirement; but excluding
terminations where there is a simultaneous commencement of employment with the
Company. The Committee, in its absolute discretion, shall determine the effect
of all matters and questions relating to Termination of Consultancy, including,
but not by way of limitation, the question of whether a Termination of
Consultancy resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Consultancy.
Notwithstanding any other provision of this Plan, the Company has an absolute
and unrestricted right to terminate a consultant's service at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
1.17 Termination of Employment. "Termination of Employment" shall mean
the time when the employee-employer relationship or directorship between the
Optionee and
2
<PAGE> 3
the Company or its subsidiaries is terminated for any reason, with or without
cause, including, but not by way of limitation, a termination by resignation,
discharge, death or retirement, but excluding (i) terminations where there is a
simultaneous reemployment or continuing employment of an Optionee by the
Company, (ii) at the discretion of the Committee, terminations which result in a
temporary severance of the employee-employer relationship, and (iii) at the
discretion of the Committee, terminations which are followed by the simultaneous
establishment of a consulting relationship by the Company or a subsidiary with
the former employee. The Committee, in its absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Employment,
including, but not by way of limitation, the question of whether a Termination
of Employment resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Employment;
provided, however, that, with respect to Incentive Stock Options, a leave of
absence, change in status from an employee to an independent contractor or other
change in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that such leave of absence, change in status or
other change interrupts employment for the purposes of Section 422(a)(2) of the
Code and the then applicable regulations and revenue rulings under said Section.
Notwithstanding any other provision of this Plan, the Company has an absolute
and unrestricted right to terminate an Employee's employment at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan. The shares of stock subject to Options
shall be shares of the Company's no par value Common Stock. The aggregate number
of such shares which may be issued upon exercise of Options shall not exceed
180,000.
2.2 Annual Dollar Limits on Grants of Incentive Stock Options. The
aggregate fair market value (determined as of the time the option is granted) of
stock with respect to which "Incentive Stock Options" (within the meaning of
Section 422 of the Code) are exercisable for the first time by any Employee in
any calendar year (under the Plan and all other incentive stock option plans of
the Company) shall not exceed $100,000.
2.3 Unexercised Options. If any Option expires or is canceled without
having been fully exercised, the number of shares subject to such Option but as
to which such Option was not exercised prior to its expiration or cancellation
may again be optioned or granted hereunder, subject to the limitations of
Sections 2.1 and 2.2.
2.4 Changes in Company's Shares. In case the Company shall (i) pay a
dividend in shares of common stock or make a distribution in shares of common
stock, (ii) subdivide its outstanding shares of common stock, (iii) combine its
outstanding shares of common stock into a smaller number of shares of common
stock, or (iv) issue by reclassification of its shares of common stock, other
securities of the Company (including any such
3
<PAGE> 4
reclassification in connection with a consolidation or merger in which the
Company is the surviving corporation), the number of shares of common stock
purchasable upon exercise of the Option immediately prior thereto shall be
adjusted so that the Optionee shall be entitled to receive the kind and number
of shares of common stock or other securities of the Company which Optionee
would have owned or have been entitled to receive after the happening of any of
the events described above, had such Option been exercised immediately prior to
the happening of such event or any record date with respect thereto. Such
adjustment in the Option shall be made without change in the total exercise
price applicable to the Option or the unexercised portion of the Option (except
for any change in the aggregate price resulting from rounding-off of share
quantities or prices) but with any necessary corresponding adjustment in Option
exercise price per share; provided, however, in the case of Incentive Stock
Options, each such adjustment shall be made in such manner as not to constitute
a "modification" within the meaning of Section 424(h)(3) of the Code. By way of
example, if an Option to purchase 100 shares at an exercise price of $2.00 per
share had been granted and a 2 for 1 stock split occurred, the number of shares
purchasable upon exercise of such Option would be adjusted to 200 shares and the
exercise price for each share subject to the Option would be reduced to $1.00
per share. An adjustment made pursuant to this Section 2.4 shall become
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event. Any such adjustment made by the Committee
shall be final and binding on the Optionee, the Company and all interested
parties.
ARTICLE III
GRANTING OF OPTIONS
3.1 Eligibility. Any Independent Director, Employee or consultant of
the Company shall be eligible to be granted Options, except as provided in
Sections 3.3 and 6.1. Each Independent Director of the Company shall be eligible
to be granted Options at the times and in the manner set forth in Section
3.4(d).
3.2 Disqualification for Stock Ownership. No person may be granted an
Incentive Stock Option under this Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing subsidiary unless such Incentive Stock Option conforms to the
applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive Stock Option
shall be granted unless such Option, when granted, qualifies as an "incentive
stock option" under Section 422 of the Code. No Incentive Stock Option shall be
granted to any person who is not an Employee.
3.4 Granting of Options.
(a) The Committee shall from time to time, in its absolute
discretion:
4
<PAGE> 5
(i) Determine which individuals are Independent
Directors, Employees or consultants, and select from among
those persons (including those to whom Options have been
previously granted under the Plan) such of them as in its
opinion should be granted Options;
(ii) Determine the number of shares to be subject to
such Options granted to such selected persons, and determine
whether such Options are to be Incentive Stock Options or
Non-Qualified Options; and
(iii) Determine the terms and conditions of such
Options, consistent with the Plan.
(b) Upon the selection of an Independent Director, Employee or
consultant to be granted an Option, the Committee shall instruct the Secretary
to issue such Option and may impose such conditions on the grant of such Option
as it deems appropriate. Without limiting the generality of the preceding
sentence, the Committee may, in its discretion and on such terms as it deems
appropriate, require as a condition on the grant of an Option to an Employee or
consultant that the Employee or consultant surrender for cancellation some or
all of the unexercised Options which have been previously granted to him under
this Plan or otherwise. An Option, the grant of which is conditioned upon such
surrender, may have an option price lower (or higher) than the exercise price of
such surrendered Option or other award, may cover the same (or a lesser or
greater) number of shares as such surrendered Option or other award, may contain
such other terms as the Committee deems appropriate, and shall be exercisable in
accordance with its terms, without regard to the number of shares, price,
exercise period or any other term or condition of such surrendered Option or
other award.
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) When a person is initially elected to the Board and is
then an Independent Director, each such new Independent Director automatically
shall be granted an Option to purchase eleven thousand (11,000) shares of Common
Stock (subject to adjustment as provided in Section 2.4) on the date of his or
her election to the Board at an exercise price of 85% of the Fair Market Value
(as defined in Section 4.2(b) herein). On each anniversary of his or her
election to the Board, each Independent Director automatically shall be granted
an Option to purchase five thousand (5,000) shares of Common Stock (subject to
adjustment as provided in Section 2.4) at an exercise price of 85% of the Fair
Market Value on such date. Members of the Board who are Employees who
subsequently retire from the Company and remain on the Board will not receive an
Option grant pursuant to this Section 3.4(d). All the foregoing Option grants
authorized by this Section 3.4(d) are subject to stockholder approval of the
Plan.
5
<PAGE> 6
ARTICLE IV
TERMS OF OPTIONS
4.1 Option Agreement. Each Option shall be evidenced by a written Stock
Option Agreement, which shall be executed by the Optionee and an authorized
Officer of the Company and which shall contain such terms and conditions as the
Committee shall determine, consistent with the Plan. Stock Option Agreements
evidencing Incentive Stock Options shall contain such terms and conditions as
may be necessary to qualify such Options as "Incentive Stock Options" under
Section 422 of the Code.
4.2 Option Price.
(a) The price of the shares subject to each Option shall be
set by the Committee; provided, however, that the price per share for an
Incentive Stock Option shall not be less than 100% of the fair market value of
such shares on the date such Option is granted, or 110% of the fair market value
of such shares on the date such Option is granted in the case of an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
subsidiary, and that the price per share subject to a Non-Qualified Option shall
not be less than 85% of the fair market value of such shares on the date such
Option is granted.
(b) For purposes of the Plan, the fair market value of a share
of the Company's stock as of a given date ("Fair Market Value") shall be: (i)
the closing price of a share of the Company's stock on the principal exchange on
which shares of the Company's stock are then trading, if any, on such date, or,
if shares were not traded on such date, then on the next preceding trading day
during which a sale occurred; or (ii) if such stock is not traded on an exchange
but is quoted on NASDAQ or a successor quotation system, (1) the last sales
price (if the stock is then listed as a National Market Issue under the NASD
National Market System) or (2) the mean between the closing representative bid
and asked price (in all other cases) for the stock on such date as reported by
NASDAQ or such successor quotation system; or (iii) if such stock is not
publicly traded on an exchange and not quoted on NASDAQ or a successor quotation
system, the mean between the closing bid and asked prices for the stock on such
date as determined in good faith by the Committee; or (iv) if the Company's
stock is not publicly traded, the fair market value established by the Committee
acting in good faith.
4.3 Option Vesting.
(a) The period during which the right to exercise an Option in
whole or in part vests in the Optionee shall be set by the Committee and the
Committee may determine that an Option may not be exercised in whole or in part
for a specified period after it is granted; provided, however, that (i) no
Option granted to a person subject to Section 16 of the Exchange Act shall be
exercisable until at least six (6) months have elapsed from (but excluding) the
date on which the Option was granted and (ii) the right to exercise shall vest
at a rate of at least 20% per year over five years from the date the Option is
6
<PAGE> 7
granted. At any time after grant of an Option, the Committee (or the Board) may,
in its sole discretion and subject to whatever terms and conditions it selects,
accelerate the period during which an Option vests. Notwithstanding the
foregoing, all Options granted to Independent Directors shall become exercisable
in cumulative annual installments of 25% on each of the first, second, third and
fourth anniversaries of the date of Option grant, and the term of each such
Option shall be ten (10) years without variation or acceleration, except as
provided in Section 4.5 and except that the Board may authorize the acceleration
of Options granted to an Independent Director upon the retirement of an
Independent Director.
(b) No portion of an Option which is unexercisable at
Termination of Employment or Termination of Consultancy, as applicable, shall
thereafter become exercisable, except as may be otherwise provided by the
Committee with respect to Options granted to Employees or consultants, in the
Stock Option Agreement or in a resolution adopted following the grant of the
Option.
(c) To the extent that the aggregate Fair Market Value of
stock with respect to which "incentive stock options" (within the meaning of
Section 422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year (under
the Plan and all other incentive stock option plans of the Company) exceeds
$100,000, such Options shall be treated as Non-Qualified Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.3(c), the Fair Market Value of
stock shall be determined as of the time the Option with respect to such stock
is granted.
4.4 Expiration of Options.
(a) No Incentive Stock Option may be exercised to any extent
by anyone after the first to occur of the following events:
(i) the later of the expiration of ten (10) years
from the date the Option was granted (five (5) years in case
of an individual then owning (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting
power of all classes of stock of the Company or any
subsidiary) or the expiration of one year from the date of the
Optionee's death; or
(ii) except in the case of any Optionee who is
disabled (within the meaning of Section 22(e)(3) of the Code),
the expiration of one month from the date of the Optionee's
Termination of Employment for any reason other than such
Optionee's death unless the Optionee dies within said
one-month period; or
(iii) in the case of an Optionee who is disabled
(within the meaning of Section 22(e)(3) of the Code), the
expiration of three months from the
7
<PAGE> 8
date of the Optionee's Termination of Employment for any
reason other than such Optionee's death unless the Optionee
dies within said three-month period.
(b) Subject to the provisions of Section 4.4(a), the Committee
shall provide, in the terms of each individual Option, when such Option expires
and becomes unexercisable.
4.5 Merger, Consolidation, Acquisition or Change in Control. In the
event of the merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving corporation, or the
acquisition by another corporation or person of all or substantially all of the
Company's assets (collectively, a "Change Transaction"), Optionees shall
thereafter be entitled, upon exercise of the Options, to receive the kind and
amount of shares, other securities, cash or property receivable upon such Change
Transaction by a holder of the number of shares of Common Stock which might have
been purchased upon exercise of the Option immediately prior to such Change
Transaction and shall have no other conversion rights. In any such event,
effective provision shall be made in the certificate or articles of
incorporation of the surviving corporation, in any contract of sale or
conveyance, or otherwise, so that so far as appropriate and as nearly as
reasonably may be, the provisions set forth herein for the protection of the
rights of Optionees shall thereafter be made applicable. Anything provided in
this Section 4.5 to the contrary notwithstanding, if upon the consummation of
any such Change Transaction, or within a period of twelve (12) months
thereafter, the Optionee's employment with the Company is terminated, or the
Optionee fails to be re-elected as a director, as the case may be, then, upon
such termination of employment or failure to re-elect Optionee as a director, as
the case may be, the Option shall immediately fully vest and become exercisable
as to all shares of Common Stock covered thereby, notwithstanding Section 4.3(a)
or 4.3(b), and/or any installment provisions of such Option, and such Option
shall be and remain exercisable for a period of sixty (60) days following such
termination of employment or failure to be re-elected as a director, as the case
may be.
ARTICLE V
EXERCISE OF OPTIONS
5.1 Person Eligible to Exercise. During the lifetime of the Optionee,
only he or she or a legal representative thereof may exercise an Option granted
to him or her, or any portion thereof. After the death of the Optionee, any
exercisable portion of an Option may, prior to the time when such portion
becomes unexercisable under Section 4.4, be exercised by his or her personal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
5.2 Partial Exercise. At any time from time to time prior to the time
when any exercisable Option or exercisable portion thereof becomes unexercisable
under Section 4.4, such Option or portion thereof may be exercised in whole or
in part; provided, however that the Company shall not be required to issue
fractional shares and the Committee may,
8
<PAGE> 9
by the terms of the Option, require any partial exercise to be with respect to a
specified minimum number of shares.
5.3 Manner of Exercise. An exercisable Option, or any exercisable
portion thereof, may be exercised solely by delivery to the Secretary or his or
her office of all of the following prior to the time when such Option or such
portion becomes unexercisable under Section 4.4:
(a) Notice in writing signed by the Optionee or other person
then entitled to exercise such Option or portion, stating that such Option or
portion is exercised, such notice complying with all applicable rules
established by the Committee;
(b) Full payment (in cash or by check) for the shares with
respect to which such Option or portion is thereby exercised. However, at the
discretion of the Committee (or the Board, in the case of Options granted to
Independent Directors), the terms of the Option may (i) allow a delay in payment
up to thirty (30) days from the date the Option, or portion thereof, is
exercised; (ii) allow payment, in whole or in part, through the delivery of
shares of common stock owned by the Optionee, duly endorsed for transfer to the
Company with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof; (iii) subject to the
timing requirements of Section 5.4, allow payment, in whole or in part, through
the surrender of shares of Common Stock then issuable upon exercise of the
Option having a Fair Market Value on the date of Option exercise equal to the
aggregate exercise price of the Option or exercised portion thereof; (iv) allow
payment, in whole or in part, through the delivery of property of any kind which
constitutes good and valuable consideration; (v) allow payment, in whole or in
part, through the delivery of a full recourse promissory note bearing interest
(at no less than such rate as shall then preclude the imputation of interest
under the Code) and payable upon such terms as may be prescribed by the
Committee or the Board, or (vi) allow payment through any combination of the
consideration provided in the foregoing subparagraphs (ii), (iii), (iv) and (v).
In the case of a promissory note, the Committee or the Board may also prescribe
the form of such note and the security to be given for such note. The Option may
not be exercised, however, by delivery of a promissory note or by a loan from
the Company when or where such loan or other extension of credit is prohibited
by law.
(c) Such representations and documents as the Committee, in
its absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee may, in its absolute discretion,
also take whatever additional actions it deems appropriate to effect such
compliance, including, without limitation, placing legends on share certificates
and issuing stop-transfer orders to transfer agents and registrars; and
(d) In the event that the Option or portion thereof shall be
exercised pursuant to Section 5.1 by any person or persons other than the
Optionee, appropriate proof of the right of such person or persons to exercise
the Option or portion thereof.
9
<PAGE> 10
5.4 Certain Timing Requirements. At the discretion of the Committee (or
Board, in the case of Options granted to Independent Directors), shares of
common stock issuable to the Optionee upon exercise of the Option may be used to
satisfy the Option exercise price or the tax withholding consequences of such
exercise, in the case of persons subject to Section 16 of the Exchange Act, only
(i) during the period beginning on the third business day following the date of
release of the quarterly or annual summary statement of sales and earnings of
the Company and ending on the twelfth business day following such date or (ii)
pursuant to an irrevocable written election by the Optionee to use shares of
common stock issuable to the Optionee upon exercise of the Option to pay all or
part of the Option price or the withholding taxes made at least six (6) months
prior to the payment of such Option price or withholding taxes.
5.5 Conditions to Issuance of Stock Certificates. The shares of stock
issuable and deliverable upon the exercise of an Option, or any portion thereof,
may be either previously authorized but unissued shares or issued shares which
have then been reacquired by the Company. The Company shall not be required to
issue or deliver any certificate or certificates for shares of stock purchased
upon the exercise of any Option or portion thereof prior to fulfillment of all
of the following conditions:
(a) There is available an exemption from registration or other
qualification of such shares under any state or federal securities laws, or
there has been completed a registration or other qualification of such shares
under any state or federal securities laws or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental regulatory
body, which the Committee shall, in its absolute discretion, deem necessary or
advisable;
(b) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable;
(c) The payment to the Company of all amounts which it is
required to withhold under federal, state, or local law in connection with the
exercise of the Option; and
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may establish from time to time for
reasons of administrative convenience.
5.6 Transfer Restrictions. The Committee, in its absolute discretion,
may impose such restrictions on the transferability of the shares purchasable
upon the exercise of an Option as it deems appropriate. Any such restriction
shall be set forth in the respective Stock Option Agreement and may be referred
to on the certificates evidencing such shares. The Committee may require the
Employee to give the Company prompt notice of any disposition of shares of stock
acquired by exercise of an Incentive Stock Option, within two years from the
date of granting such Option or one year after the transfer of such shares to
10
<PAGE> 11
such Employee. The Committee may direct that the certificates evidencing shares
acquired by exercise of an Option refer to such requirements to give prompt
notice of disposition.
5.7 Rights as Stockholders. The holders of Options shall not be, nor
have any of the rights or privileges of, stockholders of the Company in respect
of any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders. The Company shall provide to each Optionee a copy of the Company's
annual report when released to the Company's stockholders.
ARTICLE VI
ADMINISTRATION
6.1 Compensation Committee. The Compensation Committee shall consist of
at least two Independent Directors, appointed by and holding office at the
pleasure of the Board. Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board and may be replaced at any time by the
Board. Vacancies in the Committee shall be filled by the Board.
No person shall be eligible to serve on the Compensation Committee
unless he is then a "disinterested person" within the meaning of Rule 16b-3
which has been adopted by the Securities and Exchange Commission under the
Exchange Act, if and as such Rule is then in effect and an "outside director"
for purposes of Section 162(m) of the Code. This paragraph may be waived for
successive six (6) month periods by the Board of Directors.
6.2 Duties and Powers of Committee. It shall be the duty of the
Committee to conduct the general administration of the Plan in accordance with
its provisions. The Committee shall have the power to interpret the Plan and the
Options and to adopt or amend such rules for the administration, interpretation
and application of the Plan as are consistent therewith and to interpret, amend
or revoke any such rules. The Committee may accelerate the exercise date of any
Option and determine the right of any person to exercise the rights on behalf of
any Optionee. Notwithstanding the foregoing, the full Board, acting by a
majority of its members in office, shall conduct the general administration of
the Plan with respect to Options granted to Independent Directors. Any such
interpretations and rules in regard to Incentive Stock Options shall be
consistent with the basic purpose of the Plan to grant "Incentive Stock Options"
within the meaning of Section 422 of the Code. In its absolute discretion, the
Board may at any time and from time to time exercise any and all rights and
duties of the Committee under this Plan except with respect to matters which
under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules
issued thereunder, are required to be determined in the sole discretion of the
Committee.
6.3 Majority Rule. The Committee shall act by a majority of its members
in office. The Committee may act either by vote at a meeting or by a memorandum
or other written instrument signed by a majority of the Committee.
11
<PAGE> 12
6.4 Compensation; Professional Assistance; Good Faith Actions. Members
of the Committee shall receive such compensation for their services as members
as may be determined by the Board. All expenses and liabilities incurred by
members of the Committee in connection with the administration of the Plan shall
be borne by the Company. The Committee may, with the approval of the Board,
employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and its officers and directors shall be
entitled to rely upon the advice, opinions, or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee in good faith shall be final and binding upon all Optionees, the
Company, and all other interested persons. No member of the Committee shall be
personally liable for any action, determination, or interpretation made in good
faith with respect to the Plan or the Options, and all members of the Committee
shall be fully protected by the Company in respect to any such action,
determination, or interpretation.
ARTICLE VII
OTHER PROVISIONS
7.1 Options Not Transferable. Options shall not be transferable except
by testamentary will or the laws of descent and distribution, and shall be
exercisable during an Optionee's lifetime only by the Optionee. Except as
permitted by the preceding sentence, no Option granted under the Plan or any of
the rights and privileges thereby conferred shall be transferred, assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise),
and no such Option, right or privilege shall be subject to execution,
attachment, or similar process. Upon any attempt to so transfer, assign, pledge,
hypothecate or otherwise dispose of the Option, or of any right or privilege
conferred thereby, contrary to the provisions hereof, or upon the levy of any
attachment or similar process upon such Option, right or privilege, the Option
and such rights and privileges shall immediately become null and void.
7.2 Amendment, Suspension or Termination of the Plan. The Plan may be
wholly or partially amended or otherwise modified, suspended or terminated at
any time or from time to time by the Board or the Committee. However, without
approval of the Company's stockholders given within twelve (12) months before or
after the action by the Committee, no action of the Committee may, except as
provided in Section 4.5, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan, and no action of
the Committee may be taken that would otherwise require stockholder approval as
a matter of applicable law, regulation or rule. Notwithstanding the foregoing,
the provisions of this Plan relating to Option grants to Independent Directors,
including the amount, price and timing thereof, shall not be amended more than
once in any six-month period other than to comport with changes, in the Code,
the Employee Retirement Income Security Act, or the respective rules thereunder.
Neither the amendment, suspension, nor termination of the Plan shall, without
the consent of the holder of the Option, alter or impair any rights or
obligations under any Option theretofore granted. No Option may be granted
during any period of suspension nor after termination
12
<PAGE> 13
of the Plan, and in no event may any Incentive Stock Option be granted under
this Plan after the first to occur of the following events:
(a) The expiration of ten (10) years from the date the Plan is
adopted by the Board; or
(b) The expiration of ten (10) years from the date the Plan is
approved by the Company's stockholders under Section 7.3.
7.3 Approval of Plan by Shareholders. This Plan will be submitted for
the approval of the Company's shareholders within twelve (12) months after the
date of the Board's initial adoption of the Plan. Incentive Stock Options may be
granted prior to such shareholder approval; provided, however, that such
Incentive Stock Options shall not be exercisable prior to the time when the Plan
is approved by the shareholders; provided, further, that if such approval has
not been obtained at the end of said twelve (12)-month period, all Incentive
Stock Options previously granted under the Plan shall thereupon be canceled and
become null and void.
7.4 Tax Withholding. The Company shall be entitled to require payment
in cash or deduction from other compensation payable to each Optionee of any
sums required by federal, state or local tax law to be withheld with respect to
the issuance, vesting or exercise of any Option. Subject to the timing
requirements of Section 5.4, the Committee (or the Board, in the case of Options
granted to Independent Directors) may in its discretion and in satisfaction of
the foregoing requirement allow such Optionee to elect to have the Company
withhold shares of common stock (or allow the return of shares of common stock)
having a Fair Market Value equal to the sums required to be withheld.
7.5 Loans. The Committee may, in its discretion, extend one or more
loans to key Employees in connection with the exercise or receipt of an Option
granted under this Plan. The terms and conditions of any such loan shall be set
by the Committee.
7.6 Limitations Applicable to Section 16 Persons and Performance-Based
Compensation. Notwithstanding any other provision of this Plan, any Option
awarded to an Employee or Independent Director who is then subject to Section 16
of the Exchange Act, shall be subject to any additional limitations set forth in
any applicable exemptive rule under Section 16 of the Exchange Act that are
requirements for the application of such exemptive rule, and this Plan shall be
deemed amended to the extent necessary to conform to such limitations.
Furthermore, notwithstanding any other provision of this Plan, any Option
intended to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code shall be subject to any additional limitations set
forth in Section 162(m) of the Code (including any amendment to Section 162(m)
of the Code) or any regulations or rulings issued thereunder that are
requirements for qualification as performance-based compensation as described in
Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the
extent necessary to conform to such requirements.
13
<PAGE> 14
7.7 Effect of Plan Upon Other Option and Compensation Plans. The
adoption of this Plan shall not affect any other compensation or incentive plans
in effect for the Company. Nothing in this Plan shall be construed to limit the
right of the Company (a) to establish any other forms of incentives or
compensation for employees of the Company or (b) to grant or assume options
otherwise than under this Plan in connection with any proper corporate purpose,
including, but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation, or
otherwise of the business, stock, or assets of any corporation, firm or
association.
7.8 Compliance with Laws. This Plan, the granting and vesting of
Options under this Plan and the issuance and delivery of shares of common stock
or Options granted or hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all applicable
legal requirements. To the extent permitted by applicable law, the Plan or
Options granted hereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.
7.9 Titles. Titles are provided herein for convenience only and are not
to serve as a basis for interpretation or construction of this Plan.
7.10 Governing Law. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
California without regard to conflicts of laws thereof.
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of Children's Wonderland, Inc. as of September 18, 1996.
----------------------------------------
Robert M. Wilson, Secretary
14
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Children's Wonderland, Inc., a
California corporation (the "Company"), and the undersigned officers and
directors of the Company, individually and in their respective capacities
indicated below, hereby make, constitute and appoint Debby S. Bitticks and
Robert M. Wilson, or either of them, its and their true and lawful attorneys
with power of substitution, to execute on behalf of the Company, by signing the
name of the Chief Executive Officer as acting for the Company, the Form 10-KSB,
including all exhibits and any and all amendments thereto; that Debby S.
Bitticks and Robert M. Wilson, or either of them, are each granted full power
and authority to do and perform each and every act and thing whatsoever as
either may deem necessary or advisable to carry out the full intent of this
resolution to the same extent and with the same effect as the Company might or
could do personally in its capacity; and that all acts and things that Debby S.
Bitticks or Robert M. Wilson may do or cause to be done by virtue of the power
of attorney granted by this resolution and its signature as the same may be
signed by either of said persons to said Form 10-KSB and any and all amendments
thereto are hereby ratified, confirmed, and approved.
Dated as of the 18th day of September, 1996.
CHILDREN'S WONDERLAND, INC.
Attest: /s/ Robert M. Wilson By: /s/ Debby S. Bitticks
-------------------------- -----------------------------
Robert M. Wilson Debby S. Bitticks
Secretary Chief Executive Officer
(Principal Executive
Officer)
/s/ Kenneth W. Bitticks
- ---------------------------------- /s/ Debby S. Bitticks
Kenneth W. Bitticks ---------------------------------
Chairman and Director Debby S. Bitticks
Chief Executive Officer and
Director
/s/ Robert M. Wilson
- ----------------------------------
Robert M. Wilson
President, Chief Financial /s/ James W. Gott
Officer (Principal Financial ---------------------------------
and Accounting Officer) and James W. Gott
Director Director
/s/ Michael L. Laney
- ----------------------------------
Michael L. Laney
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE
30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 3,210,418
<SECURITIES> 0
<RECEIVABLES> 107,343
<ALLOWANCES> 42,676
<INVENTORY> 0
<CURRENT-ASSETS> 3,380,064
<PP&E> 662,365
<DEPRECIATION> 233,040
<TOTAL-ASSETS> 6,996,514
<CURRENT-LIABILITIES> 1,907,596
<BONDS> 2,551,744
0
0
<COMMON> 9,638,040
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,996,514
<SALES> 4,606,319
<TOTAL-REVENUES> 4,606,319
<CGS> 0
<TOTAL-COSTS> 6,791,137
<OTHER-EXPENSES> 212,699
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 360,294
<INCOME-PRETAX> (2,757,811)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,757,811)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,757,811)
<EPS-PRIMARY> (2.03)
<EPS-DILUTED> 0
</TABLE>
