-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DL8ey+Cw/EoYEws8gDUye0MS+djLxLSeeY80haX18iwF9a0wJLkv0zoiczbDrz9u oS8lPPsUEmJA/FCryXz9Dg== 0001017386-01-500067.txt : 20010820 0001017386-01-500067.hdr.sgml : 20010820 ACCESSION NUMBER: 0001017386-01-500067 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20010817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHILDRENS WONDERLAND INC CENTRAL INDEX KEY: 0000916933 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CHILD DAY CARE SERVICES [8351] IRS NUMBER: 954455341 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-12121 FILM NUMBER: 1717414 BUSINESS ADDRESS: STREET 1: C/O VITAL OPTIONS STREET 2: 15060 VENTURA BLVD STE 211 CITY: SHERMAN OAKS STATE: CA ZIP: 91403 BUSINESS PHONE: 8188651306 MAIL ADDRESS: STREET 1: C/O VITAL OPTIONS STREET 2: 15060 VENTURA BLVD STE 211 CITY: SHERMAN OAKS STATE: CA ZIP: 91403 10KSB 1 file001.txt ANNUAL REPORT 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 For the fiscal year ended June 30, 2000 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. 3775 Mansell Road Alpharetta, Ga. 30022 (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number, Including Area Code: (770-594-9790 Securities registered under Section 12(b) of the Act: None Securities registered under section 12(g) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common Stock, No Par Value Non-OTCBB Warrants to Purchase Common Stock 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 ___ No__X__ 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. [X] The issuer's revenues for its most recent fiscal year were $1,259,000. 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 the over the counter non-bulletin board on June 27, 2001 was approximately $254,414. As of May 1, 2001 the number of shares of the registrant's Common Stock issued and outstanding was 10,562,185. DOCUMENTS INCORPORATED BY REFERENCE None. Transitional Small Business Disclosure Format (check one): Yes No X -- -- Other than a Current Report on Form 8-K filed on October 13, 2000 relating to a change in its independent auditor, Children's Wonderland, Inc. (the "Company" or "CWI") has not filed any reports under the Securities Exchange Act of 1934 (the "Exchange Act") since it filed its Quarterly Report on Form 10-QSB for the quarter ended March 31,1997. This Annual Report on Form 10-KSB is intended to provide all material information about the Company that would have been available in the Company's Annual Reports for the fiscal years ended June 30, 2000, June 30, 1999, June 30,1998 and June 30, 1997 had the Company filed such Annual Reports on a timely basis. The statements in this Form10-KSB relating to ongoing operations and program offerings, development and expansion, and potential future services and products, and other similar projections are forward-looking statements within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act, and are subject to the safe harbors created thereby. Actual results could differ materially because of the following factors, among others: changes in product mix, economic conditions in the U.S., competition and competitive pressures in pricing and service availability, market acceptance of the Company and the Company's products, service efficiencies and overall capacity utilization, litigation, regulatory compliance, strategic planning decisions by management, the Company's ability to retain key personnel, ability to secure adequate financing, natural disaster, uninsured losses, ability to obtain regulatory licenses for various programs offerings, and other risks detailed in the Company's Securities and Exchange Commission("SEC") filings. All forward-looking statements contained in this Form 10-KSB are qualified in their entirety by this cautionary statement. Reference in this Report to any "fiscal year" shall mean the fiscal year ending June 30 of such year. PART I Item 1. Description of Business Business Summary and Strategy The Company was incorporated in California 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+). The Company has also provided before and/or after school care for elementary school aged children, flex-care, and care for the mildly ill. In May 2001, the Company sold for $455,000 the assets relating to its remaining Center in West Haven, CT, and assigned its lease for that Center, to Tutor Time Learning Systems, Inc. The net proceeds of such sale were used to repay certain debts and legal fees of the Company. Since June 2000, the Company's intention has been to change its focus from owning and operating child care centers to providing quality education programs to children internationally and to implementing a commerce program that creates additional revenue streams for schools, youth athletic programs and other non-profit organizations that benefit children, parents and entire communities. 2 As of June 30, 2000, the Company had two offices, one at 15060 Ventura Blvd. Suite 211, Sherman Oaks, CA 91403 and another one at 3775 Mansell Rd. Alpharetta, GA 30022. In November 2000, the Company signed a Letter of Intent to acquire assets and operations of KinderWorld, an Asian/Pacific region child-care/kindergarten franchise headquartered in Singapore. This Letter of Intent expired on January 1, 2001. The terms of the Letter of Intent stated that KinderWorld will be acquired by the Company through an exchange of one hundred percent (100%) of the outstanding stock of all classes of KinderWorld (with an agreed valuation of $8,000,000 US) for a number of shares of the Company's Common Stock ("Common Stock") to be determined prior to the closing of the acquisition. Management has maintained frequent contact with KinderWorld even though the letter of intent between the parties has expired. The Company's hope was to fuse KinderWorld's operation into a newly formed subsidiary to be owned 100% by the Company. Any acquisition of KinderWorld would be contingent upon, among other factors, securing funding of approximately $2,000,000 in new capital invested into the Company. There can be no assurance that the Company will be successful in acquiring KinderWorld or that funds necessary for such acquisitions will be raised. Further, any closing of such an acquisition would be subject to extensive due diligence from both parties and availability of audited financial results. KinderWorld is a child care/kindergarten franchise consisting of 11 English-speaking owned and operated Centers and 4 English-speaking franchised Centers in 5 countries throughout the Asia Pacific Region. Additionally, the Company believes that KinderWorld has established a relationship with Somerset/Ascott Group, one of the largest service apartment developers in the Asia-Pacific region, to establish and operate learning centers in its apartment complexes. The Company believes that an international focus is important to its future. Singapore, a country that has adopted English as its primary language, represents a gateway to the greater Asia-Pacific region. Through operations in Singapore, English speaking teachers and Western education theories and products can be funneled to the greater Asia Pacific markets where the demand for English teaching and Western products is high. Management believes that significant local presence in the major Asia-Pacific markets provides an ideal foundation for successful growth. The Company also intends to focus its efforts on developing software and commerce programs to enhance the profitability of schools, athletic programs, and non-profit organizations. The Company has established a relationship with a company that owns software relating to a transaction processing network. Management believes that if it is able to raise $2,000,000 in new capital, the Company will be able to acquire a license to the software for this network in addition to being able to acquire KinderWorld. The Company has partially developed software for predictive modeling and rebate application and would require additional funding to complete the development of such rebate application. The license to the transaction procession network, coupled with the rebate application, would permit the Company to launch its transaction based rebate program. This rebate program would permit consumers using credit, debit, ATM or other cards, by registering with the Company, to donate the rebates earned from using such cards to schools, non-profit organizations or another type of entity. TutorTime Learning Systems has agreed with the Company to permit 3 the Company until May 31, 2002 to utilize four of TutorTime's pre-schools as a test bed for launching the Company's transaction based rebate program. The Company hopes to refine its program prior to launching by utilizing focus groups consisting of participating parents from these pre-schools. There can be no assurance that any of the Company's plans or proposals set forth above or herein will be consummated. History Through 2000 In May 1996, the Company completed an initial public offering (IPO) of units, each unit consisting of one share of its Common Stock and one warrant to purchase Common Stock, raising $8,050,000 in gross proceeds before deducting related fees and commissions. In the initial public offering, 1,750,000 units were sold and, after exercise by the underwriter of the over-allotment allowance, an additional 262,500 units were sold. In both fiscal years 1995 and 1996, the Company incurred losses as a result of significant costs associated with the establishment of its 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, and creation of regional sales and development functions. A significant portion of these costs represents expenses required to break out of the childcare industry's norm of small, "mom and pop", backyard-based operations. The Company through 1996 had committed to the opening of several intergenerational care facilities, which were to be financed through a combination of public debt and equity offerings by the Company. The Company had opened a number of facilities based upon funding commitments from its IPO underwriter, an investment-banking firm. Such funding was necessary to complete construction and to offset the operating losses that typically are experienced for a period of time after a new Center is opened. The investment-banking firm did not honor its funding commitment and, as a result in fiscal year 1998, the Company was forced to abandon its projects in development, either close or sell all but one of its operating facilities and to abandon its plans for future expansion. See Item 3. Legal Proceedings. In May 1997, the Company filed a lawsuit against its IPO underwriters and certain of their principals in federal district court alleging breach of fiduciary duty, fraud, and other claims. It was alleged that in late 1996, the Company was working with new investment bankers to raise money for further expansion. The Company's former underwriters who had taken the Company public opposed a new financing by the Company. The Company's stock price collapsed and the Common Stock was de-listed from NASDAQ in April 1997. The Company lost the new financing after that development, and sued its former underwriters. In March 1997, the Company completed a private placement of $1,375,000 unsecured 10% per annum promissory notes. Principal and interest were due payable in full upon the earlier of a secondary public offering by the Company, or March 24, 1998. Each $50,000 promissory note entitled the holder to 25,000 common stock purchase warrants to purchase Common Stock for $5.00 per share during a period 4 commencing one year from the completion of a secondary offering (or January 1, 1998 if such public offering has not occurred by that date) and expiring on May 6, 2001. The following table lists the Company operated Centers, and where applicable, the year of each Center's sale and/or termination of applicable leases. The Company had operated each Center pursuant to a lease of the applicable property from a third party landlord. With respect to the Centers that are identified below as "Sold," the Company sold the business and assigned the applicable lease. With respect to the Centers identified below as "Terminated Lease," the Company neither sold the Center business nor assigned the applicable lease but rather ceased operations and terminated the lease. Location Address Sq. Ft. Sold Terminated Lease - ------- ------- ---- ---------------- 27400 Canwood St., Agoura, CA 14,500 1998 21772 Lake Forest Dr., Lake Forest, CA 7,560 1997 107 Teardrop Court, Newbury Park, CA 8,500 1997 700 Esplanade Dr., Oxnard, CA 11,600 1998 25022 Hawkbyrn Ave., Newhall, CA 3,800 1998 15250 E. 6th Ave., Aurora, CO 6,400 1997 3225 S. Wadsworth Blvd., Lakewood, CO 5,012 1997 9102 W. 88th Ave., Westminster CO 5,320 1997 1400 Ironton, Aurora, CO 6,000 1997 18707 E. Hampden Ave., Aurora, CO 3,680 1997 5207 W. 26th St., Edgewater, CO 4,800 1997 2317 Gold Meadow Way, Gold River, CA 11,600 1998 5855 DeSoto Ave., Woodland Hills, CA 12,247 1998 4 Veterans Circle, West Haven, CT 11,500 Still Operating as of June 30, 2000 - ---------------------- As of June 1997, the United States Veterans Administration ("VA") operated approximately 160 sites in the United States, and the Company was selected to operate Centers on 5 of those sites. On July 25, 1997, the Company commenced an action in the Superior Court of California in Los Angeles County against Diversified Intergenerational Care, Inc. ("DIC"). The VA had selected the Company and DIC to provide 5 care Centers on VA properties and DIC had contracted with the Company to build those care Centers. With the West Haven Center having been completed by DIC behind schedule and no work having been commenced on the other four care Centers, the complaint alleged that DIC was attempting to block the Company from submitting new proposals to the VA without DIC and that DIC was attempting to impose on the Company excessive rents, security deposits and other terms relating to the care Centers. At trial, the Company was awarded approximately $79,500 in damages plus attorney fees of approximately $166,750. In addition, the contract between the Company and DIC was nullified, permitting the Company to pursue a direct, independent relationship with the VA for future care Centers. Around May 1997 when the Company commenced its lawsuit against its former underwriters, the Company was forced to commence liquidating some of its assets. In September 1997, the Company sold its six centers in Colorado to Imagination Plus. The agreement for the sale of the Colorado Centers required that the 5 Company include for sale two of its California Centers, Lake Forest and Newbury Park. In fiscal 1998, the Company sold 8 Centers in all to Imagination Plus. In fiscal 1998, as part of its effort to save itself from bankruptcy, the Company began to downsize its corporate office in Agoura, California. A total of ten employees were laid off in the corporate facility. With its remaining four employees, the Company began the process of disposing of its Centers. As part of the Company's continuing effort to cancel existing leases and reduce expenses to the bare minimum, the remaining corporate employees were moved from the Company's corporate office in Agoura, California to the Oxnard Center in California. In October 1997, the Company and the members of its Board of Directors, were sued in a class action lawsuit caused by the decline in the Company's stock price. Due to lack of any evidence of wrongdoing on the part of the Company and its Directors, this lawsuit was dismissed with prejudice. In order to keep itself solvent through the litigation process against its former underwriters, the Company sold three of its remaining California Centers to Aloha Pacific, Inc. in May 1998. The Oxnard, Woodland Hills and Gold River Centers were sold to Aloha Pacific, Inc., but the Company still possessed a management contract with Aloha Pacific to manage these three Centers for a fee. Due to continuing financial difficulty, the Company was forced to abandon its last two California Centers, located in Agoura and Newhall, in August 1998. However, as of June 30, 2000, the Company was still operating a Center in West Haven, Connecticut. The Company's lawsuit against its former underwriters was being prepared for trial in early 2000 when a settlement was reached. Under the terms of the settlement, the Company received $1,575,000 in cash and cancellation of notes in the principal amount of $975,000 plus accrued interest of $291,000. Most of the proceeds of the settlement were used to pay attorney fees and other costs of litigation and to make repayment of loans and debt of the Company. Because of continuing financial problems, and the conflict arising with Aloha Pacific, Inc. ("API") due to API's non-payment of management fees owing to the Company, the Company relocated its corporate office in June 1999 from the Oxnard Center to 15060 Ventura Boulevard, Sherman Oaks, California. In December 1999, the Company filed a lawsuit against API and certain of its officers and directors alleging breach of contract, fraud, and other claims in connection with the sale of the three Centers by the Company to API and the associated management contract whereby the Company was to manage those Centers for API until $250,000 in management fees was earned by the Company. The Company alleged that API abruptly and without cause terminated the management contract with approximately $100,000 still owing to the Company. As of June 30, 2000, this matter had been mediated and the parties had entered into a stipulation of settlement. As part of this stipulation of settlement, the Company and API agreed to a rescission of their sale contract and the Company introduced a third party that purchased for $480,000 the three Centers which the Company had sold to API. The third party and API are continuing to resolve issues regarding the sale of these Centers. The Company will have no further obligation to API or the third party upon their completion of such sale. 6 On February 4, 2000, Tiger Ventura County, L.P. commenced an action against the Company and API in the Superior Court of California in the County of Ventura alleging the defendants' failure to pay property taxes and assessments of approximately $67,000 on a property which had been leased by the Company from the plaintiff. As of April 30, 2001, funds in the amount of $480,000, the purchase price being paid by the third party for the three Centers sold by the Company to API, and the Company's deposit of $67,000 for the Tiger Ventura settlement had been deposited into an account at Commerce Escrow Company of California. Additionally, the Company had forwarded its documentation to commence the closing of the rescission. As of May 21, 2001, the third party and API have yet to resolve certain issues involved with the purchase of the three Centers. As a result, the rescission of the original sales contract between the Company and API has not been finalized and the funds to settle the Tiger Ventura lawsuit remain in escrow. In February 2000, two investors, John R. Clarke and Robert Becker, acquired control of the Company by purchasing for $300,000, 600,000 newly issued shares of the Company's Series A Convertible Preferred Stock ("Series A Preferred") which shares can be converted into a majority of the outstanding Common Stock and can be voted on an "as-converted basis" in any vote by the holders of Common Stock. The Company used the proceeds of the sale of Series A Preferred for working capital purposes including payment of certain past due obligations. Additionally, John R. Clarke and Robert Becker have provided the Company with loans in the amount of $186,000 as of May 1, 2001. As of June 1, 2001, the amount of such loans outstanding was $126,000. In June 2000, John R. Clarke was elected the Company's Chairman of the Board and Robert Becker was elected as a member of the Company's Board of Directors. Concurrently, Ken Bitticks resigned as the Company's Chairman of the Board. During the quarter ended June 30, 2000, the Company reached an agreement with a number of its trade creditors and note holders for the exchange of one newly-issued share of the Company's Series B Convertible Preferred Stock ("Series B Preferred") for every $10.00 of debt owed by the Company, which is cancelled by such creditor or note holder. In connection with the Series B Preferred offering by the Company, each creditor or note holder was issued one warrant ("Series B Warrants") to purchase Common Stock for each Series B Preferred share issued. The Company issued no registration rights in conjunction with the Series B Preferred or Series B Warrants. On December 7, 2000, Debby Bitticks and Robert Wilson resigned from the Company's Board of Directors. Subsequently, Ms. Bitticks resigned as President of the Company. In May 2001, Robert Becker resigned from the Company's Board of Directors and his position as Chief Financial Officer. Governmental Regulation On May 1, 2001, the Company sold its one Center in West Haven, Connecticut to Tutor Time Learning Systems, Inc. This center was to 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 7 children, the dietary program, the daily curriculum and compliance with health standards. In most jurisdictions, these agencies conduct scheduled and unscheduled inspections of 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. In the ordinary course of business, the Company's West Haven Center, like others in the day care industry, from time to time had received statements of deficiency and, occasionally, citations for failure to comply with various state regulatory requirements. As of May 1, 2001, such statements of deficiency and citations had not had any material adverse effect on the Company or the Center. No statements of deficiency or citations were pending and the Center was in compliance. Based on its operating policies and compliance procedures, quality assurance programs and past experience, the Company does not believe that the Center 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. 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 for its remaining Center in West Haven, Connecticut, 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 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. Risk Factors An investor or potential investor in the Company should carefully consider the risks described below and the other information in this Form 10-KSB in evaluating the Company and its prospects. 8 a. The Company will need to obtain additional financing in order to continue operations and implement its business plan Since its initial public offering, the Company has been unable to pay its debts, has experienced limited business activity and has remained substantially leveraged. While the Company is hoping to pursue a new business strategy, as of June 30, 2000, it is faced with cash constraints and will require new capital to be able to pursue its new strategy. While the Company is operating one Center as of June 30, 2000, the operation of Centers is not at the core of the Company's new strategy. In the 2000 fiscal year, the Company has had insufficient revenues to satisfy any expenses other than the expenses of operating the one Center in Connecticut. There can be no assurance that the Company will ever be profitable. If the Company does not become profitable or obtain additional financing, it will be unable to continue even its already-downsized operations or to pursue its new business strategy. There is substantial doubt about the Company's ability to continue as a going concern. b. A start-up business is difficult to evaluate Even though the Company completed an initial public offering of Common Stock in 1996, the business which it pursued with the proceeds of such offering has substantially failed and the Company is hoping to pursue a new business. The Company must, therefore, be viewed as an early stage enterprise with an untested business model and must be considered in light of the risks and difficulties facing early stage enterprises. In addition, the Company's current management has been with the Company for only a short period of time. As a result, there is a limited operating history upon which to evaluate the Company's prospects. The Company's proposed business model is unproven and, to its knowledge, none of the Company's competitors has achieved profitability in this business segment. The Company cannot predict whether demand for its products and services will ever develop, particularly at the volume or prices which the Company needs to become profitable. c. The Company must continually enhance and develop its products and services Even if the Company obtains financing to pursue its new strategy, it may be unable to develop and to deliver compelling products and services that will attract clients necessary for the success of the Company's new business. The market for the Company's proposed services is characterized by rapidly changing technology, emerging industry standards and consumer requirements that are subject to rapid change and frequent new service introductions. These characteristics are exacerbated by the expectation that many companies may introduce products and services addressing the Company's targeted market in the near future. There can be no assurance that the Company will be successful in developing its software or in delivering comprehensive services and products on a timely basis, or that such products and services will effectively address consumer requirements and achieve market acceptance. d. The Company is in a highly competitive and evolving market Many of the Company's existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than the Company does. Additionally, many of these companies have greater name 9 recognition and more established relationships with the Company's target customers. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than the Company can. There can be no assurance that the Company can ever achieve or maintain a meaningful level of revenues. Some of the Company's competitors have or may establish relationships with and among themselves that could emerge and rapidly acquire market share. In addition, there may not be sufficient demand for the type of products and services which the Company plans to offer to child care centers. e. Risks of acquisitions The Company may seek to pursue its new strategy through acquisitions of other businesses if it can obtain financing and if acquisition candidates present desirable opportunities. There are risks related to expansion by acquisition, as the Company has already experienced following its initial public offering. There are certain risks inherent in acquiring other businesses such as the general risk that the Company may invest time and money into such acquisition or expansion without success. The integration of other businesses into the Company's business would also increase operating expenses. f. The Company is delinquent with certain obligations The Company has failed to file its corporate income tax returns and has failed to pay income taxes or minimum taxes since fiscal year ended June 30, 1996. The Company has also failed to pay payroll taxes including interest and penalties for late payments of such payroll taxes. There are liens on the Company's assets in connection with such delinquent payroll tax obligations. There can be no assurance that the Company will be able to correct these problems. g. Investors may find it difficult to trade the Company's Common Stock due to the "Penny Stock" rules Currently the Common Stock is quoted on the "pink sheets" for the over-the-counter market. As a result, trading in shares of Common Stock is covered by "penny stock" rules promulgated for non-exchange listed securities. Under these rules, any broker/dealer who recommends shares of Common Stock to persons other than prior customers and investors meeting certain financial requirements, must, prior to sale, make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction. Securities are exempt from these rules if the market price is at least $5.00 per share. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. The price and ability to sell shares of Common Stock may be negatively affected because the shares can only be sold in compliance with the penny stock rules. The Company cannot be sure that, in the future, its securities will not be subject to the penny stock regulations or other regulations that would negatively affect the market for its securities. 10 Seasonality The Company's revenues has varied throughout the year. As is the case throughout the childcare industry, the Company's first fiscal quarter (the summer months of July, August and September) generally reflected the lowest revenues. To address this matter, the Company had an enhanced summer camp program, which brought additional revenue during the summer months and helped with client retention. The fourth fiscal quarter generally reflected the highest revenues for each year. Employees As of June 30, 1997 the Company had 328 employees (242 full-time),which consisted of 20 salaried employees and 308 hourly employees. Due to the divestiture of its facilities, the number of employees diminished to 172 (140 full time), 9 salaried employees and 163 hourly employees as of June 30, 1998, to 44 (35 full time), 5 salaried employees and 39 hourly employees as of June 30, 1999 and 47 (37 full time), 5 salaried employees and 42 hourly employees as of June 30, 2000. The Company employed one full time bookkeeper for fiscal years 1997 and 1998. For fiscal years 1999 and 2000, the Company employed one part-time bookkeeper. Additionally, the Company employed one registered nurse for the Center in West Haven, CT for fiscal years 1997, 1998, 1999 and 2000 to comply with its agreement with the Veteran's Association. 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 have been good. The employees were not parties to any collective bargaining agreements and the Company does not anticipate becoming a party to any such agreements. 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 collectively reflect a philosophy which integrates the need of the child, the parent and the family as a whole. The Company owns the registration rights to trademarks for "The Highland Club", "Highland Home" and "Highland Care" which were registered for the anticipation of expanding the Company's elder care services in 1997. However, the Company is no longer offering elder care services and does not plan to use these marks in the future. In 2000, the Company made filings with the U.S. Patent and Trademark Office to register the following trademarks: "BeParents.com", "KideKiosk" and "Parent Power." Item 2. Description of Property As of June 30, 2000, the Company was operating a daycare and preschool facility in West Haven, Connecticut, with the following address: West Haven Center 4 Veteran Circle West Haven, CT 06516 11 Terms of West Haven Lease: In March 2000, a new lease agreement was entered into with Resun Leasing, Inc. The term of this lease is eighty-two (82) months beginning on March 24, 2000, expiring December 24, 2006. The monthly rental for the West Haven Center is as follows: (4) payments of $5,000.00, followed by (3) payments at $8,000.00, followed by (3) payments at $10,000.00, followed by (12) payments at $13,000, followed by (12) payments of $14,000, followed by (48) payments at $15,000. The lease was assumed by TutorTime in connection with the Company's sale of its assets at the West Haven Center. Prior Centers operated by the Company In the past, the Company, also operated the following Centers. The years, in which the Centers were sold and leases terminated are also listed. Location Address Sq. Ft. Sold Terminated Lease - ------- ------- ---- ---------------- 27400 Canwood St., Agoura, CA 14,500 1998 21772 Lake Forest Dr., Lake Forest, CA 7,560 1997 107 Teardrop Court, Newbury Park, CA 8,500 1997 700 Esplande Dr., Oxnard, CA 11,600 1998 25022 Hawkbyrn Ave., Newhall, CA 3,800 1998 15250 E. 6th Ave., Aurora, CO 6,400 1997 3225 S. Wadsworth Blvd., Lakewood, CO 5,012 1997 9102 W. 88th Ave., Westminster CO 5,320 1997 1400 Ironton, Aurora, CO 6,000 1997 18707 E. Hampden Ave., Aurora, CO 3,680 1997 5207 W. 26th St., Edgewater, CO 4,800 1997 2317 Gold Meadow Way, Gold River, CA 11,600 1998 5855 DeSoto Ave., Woodland Hills, CA 12,247 1998 4 Veterans Circle, West Haven, CT 11,500 Still Operating as of June 30, 2000 - ---------------------- Item 3. Legal Proceedings In May 1997, the Company filed a lawsuit against its former underwriters and a number of their principals in district court alleging breach of fiduciary duty, fraud, and other claims. The Company alleged that in late 1996, the Company was working with new investment bankers to raise money for further expansion and that the Company's former underwriters who had taken the Company public opposed the new financing. The price of Common Stock collapsed and the Common Stock was de-listed from NASDAQ in April 1997. The Company lost the new financing after that development, and sued the Company's former underwriters. As the case was being prepared for trial in early 2000, a settlement was reached with the old underwriters. Under the terms of the settlement, the Company received $1,575,000 in cash and cancellation of notes in the amount of $975,000 plus accrued interest of $291,000 on the notes. A confidentiality agreement was signed by CWI. 12 In July 1997, the Company commenced an action in the Superior Court of California in Los Angeles County against DIC. The VA had selected the Company and DIC to provide 5 care Centers on VA properties and DIC had contracted with the Company to build those care Centers. With the West Haven CT Center having been completed by DIC behind schedule and no work having been commenced on the other four care Centers, the complaint alleged that DIC was attempting to block the Company from submitting new proposals to the VA without DIC and that DIC was attempting to impose on the Company excessive rents, security deposits and other terms relating to the care Centers. At trial, the Company was awarded approximately $79,500 in damages plus attorney fees of approximately $166,750. In addition, the contract between the Company and DIC was nullified, permitting the Company to pursue a direct, independent relationship with the VA for future care Centers. In October 1997, the Company and the members of its Board of Directors were sued in a class action lawsuit caused by the decline in the Company's stock price. Due to lack of any evidence of wrongdoing on the part of the Company and its directors, this lawsuit was dismissed with prejudice. In December 1999, the Company filed a lawsuit against API and certain of its officers and directors alleging breach of contract, fraud, and other claims in connection with the sale of the three Centers by the Company to API and the associated management contract whereby the Company was to manage those Centers for API until $250,000 in management fees was earned by the Company. The Company alleged that API abruptly and without cause terminated the management contract with approximately $100,000 still owing to the Company. As of June 30, 2000, this matter had been mediated and the parties had entered into a stipulation of settlement. As part of this stipulation of settlement, the Company has introduced a third party to purchase the three centers for $ 480,000. Additionally, the Company has deposited $67,000 into an escrow account to settle its portion of the Tiger Ventura LP dispute. The Company has signed all the settlement and closing documents and sent the signed documents to Commerce Escrow Company, the escrow agent for the documents and funds relating to the rescission of the Company's original sale of the three centers. However, API and the third party are continuing to resolve issues pertaining to the transfer of the three centers. In February 2000, Tiger Ventura County, L.P. commenced an action against the Company and API in the Superior Court of California in the County of Ventura alleging the defendants' failure to pay real property taxes and assessments of approximately $67,000 on a property which had been leased by the Company from the plaintiff. API, which had assumed the lease from the Company, brought a cross claim against the Company and its Chief Executive Officer on June 28, 2000, alleging misrepresentations by them at the time API assumed the lease and submissions by the Company to API of misleading accounting statements. As of June 30, 2000, the parties to this action had entered into a mediated stipulation of settlement and the Company has $67,000 in a trust account for the settlement of this matter. As of May 1, 2001, the Company believes it has satisfied its requirements for the completion of the settlement of this action and the API action described above and is awaiting the resolution of certain issues by the other parties to the settlement. Item 4. Submission of Matters to a Vote of Security Holders None. 13 PART II Item 5. Market for Common Equity and Related Stockholder Matters Stock Market and Other Information; Market for Common Stock The Company's Common Stock and public warrants are quoted on the over the counter (Non-Bulletin Board) market, or the "pink sheets," under the symbols (CWIC) and (CWICW). The following table sets forth for the periods indicated the high and low last sales price, or high and low bid quotations, for a share of the Company's Common Stock in each quarter, as reported initially by NASDAQ from the inception of trading on May 7, 1996 and then by the NASD beginning in April 1997 after the de-listing of the Common Stock. Year Quarter High Low - ---------------- ------------- ----------- ----------- Fiscal 1996 Q4 9.75 6.50 - ---------------- ------------- ----------- ----------- Fiscal 1997 Q1 9.75 7.50 - ---------------- ------------- ----------- ----------- Fiscal 1997 Q2 10.125 7.0 - ---------------- ------------- ----------- ----------- Fiscal 1997 Q3 7.87 6.93 - ---------------- ------------- ----------- ----------- Fiscal 1997 Q4 7.125 0.63 - ---------------- ------------- ----------- ----------- Fiscal 1998 Q1 0.875 0.125 - ---------------- ------------- ----------- ----------- Fiscal 1998 Q2 0.375 0.045 - ---------------- ------------- ----------- ----------- Fiscal 1998 Q3 0.60 0.055 - ---------------- ------------- ----------- ----------- Fiscal 1998 Q4 0.87 0.15 - ---------------- ------------- ----------- ----------- Fiscal 1999 Q1 0.62 0.19 - ---------------- ------------- ----------- ----------- Fiscal 1999 Q2 0.35 0.04 - ---------------- ------------- ----------- ----------- Fiscal 1999 Q3 0.20 0.14 - ---------------- ------------- ----------- ----------- Fiscal 1999 Q4 0.25 0.14 - ---------------- ------------- ----------- ----------- Fiscal 2000 Q1 0.17 0.052 - ---------------- ------------- ----------- ----------- Fiscal 2000 Q2 0.10 0.001 - ---------------- ------------- ----------- ----------- Fiscal 2000 Q3 0.05 0.001 - ---------------- ------------- ----------- ----------- Fiscal 2000 Q4 0.35 0.001 - ---------------- ------------- ----------- ----------- Fiscal 2001 Q1 0.25 0.001 - ------------------------------ ----------- ----------- 14 The following table sets forth comparable price information for the Company's publicly traded warrants for the periods indicated. Year Quarter High Low - ---------------- ------------- ----------- ----------- Fiscal 1996 Q4 4.50 2.625 - ---------------- ------------- ----------- ----------- Fiscal 1997 Q1 5.00 3.750 - ---------------- ------------- ----------- ----------- Fiscal 1997 Q2 5.375 3.875 - ---------------- ------------- ----------- ----------- Fiscal 1997 Q3 4.750 3.875 - ---------------- ------------- ----------- ----------- Fiscal 1997 Q4 4.500 0.094 - ---------------- ------------- ----------- ----------- Fiscal 1998 Q1 0.13 0.02 - ---------------- ------------- ----------- ----------- Fiscal 1998 Q2 0.02 0.02 - ---------------- ------------- ----------- ----------- Fiscal 1998 Q3 0.03 0.06 - ---------------- ------------- ----------- ----------- Fiscal 1998 Q4 0.19 0.02 - ---------------- ------------- ----------- ----------- Fiscal 1999 Q1 0.14 0.04 - ---------------- ------------- ----------- ----------- Fiscal 1999 Q2 0.07 0.04 - ---------------- ------------- ----------- ----------- Fiscal 1999 Q3 0.04 0.03 - ---------------- ------------- ----------- ----------- Fiscal 1999 Q4 0.05 0.03 - ---------------- ------------- ----------- ----------- Fiscal 2000 Q1 0.03 0.03 - ---------------- ------------- ----------- ----------- Fiscal 2000 Q2 0.03 0.01 - ---------------- ------------- ----------- ----------- Fiscal 2000 Q3 0.01 0.01 - ---------------- ------------- ----------- ----------- Fiscal 2000 Q4 0.01 0.01 - ---------------- ------------- ----------- ----------- Fiscal 2001 Q1 0.01 0.01 - ---------------- ------------- ----------- ----------- As of May 1, 2001, there were, approximately 241 holders of record of the Company's common stock. As of May 1, 2001, there were, approximately 140 holders of record of the Company's publicly traded warrants. Sales of Unregistered Securities The Company completed a private placement of units in March 1997; each unit consisted of one $50,000 face amount of promissory note and 25,000 Common Stock purchase warrants. Such notes bear interest at 10% per annum and were due at the 15 earlier of the completion of the proposed secondary public offering (which has not occurred) or March 1998. The warrants entitle the holders thereof to purchase one share of Common Stock for $5.00 per share during a period commencing one year from the completion of the proposed secondary public offering (or January 1, 1998 if such public offering has not occurred by that date) and expiring on May 6, 2001. In connection with such offering, $600,000 of notes previously issued was exchanged for 12 units under this offering, and $150,000 of commissions payable with respect to the private placement was exchanged for three units under this offering. The net proceeds to the Company from this offering, including the $600,000 in converted notes and after deducting costs of issuance, amounted to $1,180,326. In August 1997, the Company issued 36,476 shares of restricted Common Stock to an owner of a company in partial consideration for such company's providing renovation services at the Agoura Center. In September 1997, the Company privately sold to an investor a promissory note with a two month maturity, a total face value of $7,500 and an interest premium of 10%. On September 22, 1997, this investor exercised the option to convert the note into 62,500 shares of Common Stock at the conversion rate of $0.12 per share. In June 1998, the Company completed a $600,000 private placement, issuing 3,999,987 shares of restricted Common Stock to various investors at an offering price of $.15 per share. In connection with this placement, the Company issued 364,000 shares, 436,000 shares and 50,000 shares, respectively, of restricted Common Stock in February 1999 to three consultants in consideration for their financial and consulting services to the Company. In June 1998, the Company privately issued 20,000 shares of restricted Common Stock to a principal of a company that owned certain land as partial consideration for that company's agreement to sell such land to Aloha Pacific rather than to a competitor of the Company, so that Aloha Pacific could develop a Center on the site. The Company had entered into a management contract to manage such Center for a fee from Aloha Pacific. In October 1998, the Company privately sold to six investors, four-month promissory notes with a total face value of $151,000, accruing 13.46% interest for such four-month period. The Company also issued to these investors, for no additional consideration, a total of 75,450 restricted shares of Common Stock and warrants to purchase within two years of their issuance up to 75,450 shares of Common Stock at the exercise price of $0.25 per share. In February 1999, the Company issued 8,333 restricted shares of Common Stock to a former employee in connection with the exercise of her stock options for a total exercise price of $416.65, or $0.05 per share. In June 1998, the Company issued a total of 474,402 restricted shares of Common Stock to two of its creditors in satisfaction of the Company's debt to such creditors of $349,160 plus interest accrued thereon from March 23, 1998. In February 2000, the Company issued 600,000 shares of Series A Preferred for $300,000 to two investors, who are currently officers and directors of the Company. Each share of Series A Preferred has a stated value of $.50, and may be 16 converted at the option of the holder, into the number of shares of Common Stock equal to the number of fully diluted outstanding shares of Common Stock as of February 24, 2000 divided by.10 and then dividing the result obtained by 600,000. On matters requiring the consent of the holders of the Common Stock, each share of Series A Preferred is entitled to the number of votes equal to the number of shares of Common Stock into which it is convertible. The Series A Preferred is senior to the Common Stock and Series B Preferred as to liquidation, and if dividends are declared on Common Stock, is entitled to the same dividends as would have been paid with respect to the number of shares of Common Stock the holder would have received had it converted all of its Series A Preferred shares. In June 2000, the Company issued 386,183 shares of its Series B Preferred in full settlement of $4,564,000 of Company debt and 50,000 shares of Series B Preferred to a note holder, whose release of the debt is subject to certain conditions. The shares of Series B Preferred have been recorded at their estimated fair value of $2.48 per share and a gain has been recognized for the difference between the recorded amount of the debt and the fair value of the shares issued (See Note K to the Company's financial statements attached hereto). Each share of Series B Preferred has a stated value of $10, and automatically converts into the number of shares of Common Stock equal to $10 divided by 85% of the average of the per share closing bid and asked prices (or last sale price) of the Company's Common Stock for the last five trading days preceding the date of conversion (the "Conversion Date"). The Conversion Date is the later of January 1, 2001, or the date on which a sufficient number of shares of Common Stock is authorized under the Company's Restated Articles of Incorporation to permit the conversion into Common Stock of all of the Company's then outstanding convertible securities. The Company plans to file a proxy statement to increase the number of authorized Common Stock to cover conversions of all Series of Preferred Stock into Common Stock by June 30, 2001. On matters requiring the consent of the holders of the Company's Common Stock, each share of Series B Preferred is entitled the number of votes equal to the number of shares of Common Stock, which would be issuable upon its conversion. The Series B Preferred is junior to Series A Preferred and senior to Common Stock as to liquidation, and if dividends are declared on Common Stock, is entitled to the same dividends as would have been paid with respect to the number of shares of Common Stock the holder would have received had it converted all of its Series B Preferred shares. In connection with the Company's issuance of the Series B Preferred, each holder was issued one warrant to purchase Common Stock for each preferred share issued, exercisable for a two-year period at 120% of the average of the closing bid and asked prices for the Common Stock for the five days in which trading has occurred immediately preceding the later of (1) April 30, 2000 or (2) the 20th business day following the date on which a reverse split of the Common Stock becomes effective. The Company believes that the unregistered sales of securities described above were exempt from registration under section 4 (2) of the Securities Act. 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 its Board of 17 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 for the common stock. The Board of Directors will use its discretion to pay any dividends on existing or future classes of preferred stock. 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 public warrants. Item 6. Management's Discussion and Analysis of Financial Condition or 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. Reference in this Item 6 to any year shall mean the fiscal year ending June 30 of such year. OVERVIEW Results of Operation As of June 30, 1997, the Company owned and operated 14 child care and elder care centers. Throughout the period of fiscal years 1998, 1999 and 2000, the Company sold and closed all but 1 Center located in West Haven, CT. Since June 2000, the Company's intention has been to change its direction from strictly owning and operating Centers to providing a suite of products and services that enhance the profitability of early learning centers. The Company intends to provide quality education programs to children internationally and implement a commerce program that creates additional revenue streams for schools, youth athletic programs, and other non-profit organizations that benefit children, parents, and entire communities. RESULTS OF OPERATIONS The following table sets forth the Company's results of operations for the periods indicated: 18 Year Ended June 30 1996 1997 1998 1999 2000 ------------ ------------ ------------ ------------ ------------ Revenue (including $190,000 of $ 4,606,319 $ 5,698,000 $ 4,840,000 $ 1,236,000 $ 884,000 management fees in 1999) Grant Revenue -- -- -- -- 375,000 ------------ ------------ ------------ ------------ ------------ Total Revenue 4,606,319 5,698,000 4,840,000 1,236,000 1,259,000 ------------ ------------ ------------ ------------ ------------ Operating Expense: Payroll and Related Costs 3,030,776 5,101,000 4,437,000 812,000 923,000 Center Facilities Costs 953,831 1,125,000 1,086,000 360,000 220,000 General and Administrative 1,709,279 5,589,000 1,891,000 773,000 710,000 Development Costs 368,270 -- -- -- -- Food & Other 389,093 172,000 116,000 17,000 49,000 Depreciation and Amortization 339,888 669,000 843,000 53,000 44,000 ------------ ------------ ------------ ------------ ------------ Total 6,791,137 12,656,000 8,373,000 2,015,000 1,946,000 ------------ ------------ ------------ ------------ ------------ Operating Loss (2,184,818) (6,958,000) (3,533,000) (779,000) (687,000) ------------ ------------ ------------ ------------ ------------ Other (income) expense: Interest Expense, net 360,294 2,829,000 2,753,000 837,000 828,000 Interest/Penalties on Payroll Taxes -- -- -- 158,000 149,000 Loss on disposition of Centers -- -- 552,000 -- -- Gain on Settlement of litigation -- -- -- -- (2,075,000) Other Non-Operating Costs 212,699 219,000 58,000 19,000 22,000 ------------ ------------ ------------ ------------ ------------ 572,993 3,048,000 3,363,000 1,014,000 (1,076,000) ------------ ------------ ------------ ------------ ------------ Income(loss) before Income Taxes (benefits) & Extraordinary item (2,757,811) (10,006,000) (6,896,000) (1,793,000) 389,000 ------------ ------------ ------------ ------------ ------------ Income(loss) before Extraordinary item (2,757,811) (10,006,000) (6,896,000) (1,793,000) 389,000 Extraordinary Item: Gain on settlement of Indebtedness(net of tax Benefit of $0) 2,038,000 ------------
19 Year Ended June 30 1996 1997 1998 1999 2000 ------------ ------------ ------------ ------------ ------------ Net Income(Loss) $ (2,757,811) $(10,006,000) $ (6,896,000) $ (1,793,000) $ 2,427,000 ============ ============ ============ ============ ============ Net Income(Loss) per share - basic: Before extraordinary item $ (2.03) $ (2.53) $ (1.62) $ (0.18) $ 0.04 Extraordinary item -- -- -- -- 0.20 ------------ ------------ ------------ ------------ ------------ Net income(Loss) per share $ (2.03) $ 2.53) $ (1.62) $ (0.18) $ 0.24 ------------ ------------ ------------ ------------ ------------ Net income(Loss) per share-diluted: Before extraordinary item $ (2.03) $ (2.53) $ (1.62) $ (0.18) $ 0.00 Extraordinary item -- -- -- -- $ 0.03 ------------ ------------ ------------ ------------ ------------ Net income(Loss) per share $ (2.03) $ (2.53) $ (1.62) $ (0.18) $ 0.03 ============ ============ ============ ============ ============ Weighted average common shares Outstanding-basic 1,979,254 3,957,024 4,251,285 9,961,863 10,012,185 Weighted average common shares Outstanding-diluted 1,979,254 3,957,024 4,251,285 9,961,863 76,994,706
The following table sets forth the Company's percentage of expenses to total revenue for the periods indicated: Year Ended June 30 1996 1997 1998 1999 2000 ---------- ---------- ----------- ----------- ------------ Revenue 100 % 100 % 100 % 100 % 70.2% Grant Revenue - - - - 29.8% Total Revenue 100 % 100 % 100 % 100 % 100 % ---------- ---------- ----------- ----------- ------------ Operating Expense: Payroll and Related Costs 65.8% 89.5% 91.6% 65.6% 73.3% Center Facilities Costs 20.7% 19.7% 22.4% 29 % 17.4% General and Administrative 37.1% 98.1% 39 % 62.5% 56.3% Development Costs 8 % Food & Other 8.4% 3 % 2.4% 1.3% 3.8% Depreciation and Amortization 7.4% 11.7% 17.4% 4.2% 3.4% -------- ---------- ----------- ----------- ------------ Total Operating Expenses as a % of Revenue 147.4% 222 % 172.8% 162.6% (154.2%) -------- ---------- ----------- ----------- ------------
COMPARISON OF FISCAL YEAR 2000 TO 1999 Revenue. Revenue increased 1.8% to $1,259,000 for fiscal year 2000, from $1,236,000 in fiscal year 1999. The increase in revenue was attributable to an 20 increase in Center capacity at the West Haven, Connecticut Center, as well as a grant issued to the West Haven, CT Center in the amount of $375,000 from the State of Connecticut. The increase in revenue was offset by a $190,000 decrease in management fees. Operating Expense - Payroll and Related Costs. Payroll costs related to Center operations increased 13.6% to $923,000 for fiscal year 2000, from $812,000 in fiscal year 1999. The increase resulted from an approximate 6.8% increase in the average number of employees from 44 for fiscal year 1999 to 47 for the 2000 fiscal year. This increase was due to the increase in enrollment at the West Haven, CT Center. Operating Expense - Center Facilities Costs. Facilities costs decreased 38.8% to $220,000 for fiscal year 2000, from $360,000 for fiscal year 1999. This expense category consists primarily of facilities rent expense for the West Haven CT Center. The decrease was due to the closing of Centers, except the Company's one remaining Center in West Haven, Connecticut. Operating Expense - General & Administrative. General & administrative costs decreased 8.1% to $710,000 for fiscal year 2000, from $773,000 for fiscal year 1999; these costs decreased as a percent of revenue, from 62.5% to 56.3% of revenue for fiscal years 1999 and 2000, respectively. The decrease was due to the reduction in employees and office expense in California, as well as to a decrease in legal fees and expenses due to the Company's settlement of certain legal matters. Operating Expense - Food & Other. Food & Other operating expenses increased 188% to $49,000 for fiscal year 2000 from $17,000 for fiscal year 1999. This expense category includes the cost of Center supplies, food, special activities, and other Center related items. As such, these expenses increased as total enrollment at the West Haven Center increased. In addition, a higher proportion of enrolled students were contracted to receive food due to certain grant revenue. Operating Expense - Depreciation & Amortization. Depreciation & amortization decreased 16.9% to $44,000 for fiscal year 2000, from $53,000 for fiscal year 1999. Operating Loss. Operating loss decreased 11.8% to $687,000 for fiscal year 2000, from $779,000 for fiscal year 1999. Such decrease in operating loss was due to increased grant revenue and revenue from the West Haven Center, to a decrease in facility costs due to the closing of Centers and to a decrease in legal expenses. Interest Expense, Net. Net interest expense decreased 1% to $828,000 for fiscal year 2000, from $837,000 for fiscal year 1999. The decrease was attributable to the decrease of expenses associated with the issuance of warrants in connection with notes payable. Interest and Penalties on payroll taxes. Interest and Penalties on payroll taxes decreased 6% to $149,000 for fiscal year 2000, from $158,000 for fiscal year 1999. 21 Gain on Settlement of Litigation. In June 2000, the Company recorded a $2,075,000 gain resulting from the settlement of its lawsuit against its underwriters. Other Non-Operating Costs. Other non-operating costs increased to 15.7% to $22,000 for fiscal year 2000, from $19,000 for fiscal year 1999. Extraordinary Item. In June 2000, the Company issued 386,183 shares of its Series B Preferred in full settlement of $4,564,000 of Company debt. The shares have been recorded at their fair value of $2.48 per share and a gain of $2,038,000 has been recognized for the difference between the recorded amount of the debt and the fair value of shares issued. (See Note K to the Company's financial statements attached hereto.) LIQUIDITY AND CAPITAL RESOURCES The Company's net cash used for operations for fiscal year 2000 was $218,000 compared to $ 446,000 for fiscal year 1999. The Company's net cash used for investing for fiscal year 2000 was $16,000 compared to $8,000 used for fiscal year 1999. The Company's net cash provided by financing activities for fiscal year 2000 was $244,000 compared to $254,000 for fiscal year 1999. Cash and cash equivalents totaled $16,000 at June 30, 2000 compared to $6,000 at June 30, 1999. The Company's working capital deficit was $ 2,789,000 in 2000 versus $8,488,000 in 1999. The Company's current liabilities include past due payroll taxes, including penalties and interest, of approximately $915,000. In February of 2000, two investors, John Clarke and Robert Becker purchased 600,000 newly issued shares of the Series A Preferred for $300,000, allowing for potential conversion into a majority ownership of the outstanding capital stock of the Company. The Company used these proceeds for working capital purposes. In April of 2000, the Company received a $1,575,000.00 cash settlement of its lawsuit against its former underwriters. The Company used most of proceeds for settlements of payables, legal fees, court cost and loans. In June 2000, the Company issued 386,183 shares of its Series B Preferred in full settlement of $4,564,000 of Company debt and 50,000 shares of Series B Preferred to a note holder whose release of the Company's debt is subject to certain conditions. At various times from July 1999, the Company had experienced severe cash flow shortfalls from operations and due to its inability to secure financing on a timely basis. The Company's success will depend significantly on its ability to obtain financing on a continuing basis for its working capital needs. To complete the Company's new strategic direction, it will need to raise $2 million in the immediate future to acquire the KinderWorld operation and to develop and test its software products. At present, the Company does not have a sufficient number of authorized shares available under its Certificate of Incorporation to be able to raise capital through the sale of capital stock. However, Management controls a sufficient number of the votes of the Company's capital stock to approve an increase in the authorized number of shares of the Company. Management believes that it can take all other necessary action to effect such an increase. 22 COMPARISON OF FISCAL YEAR 1999 TO 1998 Revenue. Revenue decreased 74.4% to $1,236,000 for fiscal year 1999, from $4,840,000 in fiscal year 1998. The decrease in revenue was attributed to the decrease in the number of Centers in operation from four to one, and the related decrease in Center capacity. Operating Expense - Payroll and Related Costs. Payroll costs related to Center operations decreased 81.7% to $812,000 for fiscal year 1999, from $4,437,000 in fiscal year 1998. The decrease resulted from an approximate 75% decrease in the average number of employees from 172 for fiscal year 1998 to 44 for the 1999 fiscal year. Center payroll expenses as a percent of Center revenues decreased due to the decrease in the number of Centers and Center capacity. Operating Expense - Center Facilities Costs. Facilities costs decreased 66.8% to $360,000 for fiscal year 1999, as compared to $1,086,000 for fiscal year 1998. This expense category consists primarily of facilities rent expense. The decrease was due to the closing of Centers in fiscal year 1998. Operating Expense - General & Administrative. General & administrative costs decreased 59% to $773,000 for fiscal year 1999, from $1,891,000 for fiscal year 1998. These expenses decreased due to the decrease in personnel at the Centers and corporate office. Operating Expense - Food & Other. Food & Other operating expenses decreased 85% to $17,000 for fiscal year 1999, from $116,000 for fiscal year 1998. This expense category includes the cost of Center supplies, food, special activities, and other Center related items. As such, these expenses decreased as total enrollment as well as the number of Centers decreased. Operating Expense - Depreciation & Amortization. Depreciation & amortization decreased 93.7% to $53,000 for fiscal year 1999, from $843,000 for fiscal year 1998. The decrease is related to decreased fixed assets balances and capitalized acquisition costs. Operating Loss. Operating loss decreased 77.9% to $779,000 for fiscal year 1999, from $3,533,000 for fiscal year 1998. The decrease in the operating loss was related to decreased number of Centers and the resulting decrease in general and administrative expenses related to the smaller operation. Interest Expense, Net. Net interest expense decreased 69.6% to $837,000 for fiscal year 1999, from $2,753,000 for fiscal year 1998. Interest Expense in 1998 included $1,832,000 of amortization related to warrants issued in connection with promissory notes issued by the Company in 1997. The Company did not have comparable interest expense in 1999. Interest and Penalties on payroll taxes. Interest and Penalties on payroll taxes increased to $158,000 for fiscal year 1999 from $0 for fiscal year 1998. Such interest and penalties arose out of missed payroll tax payments from 1998 and were assessed to the Company in 1999. Other Non-Operating Costs. Other non-operating costs decreased 67.2% to $19,000 for fiscal year 1999, from $58,000 for fiscal year 1998. This expense includes costs primarily related to acquisition activities which were sharply curtailed during fiscal 1998. 23 LIQUIDITY AND CAPITAL RESOURCES The Company's net cash used for operations for fiscal year 1999 was $ 446,000 compared to $ 1,422,000 for fiscal year 1998. The Company's net cash used for investing for fiscal year 1999 was $8,000 compared to $920,000 provided in fiscal year 1998. The Company's net cash provided by financing activities for fiscal year 1999 was $254,000 compared to $ 636,000 in fiscal year 1998. Cash and cash equivalents totaled $6,000 at June 30, 1999 compared to $206,000 at June 30, 1998. The Company's working capital deficit was $8,488,000 in 1999, versus $6,846,000 in 1998. The Company had negative cash flow from operations as of June 30, 1999. As of June 30, 1999, the Company had financed its operations from the following sources of cash: The Company received net proceeds of $975,000 from the sale of Centers in 1998; borrowed $156,000 and $420,000 pursuant to short-term promissory notes in fiscal 1999 and 1998, respectively; received loans from certain officers of the Company in the amounts of $110,000 in fiscal 1999 and $389,000 in fiscal 1998; and issued 3,999,987 shares of common stock for $600,000 in 1998. COMPARISON OF FISCAL YEAR 1998 TO 1997 Revenue. Revenue decreased 15% to $4,840,000 for fiscal year 1998, from $5,698,000 in fiscal year 1997. The decrease in revenue was attributable to the decrease in number of Centers and decrease in Center capacity. Operating Expense - Payroll and Related Costs. Payroll costs related to Center operations decreased 13% to $4,437,000 for fiscal year 1998, from $5,101,000 in fiscal year 1997. The decrease resulted from an approximate 49% decrease in the number of employees from 338 for June 30, 1997 to 172 for June 30, 1998 the current fiscal year. The decrease was attributed to the decrease in the number of Centers and Center enrollment. Operating Expense - Center Facilities Costs. Facilities costs decreased 3.4% to $1,086,000 for fiscal year 1998, from $1,125,000 for fiscal year 1997, although the balance remained consistent as a percent of revenues. Operating Expense - General & Administrative. General & administrative costs decreased 66% to $1,891,000 for fiscal year 1998, from $5,589,000 for fiscal year 1997; these costs also decreased as a percent of revenue, from 98% to 40% of revenue for fiscal years 1997 and 1998, respectively. The decrease was due to a reduction in legal fees which were higher in 1997 because of the Company's commencement of a lawsuit against its underwriters. The decrease was also due to reduced payroll for administrative employees corresponding with the reduction in the number of Centers in 1998. Also, general and administrative expenses were higher in 1997 due to $2,297,000 of expenses attributable to the Company's issuance of warrants to various parties in connection with their services relating to development of corporate strategic direction for the Company and real estate development. Operating Expense - Food & Other. Food & Other operating expenses decreased 32.5% to $116,000 for fiscal year 1998, from $172,000 for fiscal year 1997. This expense category includes the cost of Center supplies, food, special activities, 24 and other Center related items. As such, these costs decreased as total enrollment decreased. Other operating expenses remained relatively consistent as a percent of revenue, decreasing from 3% to 2% percent of revenue for fiscal years 1997 and 1998, respectively. Operating Expense - Depreciation & Amortization. Depreciation & amortization increased 26% to $843,000 for fiscal year 1998, from $669,000 for fiscal year 1997. The increase was related to higher average fixed assets balances during fiscal 1998 compared with fiscal 1997. Operating Loss. Operating loss decreased 49.2% to $3,533,000 for fiscal year 1998, from $6,958,000 for fiscal year 1997. The decrease in the operating loss was related to decreased number of Centers, payroll expenses and development costs. Interest Expense, Net. Net interest expense decreased 2.6% to $2,753,000 for fiscal year 1998, from $2,829,000 for fiscal year 1997. Interest expense attributable to the issuance of warrants in connection with the private placement of notes by the Company decreased by $332,000 from fiscal 1997 to 1998 and this decrease in warrant expense was substantially offset by higher interest expense in fiscal 1998 relating to the Company's higher notes payable balances in 1998 compared with 1997. Other Non-Operating Costs. Other non-operating costs decreased 73.5% to $58,000 for fiscal year 1998, from $219,000 for fiscal year 1997. This expense includes costs primarily related to acquisition activities, which were sharply curtailed during fiscal 1998. Loss on disposition of Centers. The Company recorded a loss of $552,000 from the disposition of centers in fiscal year 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's net cash used for operations for fiscal year 1998 was $1,422,000 compared to $3,554,000 used in fiscal year 1997. The Company's net cash provided from investing activities for fiscal year 1998 was $920,000 compared to $1,964,000 used in fiscal year 1997. The Company's net cash provided by financing activities for fiscal year 1998 was $636,000 compared to $ 2,380,000 in fiscal year 1997. Cash and cash equivalents totaled $206,000 at June 30, 1998 compared to 72,000 at June 30, 1997. The Company's working capital deficit was $6,846,000 in 1998, versus $4,725,000 in 1997. The Company had negative cash flow from operations as of June 30, 1998. As of June 30, 1998 the Company was financing its operations from the following sources of cash: The Company received net proceeds of $975,000 from the sale of centers in 1998, and completed a $600,000 private placement. In connection with the $600,000 private placement, the Company issued 3,999,982 shares of restricted common stock to various investors at an offering price of $.15 per share. The Company also borrowed $420,000 by issuing short-term promissory notes to various parties and $389,000 from certain offices of the Company. During 1998, the Company used funds otherwise payable for payroll taxes to pay other of its current obligations. In or about June 1998, the Company owed 25 approximately $700,000 for back payroll taxes including interest and penalties on such taxes. COMPARISON OF FISCAL YEAR 1997 TO 1996 Revenue. Revenue increased 23.6% to $5,698,000 for fiscal year 1997, from $4,606,000 in fiscal year 1996. The increase in revenue was attributable to the Center acquisitions as well as to an increase in the number of Centers in operation and the related increase in Center capacity. Operating Expense - Payroll and Related Costs. Payroll costs related to Center operations increased 68.3% to $5,101,000 for fiscal year 1997, from $3,031,000 in fiscal year 1996. The increase resulted from an approximate 40.8% increase in the average number of employees from 240 for fiscal year 1996 to 338 for the 1997 fiscal year. Center payroll expenses as a percent of Center revenues increased from 65% in 1996 to 89.5% in 1997 due to the temporary need for proportionately higher staffing levels for the new Centers that were acquired 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. Operating Expense - Center Facilities Costs. Facilities costs increased 17.9% to $1,125,000 for fiscal year 1997, from $954,000 for fiscal year 1996, although such costs remained consistent as a percent of revenues. 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 under long term lease at various times during fiscal year 1996. Two additional Centers were added early in fiscal year 1997. Operating Expense - General & Administrative. General & administrative costs increased 227% to $5,589,000 for fiscal year 1997, from $1,709,000 for fiscal year 1996; these costs also increased as a percent of revenue, from 37% to 98% of revenue for fiscal years 1996 to 1997, respectively. The increase was due to higher legal expenses in 1997 and higher administrative costs associated with the operation of additional Centers in 1997. Also, general and administrative expenses were higher in 1997 due to $2,297,000 of expenses attributable to the Company's issuance of warrants to various parties in connection with their services relating to development of corporate strategic direction for the Company and real estate development. Operating Expense - Development Costs. Development costs decreased 100% to $0 for fiscal year 1997, from $368,000 for fiscal year 1996. In 1996, the Company incurred development costs associated with starting up new Centers which costs were not incurred in 1997 when the Company began to purchase existing Centers. Operating Expense - Food & Other. Food & Other operating expenses decreased 55.7% to $172,000 for fiscal year 1997, from $389,000 for fiscal year 1996. This expense category included the cost of Center supplies, food, special activities, and other Center related items. The decrease in this expense category was attributable to the Company's shift in 1997 from supplying food at its Centers through Company-employed cooks and staff to supplying food through third-party catering and delivery services. 26 Operating Expense - Depreciation & Amortization. Depreciation & amortization increased 96.8% to $669,000 for fiscal year 1997, from $340,000 for fiscal year 1996. The increase was related to increased fixed assets, capitalized acquisition and start up cost balances related to new Center additions during the year. Operating Loss. Operating loss increased 218% to $6,958,000 for fiscal year 1997, from $2,185,000 for fiscal year 1996. 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 newly opened Centers, increased depreciation and amortization expenses related to the increased facilities, equipment, and intangible assets related to goodwill and the start-up of Centers, and increased general and administrative expenses relating to higher legal expenses, higher warrant expense relating to warrants issued to consultants for services, and the administration of additional Centers. Interest Expense, Net. Net interest expense increased 685% to $2,829,000 for fiscal year 1997, from $360,000 for fiscal year 1996. The increase was due to the expense associated with the issuance of warrants in connection with the issuance of notes and higher levels of debt. Other Non-Operating Costs. Other non-operating costs increased 2.9% to $219,000 for fiscal year 1997, from $213,000 for fiscal year 1996. This expense includes costs related to acquisition activities and other items. LIQUIDITY AND CAPITAL RESOURCES The Company's net cash used for operations for fiscal year 1997 was $3,554,000 compared to $2,688,000 for fiscal year 1996. The Company's net cash used for investing activities for fiscal year 1997 was $1,964,000 compared to $644,000 for fiscal year 1996. The Company's net cash provided by financing activities for fiscal year 1997 was $2,380,000 compared to $6,477,000 provided in fiscal year 1996. Cash and cash equivalents totaled $72,000 at June 30, 1997 compared to $3,210,000 at June 30, 1996. The working capital deficit was $4,725,000 in 1997 versus positive working capital of $3,145,346 in 1996. During 1997, the Company financed its operations through cash flow from Center operations, private sales of its restricted securities and borrowings providing net proceeds of approximately $2,216,000, the issuance of shares of its restricted common stock for $66,000 in consideration, and $96,000 in advances from certain of its officers. The Company's investing activities were primarily related to acquiring or constructing new Centers, renovating and upgrading existing Centers. During fiscal years 1996-97, the Company anticipated opening new centers and renovating existing Centers as enrollment increased. 27 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-32. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure At a meeting of its Board of Directors dated January 3, 2000, the Company appointed Richard A. Eisner & Company, LLP ("Eisner") as its independent auditors for the years ended June 30, 1997, 1998, and 1999. Subsequently, the board approved the appointment of Eisner as its auditor for fiscal 2000. During the three most recent fiscal years and through January, 2000, the Company had not consulted Eisner regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statement, or (ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K. Deloitte & Touche LLP had been the Company's prior independent auditors for the years ended June 30, 1995 and 1996 and during that period there were no reportable disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Deloitte & Touche would have caused it to make reference thereto in its report on the financial statements for such years. As of August 1997, Deloitte & Touche LLP was no longer the independent auditor for the Company. Between the time Deloitte & Touche stopped serving as the Company's auditors and the Company's appointment of Eisner, the Company had no independent auditor. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons;Compliance with Section 16(a) of the Exchange Act The directors, executive officers and significant employees of the Company and their respective ages and positions with the Company are set forth in the following table. Name Age Position ---- --- -------- John Clarke 38 Chairman of the Board of Directors and Chief Executive Officer Robert Becker 38 Chief Financial Officer and Director John Clarke has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since June 2000. Prior to joining CWI, Mr. Clarke held the title of Managing Director of Capital Markets at J.P. Turner from June 1998 28 to June 2000. From October 1996 to June 1998, he was employed with Perpetual Growth Advisors as the Managing Director of the firm. From November 1995-October 1996, Mr. Clarke was the Senior Vice President of Sales at JW Charles Securities, Inc. He earned his Bachelor of Science degree in finance from the E. Claiborne School of Business at the University of Richmond. Robert Becker has served as Chief Financial Officer and a member of the Board of Directors of the Company since June 2000. Prior to joining CWI, Mr. Becker was the Sr. Vice President of High Yield Sales at Raymond James Financial from July 1999 to January 2000. From February 1997 to July of 1999, he was the Senior Salesman for Montgomery Securities, which later merged with Bank of America. From October 1995 to 1997, Mr. Becker held the position of Sr. Vice President of Corporate Finance and Strategic Planning for ACTV, Inc., a company specializing in interactive television. For six years prior to ACTV, he was employed as an analyst/portfolio manager at Providence Investment Management Group. Mr. Becker earned his B.S. degree in Marketing/Management at Alfred University in Northwestern New York State. As of May 1, 2001, Robert Becker resigned from the Board of Directors and as Chief Financial Officer. Former Officers and Directors of the Company from 1997 through 2000. Debby Bitticks is a former Chief Executive Officer, former President, and former Board member of the Company. From June 2000 to December 2000, Ms. Bitticks served as the CWI's President and a member of its Board of Directors. She co-founded the Company in 1993 and served as its Chief Executive Officer from the Company's inception in 1993 to June 2000. She served as Chief Executive Officer of D & D Child Development Corporation from 1972 to May 1994, when D & D sold its remaining day care Centers to the Company. Prior to this, she worked as an educational therapist at the West Valley Center for Educational Therapy in California. Ms. Bitticks attended UCLA where she majored in early childhood education and education therapy. Kenneth Bitticks is the former Chairman of the Board of Directors, and a former director of the Company. He was a director since the formation of the Company and was appointed the Chairman of the Board in September 1994 until he resigned from both positions in June 2000. Prior to joining CWI, Mr. Bitticks was the Chief Executive Officer of Interlink Electronics ("Interlink"), a public company that manufactures electronic components, from September 1987 through February 1994 and also served as Interlink's Chairman of the Board from June 1990 through September 1994. Prior to that time, he had been a Chief Executive Officer and director of Delphi Information Systems, Inc., a publicly traded computer software company. Mr. Bitticks, a Certified Public Accountant, founded and managed a computer software development and marketing group for Haskins & Sells, Certified Public Accountants, from 1968 to 1976. Mr. Bitticks holds a B.S. degree from the University of Southern California. Robert Wilson is a former President, former Chief Financial Officer, former Secretary, and a former director of the Company. Mr. Wilson held these positions from June 1995 until he resigned from the Company in June 2000. Prior to joining CWI, Mr. Wilson served in various capacities, including Vice President, Chief Financial/Operating Officer at Wismer*Martin Inc., a publicly traded provider of health care information systems, from February 1992 to May 1995. From 1989 to 1991 he was President, Chief Executive Officer and a director of Caelus, Inc., a 29 software developer. He was employed from 1987 to 1989 by Interlink as Chief Financial/Operating Officer and a director. From 1981 to 1986 he was President and Chief Executive Officer and director of Collins Systems, Inc., a provider of information systems to the oil industry. Mr. Wilson is a Certified Public Accountant and holds a B.S. degree from the University of Southern California. Elliot Wax served as a director of the Company from October 1994 to May 1997. Prior to joining CWI, Mr. Wax was the owner and Chief Executive Officer of Elliot Wax & Associates, Inc., a company formed by him, which is a boutique talent agency with a selective clientele of television producers, writers and directors. Prior to owning his own business, he was a Vice President of the William Morris Agency. Mr. Wax holds a B.A. in Industrial Psychology from the New York University (Heights). Michael Laney is a former President, former Chief Financial Officer, and former director of the Company from January 1997 to April 1997. Prior to joining CWI, Mr. Laney was the Senior Vice President of Operations of the Feature Animation Division at Warner Bros., a subsidiary of Time-Warner, Inc from 1994 to 1996. From 1992 to 1994, he served as Vice President of Operations of the Feature Animation Division at Walt Disney Pictures and Television, a subsidiary of The Walt Disney Studios, Inc. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires the Company's executive officers and directors and persons who beneficially own more than 10% of the Company's outstanding Common Stock to file initial reports of ownership and reports of changes in ownership with the SEC. Such officers, directors, and stockholders are required by the SEC regulations to furnish the Company with copies of all Section 16 (a) reports that they file. Solely based upon such reports received or not received by the Company, the Company is not aware of any failure to comply with the filing requirements of Section 16 (a). However, because the Company has not been reporting under the Exchange Act for the periods following the quarter ended March 31, 1997, it believes that none of its officers, directors, or 10% shareholders has been making filings under Section 16 (a) of the Exchange Act. Item 10. Executive Compensation The following table sets forth information for the fiscal year ended June 30, 2000, 1999,1998 and 1997 concerning the compensation paid and awarded to the Company's Chief Executive Officer and all other executive officers whose total annual salary and bonus exceeded $100,000 during those fiscal years. 30 Summary Compensation Table -------------------------- Fiscal All Other Long Term Compensation Name and Principal Position Year Salary Bonus Compensation Securities Underlying Option - --------------------------- ---- ------ ----- ------------ ---------- ----------------- Debby S. Bitticks 2000 $0 $ 0 $70,000(1) Former Chief Executive 1999 $69,813 $ 0 ------ Officer & President 1998 $172,691 $ 0 ------ 1997 $175,646 $ 0 ------ ------
- --------------------------------- (1) This figure represents the value of the Company's securities granted to Ms. Bitticks in June 2000 in lieu of accrued salary. In June 2000, the Company granted to Ms. Bitticks 155,000 Units from the Series B Preferred offering and approximately 9,904,310 shares of Common Stock (to be issued after a sufficient number of shares of Common Stock become available under the Company's charter), which securities had an estimated fair value of $586,000, in exchange for $227,000 of accrued salary and $1,675,000 of other debt owed to Ms. Bitticks and her husband. Of such $586,000, $70,000 was allocated to compensation based on the portion of the total amount of the Company debt exchanged by the Bitticks' which is represented by accrued salary. The following tables sets forth information regarding the outstanding options to purchase Common Stock granted in the fiscal years ended June 30, 2000, 1999, 1998 and 1997 to the executive officers named in the foregoing compensation table. Option Grants (1) Number of % of Securities Total Options Underlying Granted to Fiscal Options Employees in Exercise Expiration Year Granted Fiscal Year Price Date ---- ------- ----------- ----- ---- Debby S. Bitticks....... 2000 0 Debby S. Bitticks....... 1999 0 Debby S. Bitticks....... 1998 50,000 23% $.05 8/13/02 Debby S. Bitticks....... 1997 125,000 41% $.05 1/10/02 - ------------------------ (1) In January 1997, the Company granted Debby Bitticks options to purchase 125,000 shares of Common Stock, for the exercise price of $7.00 per share, vesting as to 50,000 shares on the date of grant and, as to the remainder, vesting as to 25,000 shares on each of the three anniversaries following the date of grant. In August 1997, the Company granted Ms. Bitticks options to purchase 50,000 shares of Common Stock, exercisable for $0.31 per share, vesting as to one-third on the 30th day following the date of grant, as to another one-third on the 6-month anniversary of the date of grant and as to the final 31 one-third on the 18-month anniversary of the date of grant. On December 30, 1997, the Company adjusted the exercise price for Ms. Bitticks' Company stock options, as well as for the stock options held by other officers, directors and key employees of the Company, to $0.05 per share, the market price of the Common Stock as of such date. In May 2000, the Company extended the terms of Ms. Bitticks' options so that they expire on January 2004 as to the 125,000 share options and August 2004 as to the 50,000 share options. As of May 30, 2000, the date of such extension, the Common Stock was trading at $0.20 per share. No options were exercised in fiscal years 1997, 1998, 1999, or 2000 by any of the Company's officers named above. The following table sets forth, for each such officer, the number and value of vested and unvested options held as of June 30, 2000,1999, 1998, and 1997. Number of Securities Value of Unexercised Underlying Unexercised In-The-Money Options at June 30 Options at June 30 ------------------------ ----------------------- Exercisable Un-exercisable Exercisable Un-exercisable ----------- -------------- ----------- -------------- Option Value at June 30, 2000 Debby S. Bitticks......... 175,000 -- -0- -0- Option Value at June 30, 1999 Debby S. Bitticks......... 150,000 25,000 -0- -0- Option Value at June 30, 1998 Debby S. Bitticks......... 108,333 66,667 -0- -0- Option Value at June 30, 1997 Debby S. Bitticks......... 50,000 75,000 -0- -0- Stock Option Plan In December 1993, the Board of Directors adopted the 1993 Incentive Stock Option Plan and amended such plan in December 1995 (the "1993 Option Plan"). The 1993 Option Plan provides for grants to key employees, directors, and consultants of the Company. There is no maximum or minimum number of shares, which may be subject to options granted to any one individual under the 1993 Option Plan. Pursuant to the 1993 Option Plan, options to acquire or awards of restricted stock were granted to key employees, directors and consultants. Subject to the provisions of the 1993 Option Plan, the Board or a committee of the Board has the authority to determine the individuals to whom the stock awards are to be granted, the number of shares to be covered by each award, the restrictions, if any, on the award, and other terms and conditions. In 1996, the Board of Directors adopted the 1996 Stock Option Plan under which plan the Company has issued stock options to its employees, directors and consultants. 32 Compensation of Directors Directors of the Company did not receive fees for attending meetings of the Board of Directors for fiscal years 2000, 1999, 1998 and 1997. Employment Agreements: Mark Rosenberg became VP of Corporate Development effective November 15, 2000. The terms of his employment contract allow Mr. Rosenberg an accrued salary of $6,000 per month to be paid upon the Company's closing of a minimum of $2 million in an equity financing. Additionally, Mr. Rosenberg will be issued an option to purchase shares of Common Stock equal to .125% of the shares of Common Stock outstanding on a fully-diluted basis and options to purchase shares of Common Stock equal to up to 5% of the outstanding shares on a fully-diluted basis based on certain criteria if he becomes a full time employee. Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth the number of shares of the Company's Common Stock (as of May 1, 2000 unless otherwise indicated) beneficially owned by the Company's directors, Chief Executive Officer and its other executive officer(s), each person known by the Company to own beneficially more than 5% of the outstanding shares of the Company's outstanding Common Stock, and all directors and executive officers as a group. Unless otherwise indicated below, the business address of each individual is the same as the address of the Company's principal executive offices. As of December 30, 2000, Debby Bitticks, Ken Bitticks and Robert Wilson are no longer directors, or officers of the company, but are considered as such for the purpose of the following table. Name of Beneficial Owner Number of Share Percentage of Class of Beneficially Owned Common Stock - -------------------------------------------------------------------------------- John Clarke 99,046,150 (2) 49.4 Robert Becker 81,037,755 (2) 40.4 Debby Bitticks 10,889,841 (1)(3) 5.4 Kenneth W. Bitticks 975,483 (4) * Robert Wilson 120,818 (5) * All Executive Officers and Directors as a Group: 192,070,030 (2)(3)(5) 69.3% - --------------------------- Less than 1%. 1. All calculations in this table assume that all outstanding shares of the Company's Series A Preferred (but not Series B Preferred) have been converted into a total of 180,083,910 shares of Common Stock and assume 33 the issuance of 9,904,310 shares to Debby Bitticks pursuant to a letter agreement, dated June 9, 2000. Such letter agreement provides for the issuance to Ms. Bitticks of a number of shares of Common Stock equal to 5.0% of the Common Stock outstanding as of June 9, 2000 on a fully diluted basis after taking into account the conversion of all outstanding shares of the Series A Preferred. The Company is not obligated to issue such shares to Ms. Bitticks until it has amended its certificate of incorporation to sufficiently increase its authorized Common Stock from the current 20,000,000 shares. The Series A Preferred has the power to vote with the Common Stock on as as-converted basis. This table includes shares issuable upon the exercise of options or warrants that are exercisable within 60 days of the date of the beneficial ownership information set forth above. The shares underlying such options or warrants are deemed to be outstanding for the purpose of computing the percentage of outstanding stock owned by such persons individually and by each group of which they are a member, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. 2. Includes shares of Common Stock issuable upon conversion of the Series A Preferred held by such person. 3. Includes 175,000 shares issuable upon exercise of options and 625,466 shares issuable upon exercise of warrants jointly held with her husband, Kenneth Bitticks. Excludes shares issuable upon exercise of options solely held by Mr. Bitticks and shares owned by Mr. Bitticks, to which Debby Bitticks disclaims beneficial ownership. 4. Includes 115,000 shares issuable upon exercise of options and 625,466 shares issuable upon exercise of warrants jointly held with his wife, Debby Bitticks. Excludes shares issuable upon exercise of options and warrants solely held by Ms. Bitticks and shares owned by Ms. Bitticks, to which Kenneth Bitticks disclaims beneficial ownership. Mr. Bitticks was the Company's Chairman prior to June 9, 2000. 5. Includes 90,000 shares issuable upon exercise of options and warrants. Item 12. Certain Relationships and Related Transactions On February 24, 2000, the Company sold 600,000 total shares of its Series A Preferred to John Clarke and Robert Becker for the aggregate purchase price of $300,000. Mr. Clarke and Mr. Becker were not affiliates of the Company at such date, but both have since become an officer and director of the Company. The holders may convert the 600,000 outstanding shares of Series A Preferred at any time into approximately 180,083,910 shares of Common Stock (equal to the number of shares of Common Stock that would result in the holders together owning approximately 90.09% of the fully-diluted shares of Common Stock outstanding as of February 24, 2000). The Company entered into an agreement as of June 9, 2000 (the "Bitticks Agreement") with Debby Bitticks (at that time the President of the Company and a member of its Board of Directors) and Kenneth Bitticks (the former Chairman of the Company). The Company agreed (1) to indemnify Ken and Debby Bitticks from 34 any lawsuits initiated against them by the Company's former underwriter (or its affiliates) whom the Company had sued; (2) to use certain proceeds to repay Ken and Debby Bitticks for $350,000 of credit card debt which they incurred for Company expenses; (3) to issue to Debby Bitticks the number of shares of Common Stock (approximately 9,904,310) that would be equal to 5% of the fully diluted Common Stock outstanding as of June 9, 2000, assuming for this purpose the conversion of all shares of Series A Preferred into Common Stock; and (4) to negotiate a two-year employment with Debby Bitticks with a minimum salary of $100,000 per year. However, Ms. Bitticks resigned from the Board of Directors and as President of the Company in December 2000. Ken and Debby Bitticks, as part of the Bitticks Agreement, agreed to exchange all of their debt against the Company (except the $350,000 in credit card debt described above) into units consisting of 155,000 shares of Series B Preferred and Series B Warrants to purchase 155,000 shares of Common Stock pursuant to the Series B Preferred Offering. The amount owed by the Company to Ken and Debby Bitticks totaled approximately $1,902,000 at the time of the Bitticks' exchange of such obligations into the Company's units, consisting of (i) $110,000 of notes payable by the Company to the Bitticks', comprised of two $50,000 notes dated October 7, 1994 and one $10,000 note dated August 11, 1994, (ii) $652,000 of loans payable by the Company (which does not includes the $350,000 of credit card debt described above), of which $57,000 was loaned by the Bitticks' prior to 1997, $96,000 was loaned by them in 1997, $389,000 was loaned by them in 1998 and $110,000 was loaned by them in 1999, (iii) $403,000 of interest accruing to June 30, 2000 on such notes and loans, (iv) $227,000 of unpaid salary accrued from fiscal 1997 through fiscal 2000, , and (v) $510,000 of accrued fees incurred by the Company for the Bitticks' consulting services from January 1, 1997 to January 1, 2000. The Company entered into an agreement as of April 20, 2000 with Mr. Justin Gasarch, a major note holder of the Company and the holder of 200,000 shares of Common Stock. In return for advisory services from Mr. Gasarch and his agreement to exchange $500,000 of the Company's debt to him for units pursuant to the Series B Preferred Offering, the Company agreed to issue to him the number of shares of Common Stock (after giving effect to a contemplated reverse split by the Company) which is higher of (i) 250,000 or (ii) 3.8% of the total outstanding Common Stock as of April 20, 2000, assuming for this purpose the conversion of all shares of Series A Preferred into Common Stock. Because the Company does not have a sufficient number of authorized shares, it would have to amend its Articles of Incorporation to increase its authorized Common Stock before it can issue shares of Common Stock due to Debby Bitticks and Justin Gasarch upon conversion of the Series A Preferred, the Series B Preferred and the Series B Warrants. 35 Item 13. Exhibits and Reports on Form 8-K Exhibits (a) Item Number Description 2.1 Asset Purchase Agreement, dated as of August 1, 1997, between the Registrant and Imagination Plus Child Development Center, Inc. relating to the sale of two centers in California and six centers in Colorado. (*) 2.2 Asset Purchase Agreement dated as of April 24, 1998, by and among the Registrant, Aloha Pacific, Inc., Kenneth Bitticks and Debby Bitticks relating to three centers in California. (*) 3.1 Restated Articles of Incorporation and Amendments thereto, including Certificates of Determination, of the Registrant. (*) 3.2 By laws of the Registrant (1) 3.3 Form of Warrant Agreement and Warrant Certificate relating to Registrant's Initial Public Offering (1) 4.1 Form of Underwriters Unit Purchase Option (1) 4.2 Form of Common Stock Certificate (1) 4.4 Certificates of Determination for the Registrant's Series A Preferred Stock and Series B Preferred Stock (filed herewith as part of Exhibit 3.1). 4.5 Form of Warrant issued with Series B Preferred Stock of Registrant. (*) 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 [Intentionally Left Blank] 10.4 Amended 1993 Incentive Stock Option Plan (1) 10.5 Incentive Stock Option Agreement dated June 1, 1995 between the Registrant and Kenneth W. Bitticks (1) 10.6 Incentive Stock Option Agreement dated June 1, 1995 between the Registrant and Robert M. Wilson (1) 10.7 Agreement dated June 24, 1994 between the Registrant and Scott L. Shafer and Bernard L. Ginsberg (1) 10.8 Agreement dated June 15, 1995 between Registrant and Brian T. Fitzpatrick (1) 36 10.9 Asset Purchase Agreement dated December 27, 1993 between Registrant and D&D Child Development Corporation (1) 10.10 Asset Purchase Agreement dated December 27, 1993 between Registrant and Growth and Learning Center (1) 10.11 Asset Purchase Agreement dated December 27, 1993 between Registrant and Children's Village of Oxnard, Inc. (1) 10.12 Credit Agreement dated November 30, 1993 between Registrant and Kenneth W. Bitticks (1) 10.13 Amendment to Credit Agreement dated April 25, 1994 between Registrant and Kenneth W. Bitticks (1) 10.14 Subscription Agreement dated November 30, 1993 between Registrant and Debby S. Bitticks (1) 10.15 Subscription Agreement dated November 30, 1993 between Registrant and Kenneth W. Bitticks (1) 10.16 Subscription Agreement dated November 30, 1993 between Registrant and Brian T. Fitzpatrick (1) 10.17 Subscription Agreement dated November 30, 1993 between Registrant and Stefan Harlan (1) 10.18 Subscription Agreement and Letter of Investment Intent dated April 29, 1994 between Registrant and Kenneth W. Bitticks and Debby S. Bitticks (1) 10.19 Indemnity Agreement dated June 15, 1995 between Registrant and Kenneth W. Bitticks and Debby S. Bitticks (1) 10.20 Security Agreement dated November 30, 1993 between Registrant and Kenneth W. Bitticks (1) 10.21 Commercial Lease dated November 13, 1993 between Registrant and KASCO for 27400 West Canwood Street, Agoura, California (1) 10.22 Lease Agreement dated December 17, 1993 between Registrant and Teardrop Partners for 107 Teardrop Court, Thousand Oaks, California (Newbury Park) (1) 10.23 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 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) 10.24 Build-to-Suit Lease for a Child Care Center, Gold River, California dated April 1995 between Registrant and Panattoni-Catlin Venture (Sacramento) (1) 37 10.25 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) 10.26 Build-to-Suit Sublease for a Child Care Center, West Haven, Connecticut dated June 16, 1995 between Registrant and Medical Marketing & Management (1) 10.27 Form of Director and Officer Indemnification (1) 10.28 Commercial Lease dated May 31, 1996 between Registrant and KASCO for 27400 West Canwood Street, Agoura, California (2) 10.29 Letter Agreement, dated June 9, 2000, among Debby Bitticks, Kenneth Bitticks and Registrant (*) 10.30 Lease Agreement, dated as of March 24,2000, between Resun Leasing, Incorporated and Registrant relating to property in West Haven, Connecticut. (*) 10.31 Letter Agreement, dated April 20, 2000, among Justin Gasarch, Registrant, Robert Becker and John Clarke. (*) 16 Letter of Deloitte & Touche LLP concerning its ceasing to serve as the Registrant's independent auditor. (3) 27 Financial Data Schedules (*) - ------------------------------------------------------------ (*) Filed herewith. 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 as an exhibit of the same number to Registrants' Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996. 3. Filed as an exhibit of the same number to Registrant's Current Report on Form 8-K, dated January 3, 2000, and filed with the Commission on October 13, 2000. (b) Reports on Form 8-K ------------------- The Company did not file any reports on Form 8-K during the periods covered by this Form 10-KSB report. However, on October 13, 2000, the Company filed a Current Report on Form 8-K, dated January 3, 2000, reporting under Item 4 (Changes in Registrant's Certifying Accountant) and Item 7 (Exhibits). 38 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: August 13, 2001 By: /s/ John Clarke ----------------------- John Clarke, Chief Executive Officer and Sole Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person(s) on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ John Clarke Chief Executive Officer, August 13, 2001 - ------------------ Chief Financial Officer and John Clarke Sole Director 39 CHILDREN'S WONDERLAND, INC. Contents Page Financial Statements Independent auditors' report F-1 Balance sheets as of June 30, 2000, 1999, 1998 and 1997 F-2 Statements of operations for the years ended June 30, 2000, 1999, 1998, and 1997 F-4 Statements of changes in capital deficit for the years ended June 30, 2000, 1999, 1998, and 1997 F-6 Statements of cash flows for the years ended June 30, 2000, 1999, 1998, and 1997 F-9 Notes to financial statements F-12 F-i INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Children's Wonderland, Inc. We have audited the accompanying balance sheets of Children's Wonderland, Inc. (the "Company") as of June 30, 2000, 1999, 1998 and 1997, and the related statements of operations, changes in capital deficit and cash flows for each of the years in the four-year period ended June 30, 2000. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements enumerated above present fairly, in all material respects, the financial position of Children's Wonderland, Inc. as of June 30, 2000, 1999, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the four-year period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A[2] to the financial statements, the Company has experienced net losses, has a negative working capital position, has a capital deficiency, has failed to remit payroll taxes withheld to the authorities, has failed to file corporate income tax(es) returns, has sold its sole remaining childcare center and is not in compliance with terms of its debt that raises substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are also described in Note A[2]. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Richard A. Eisner & Co., LLP - -------------------------------- New York, New York December 29, 2000 With respect to Notes P[3] and P[4] March 12, 2001 F-1 CHILDREN'S WONDERLAND, INC. Balance Sheets June 30, ------------------------------------------------------------- 2000 1999 1998 1997 --------------- -------------- ------------- ------------- ASSETS (Notes A[2], F and P) Current assets: Cash and cash equivalents $ 16,000 $ 6,000 $ 206,000 $ 72,000 Cash held in escrow 423,000 Accounts receivable, net of allowance for doubtful accounts of $5,000, $13,000 $15,000 and $55,000 as of June 30, 2000, 1999, 1998 and 1997, respectively 77,000 36,000 64,000 191,000 Prepaid expenses 12,000 9,000 49,000 158,000 ------------ ------------ ------------ ------------ Total current assets 528,000 51,000 319,000 421,000 Equipment and improvements, net 90,000 128,000 169,000 3,446,000 Intangible assets, net 4,000 643,000 Assets held for sale 129,000 609,000 Deposits and other 4,000 107,000 50,000 704,000 ------------ ------------ ------------ ------------ $ 622,000 $ 286,000 $ 671,000 $ 5,823,000 ============ ============ ============ ============ LIABILITIES AND CAPITAL DEFICIT Current liabilities: Checks issued in excess of bank balances $ 335,000 Accounts payable $ 453,000 $ 1,257,000 $ 1,242,000 1,488,000 Accrued expenses and other liabilities 1,554,000 2,978,000 1,790,000 812,000 Due to stockholders and directors 350,000 978,000 868,000 479,000 Notes payable (in default) (net of debt discount of $1,375,000 in 1997) 949,000 3,312,000 3,252,000 1,711,000 Current portion of capitalized lease 11,000 14,000 13,000 321,000 obligation ------------ ------------ ------------ ------------ Total current liabilities 3,317,000 8,539,000 7,165,000 5,146,000 Capitalized lease obligations, less 2,000 23,000 36,000 2,034,000 current portion Liabilities to be paid with common stock 439,000 ------------ ------------ ------------ ------------ Total liabilities 3,758,000 8,562,000 7,201,000 7,180,000 ------------ ------------ ------------ ------------
F-2 CHILDREN'S WONDERLAND, INC. Balance Sheets (continued) June 30, ------------------------------------------------------------- 2000 1999 1998 1997 --------------- -------------- ------------- ------------- Commitments and contingencies Capital deficit: Preferred stock, no par value; 5,000,000 shares authorized: Series A, convertible 600,000 issued and outstanding, $300,000 liquidation value 300,000 Series B, convertible 900,000 shares authorized; 436,183 issued and outstanding; $4,361,830 liquidation value 314,000 Common stock, no par value, 20,000,000 shares authorized; shares issued and outstanding:10,012,185 as of June 30, 2000 and 1999, 9,428,402 and 3,985,037 as of June 30, 1998 and 1997, respectively 10,761,000 10,761,000 10,729,000 9,749,000 Paid in capital 8,858,000 6,759,000 6,744,000 6,458,000 Debt discount in excess of notes payable (457,000) Accumulated deficit (23,369,000) (25,796,000) (24,003,000) (17,107,000) ------------ ------------ ------------ ------------ Total capital deficit (3,136,000) (8,276,000) (6,530,000) (1,357,000) ------------ ------------ ------------ ------------ $ 622,000 $ 286,000 $ 671,000 $ 5,823,000 ============ ============ ============ ============
See notes to financial statements F-3 CHILDREN'S WONDERLAND, INC. Statements of Operations Year Ended June 30, ------------------------------------------------------------ 2000 1999 1998 1997 ------------ ------------ ------------ ------------ Revenue (including $190,000 of managementfees in 1999) $ 884,000 $ 1,236,000 $ 4,840,000 $ 5,698,000 Grant revenue 375,000 ------------ ------------ ------------ ------------ 1,259,000 1,236,000 4,840,000 5,698,000 ------------ ------------ ------------ ------------ Costs and operating expenses: Payroll and related 923,000 812,000 4,437,000 5,101,000 Facilities 220,000 360,000 1,086,000 1,125,000 General and administrative 710,000 773,000 1,891,000 5,589,000 Food and other 49,000 17,000 116,000 172,000 Depreciation and amortization 44,000 53,000 843,000 669,000 ------------ ------------ ------------ ------------ 1,946,000 2,015,000 8,373,000 12,656,000 ------------ ------------ ------------ ------------ Loss from operations before other (687,000) (779,000) (3,533,000) (6,958,000) (income) expense ------------ ------------ ------------ ------------ Other (income) expense: Interest expense 828,000 837,000 2,753,000 2,829,000 Interest and penalties on payroll taxes 149,000 158,000 Loss on disposition of centers 552,000 Gain on settlement of litigation (2,075,000) Other 22,000 19,000 58,000 219,000 ------------ ------------ ------------ ------------ (1,076,000) 1,014,000 3,363,000 3,048,000 ------------ ------------ ------------ ------------ Income (loss) before income taxes (benefits) and extraordinary item 389,000 (1,793,000) (6,896,000) (10,006,000) Income tax expense (benefit) ------------ ------------ ------------ ------------ Income (loss) before extraordinary item 389,000 (1,793,000) (6,896,000) (10,006,000)
F-4 CHILDREN'S WONDERLAND, INC. Statements of Operations (continued) Year Ended June 30, ------------------------------------------------------------ 2000 1999 1998 1997 ------------ ------------ ------------ ------------ Extraordinary item: Gain on settlement of indebtedness (net of tax benefit of $-0-) 2,038,000 ------------ ------------ ------------ ------------ Net income (loss) $ 2,427,000 $ (1,793,000) $ (6,896,000) $(10,006,000) ============ ============ ============ ============ Net income (loss) per share - basic: Before extraordinary item $ 0.04 $ (0.18) $ (1.62) $ (2.53) Extraordinary item 0.20 ------------ ------------ ------------ ------------ Net income (loss) per share $ 0.24 $ (0.18) $ (1.62) $ (2.53) ============ ============ ============ ============ Net income (loss) per share - diluted: Before extraordinary item $ 0.00 $ (0.18) $ (1.62) $ (2.53) Extraordinary item 0.03 ------------ ------------ ------------ ------------ Net income (loss) per share $ 0.03 $ (0.18) $ (1.62) $ (2.53) ============ ============ ============ ============ Weighted average common shares outstanding - basic 10,012,185 9,961,863 4,251,285 3,957,024 ============ ============ ============ ============ Weighted average common shares outstanding - diluted 76,994,706 9,961,863 4,251,285 3,957,024 ============ ============ ============ ============
See notes to financial statements F-5 Statements of Changes in Capital Deficit Years Ended June 30, 2000, 1999, 1998 and 1997 Convertible Preferred Stock ------------------------------------ Common Stock Series A Series B -------------------------------- Number of Paid-In Number of Number of Shares Amount Capital Shares Amount Shares Amount --------- ----------- ----------- --------- ------ --------- -------- Balance - June 30, 1996 3,925,689 $ 9,638,000 Issuance of common stock for services 6,000 45,000 Exercise of warrants for cash 53,348 66,000 Issuance of 687,500 warrants with debt offering $ 2,442,000 Discount in excess of face value of debt Issuance of 365,000 warrants for services 2,297,000 Issuance of 837,650 warrants with demand and short-term notes 1,649,000 Issuance of 98,000 warrants with borrowing from officers/stockholders 70,000 Net loss --------- ----------- ------------ Balance - June 30, 1997 3,985,037 9,749,000 6,458,000 Sale of common stock 4,849,987 600,000 Shares issued to settle obligations to trade creditors 536,902 357,000 Shares issued for services 56,476 23,000 Issuance of 308,200 warrants for services 121,000 Issuance of 186,000 warrants with demand notes 67,000 Issuance of 459,666 warrants with borrowings from officers/stockholders 98,000 Amortization of discount in excess of face amount of indebtedness Net loss --------- ----------- ------------ Balance - June 30, 1998 9,428,402 10,729,000 6,744,000 Shares issued to creditor upon exercise of warrants in settlement of interest payable 500,000 25,000 Shares issued in financing 75,450 7,000 Issuance of shares upon exercise of options 8,333 Issuance of 75,450 warrants with financing 15,000 Net loss ---------- ----------- ------------ Balance - June 30, 1999 10,012,185 10,761,000 6,759,000
See notes to financial statements F-6 Statements of Changes in Capital Deficit Years Ended June 30, 2000, 1999, 1998 and 1997 (continued) Convertible Preferred Stock ------------------------------------ Common Stock Series A Series B -------------------------------- Number of Paid-In Number of Number of Shares Amount Capital Shares Amount Shares Amount --------- ----------- ----------- --------- ------ --------- -------- Class A convertible preferred shares issued in private placement 600,000 $300,000 Class B convertible preferred shares issued in settlement of indebtedness 281,183 $699,000 Value of beneficial conversion feature in Class B convertible preferred stock 770,000 (770,000) Issuance of 155,000 Class B convertible preferred shares in settlement of indebtedness owed to officers/stockholders 1,316,000 155,000 385,000 Issuance of 436,183 warrants in settlement of indebtedness (Re: Series B) 13,000 Net income ---------- ----------- ------------ ------- -------- ------- -------- Balance - June 30, 2000 10,012,185 $10,761,000 $ 8,858,000 600,000 $300,000 436,183 $314,000 ========== =========== ============ ======= ======== ======= ========
F-7 Statements of Changes in Capital Deficit Years Ended June 30, 2000, 1999, 1998 and 1997 (continued) Discount in Excess of (Accumulated Face Value Deficit) of Debt Total ------------- ------------- -------------- Balance - June 30, 1996 $ (7,101,000) $ 2,537,000 Issuance of common stock for services 45,000 Exercise of warrants for cash 66,000 Issuance of 687,500 warrants with debt offering 2,442,000 Discount in excess of face value of debt $ (457,000) (457,000) Issuance of 365,000 warrants for services 2,297,000 Issuance of 837,650 warrants with demand and short-term notes 1,649,000 Issuance of 98,000 warrants with borrowing from officers/ stockholders 70,000 Net loss (10,006,000) (10,006,000) ------------ ------------ ------------ Balance - June 30, 1997 (17,107,000) (457,000) (1,357,000) Sale of common stock 600,000 Shares issued to settle obligations to trade creditors 357,000 Shares issued for services 23,000 Issuance of 308,200 warrants for services 121,000 Issuance of 186,000 warrants with demand notes 67,000 Issuance of 459,666 warrants with borrowings from officers/stockholders 98,000 Amortization of discount in excess of face amount of indebtedness 457,000 457,000 Net loss (6,896,000) (6,896,000) ------------ ------------ ------------ Balance - June 30, 1998 (24,003,000) 0 (6,530,000) Shares issued to creditor upon exercise of warrants in settlement of interest payable 25,000 Shares issued in financing 7,000 Issuance of shares upon exercise of options Issuance of 75,450 warrants with financing 15,000 Net loss (1,793,000) (1,793,000) ------------ ------------ ------------ Balance - June 30, 1999 (25,796,000) 0 (8,276,000) Class A convertible preferred shares issued in private placement 300,000 Class B convertible preferred shares issued in settlement of indebtedness 699,000 Value of beneficial conversion feature in Class B convertible preferred stock 0 Issuance of 155,000 Class B convertible preferred shares in settlement of indebtedness owed to officers/stockholders 1,701,000 Issuance of 436,183 warrants in settlement of indebtedness (Re: Series B) 13,000 Net income 2,427,000 2,427,000 ------------ ------------ ------------ Balance - June 30, 2000 $(23,369,000) $ 0 $ (3,136,000) ============ ============ ============
See notes to financial statements F-8 Statements of Cash Flows Year Ended June 30, ------------------------------------------------------------ 2000 1999 1998 1997 ------------ ------------- ------------ ------------ Cash flows from operating activities: Net income (loss) $ 2,427,000 $ (1,793,000) $ (6,896,000) $(10,006,000) Adjustments to reconcile net income (loss) to net cash used in operating activities: Extraordinary gain on settlement of indebtedness (2,038,000) Cancellation of notes payable and accrued interest in litigation settlement (1,266,000) Depreciation and amortization 44,000 53,000 843,000 669,000 Issuance of warrants for services and in connection with indebtedness 13,000 15,000 309,000 4,626,000 Issuance of Series B convertible preferred stock for finance fees 124,000 Interest and finance fees to be paid in common stock 147,000 Issuance of common stock for services 45,000 Rent financed with notes payable 18,000 14,000 Issuance of common stock in connection with bridge loans 7,000 Amortization of debt discount in connection with bridge loans 15,000 Amortization of warrants issued as debt discount 1,832,000 Loss on asset dispositions and capital lease termination 1,000 552,000 Changes in: Cash held in escrow (423,000) Accounts receivable, net (41,000) 28,000 127,000 (126,000) Prepaid expenses and other current assets (3,000) 40,000 109,000 (53,000) Accounts payable and accrued expenses 772,000 1,228,000 1,188,000 1,291,000 Other 25,000 (57,000) 500,000 ------------ ------------ ------------ ------------ Net cash used in operating activities (218,000) (446,000) (1,422,000) (3,554,000) ------------ ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets 1,250,000 Fee for capital lease termination (275,000) Purchases of intangible assets (19,000) (111,000) Purchases of equipment and improvements (16,000) (8,000) (36,000) (1,543,000) Increase in deposits and other assets (310,000) ------------ ------------ ------------ ------------ Net cash (used in) provided by investing activities (16,000) (8,000) 920,000 (1,964,000) ------------ ------------ ------------ ------------
F-9 Statements of Cash Flows (continued) Year Ended June 30, ------------------------------------------------------------ 2000 1999 1998 1997 ------------ ------------- ------------ ------------ Cash from financing activities: Checks issued in excess of bank balances (335,000) 335,000 Borrowings from stockholders 110,000 389,000 96,000 Proceeds from notes payable 156,000 420,000 2,546,000 Financing expense (330,000) Payments of notes payable (41,000) (268,000) (161,000) Principal payments on capital leases (15,000) (12,000) (170,000) (172,000) Issuance of Series A convertible preferred stock 300,000 Issuance of common stock 600,000 66,000 ------------ ------------ ------------ ------------ Net cash provided by financing activities 244,000 254,000 636,000 2,380,000 ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 10,000 (200,000) 134,000 (3,138,000) Cash and cash equivalents - beginning of year 6,000 206,000 72,000 3,210,000 ------------ ------------ ------------ ------------ Cash and cash equivalents - end of year $ 16,000 $ 6,000 $ 206,000 $ 72,000 ============ ============ ============ ============
F-10 Statements of Cash Flows (continued) Year Ended June 30, -------------------------------------------- 2000 1999 1998 1997 --------- --------- --------- --------- Supplemental disclosures: Cash paid for interest $ 62,000 $ 117,000 $ 416,000 $ 482,000 Non-cash financing activities: In March 1997, the Company issued 536,902 shares of common stock at fair market value of $357,000 in exchange for accounts payable. In July 1998, the Company issued 500,000 shares of common stock pursuant to exercise of warrants at $.05 per share in settlement of $25,000 of accrued interest. Capitalized leases $ 23,000 $ 161,000 In June 2000, the Company exchanged accounts payable and accrued expenses (including interest of $696,000) aggregating $1,582,000, notes and loans payable (including bank loan of $103,000) aggregating $1,171,000 for 231,183 shares of Series B convertible preferred stock and warrants valued at $583,000. In June 2000, the Company exchanged liabilities owed to an officer stockholder and her spouse/ stockholder/ex-director in the total amount of $1,902,000 for 155,000 shares of Series B convertible preferred stock and warrants valued at $385,000. In June 2000, the Company also agreed with these stockholders to issue common stock concurrent with exchange of debt as an additional consideration valued at $201,000 which is shown as reduction of additional paid-in capital. In June 2000, the Company agreed to issue common stock for certain of its loan balance and interest payable aggregating $91,000. In September 1999, assets held for sale was exchanged for notes payable in the amount of $129,000. During the year ended June 30, 1998, capitalized lease obligations, and notes payable in the aggregate amount of $2,333,000 and related assets were exchanged in connection with sale/termination of such transactions. During the year ended June 30, 1997, the Company issued 687,500 warrants in connection with the debt valued at $2,442,000 and amortized $610,000 leaving an unamortized balance of $1,832,000 which is shown as reduction of face amount of notes payable of $1,375,000 and $457,000 as discount in excess of face value of debt in Capital Deficit.
See notes to financial statements F-11 CHILDREN'S WONDERLAND, INC. Notes to Financial Statements June 30, 2000, 1999, 1998 and 1997 Note A - Business Description and Summary of Significant Accounting Policies [1] Description of business: Children's Wonderland, Inc. (the "Company" or "CWI") was incorporated in September 1993 to own and operate full service family care centers (the "Centers") which provide developmentally appropriate educational programs and activities for infants and toddlers (ages 6 weeks to 2 years), preschoolers (ages 3 to 4), and kindergartners (ages 4 to 5). The Company has also provided before and/or after school care for elementary school aged children, flex-care, and care for the mildly-ill and provided activities for the elderly (ages 60+). In the past the Company has owned and operated full service intergenerational family care centers. During fiscal 1998, eleven centers operating in California and Colorado were sold and in fiscal 1999 the remaining two centers in California were closed. As of June 30, 2000 there was one operating center located in West Haven, Connecticut. In August 1999, the Company applied for and received a grant from the State of Connecticut for its School Readiness and Child Day Care Grant Program. The Company operated the program in its West Haven Center, serving 77 children. In May 2001, the Company sold its sole center (Note Q). [2] Basis of presentation: The accompanying financial statements have been prepared assuming the Company will continue as a going concern which assumes the realization of assets and the satisfaction of liabilities in the normal course of business. The Company had experienced substantial negative operating trends during the four years ended June 30, 2000. As at June 30, 2000 the Company had a working capital deficit of $2,789,000 and a capital deficiency of $3,136,000. The Company's financial difficulties are occasioned by not being in compliance with terms of various notes payable and other obligations. The Company sold its sole operating center (Note Q). The Company's chief executive officer resigned as of December 31, 2000. The Company has failed to file and meet various regulatory requirements of the Security Exchange Commission. The Company has failed to file its corporate income tax returns since the fiscal year ended June 30, 1996 and has failed to pay income taxes or minimum taxes due for such periods. Such failure to file corporate tax returns at the state level may result in withdrawals of the charter issued by states. The Company has failed to comply with reporting requirements under Internal Revenue Code such as issuance of Form 1099s, for which the Company may be liable for penalties as well as income taxes payable by the reportable entities. Although some trade and notes payable amounts have been settled, other creditors have not agreed to such settlements, restructurings or forbearance. Further, there are liens on the Company's assets in connection with significant delinquent payroll tax obligations for which the Company has not been able to enter into arrangements with the applicable taxing authorities and these assets have been sold since then. F-12 NOTE A - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) [2] Basis of presentation: (continued) The Company will not generate sufficient cash flows from its remaining operating center to service its debt and there can be no assurance that it will meet its obligations or reach settlement with its creditors, obtain additional financing for future operations, on favorable terms or at all. In the event of a failure to do so, the Company may be forced to file for bankruptcy protection. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustment relating to the recoverability or classification of recorded asset amounts or the amount and classification of liabilities that might be necessary as a result of this uncertainty. The Company has changed its strategic direction away from owning and operating Centers, and put its efforts into developing a suite of products and services that enhance the profitability of early learning centers throughout the world. In addition, the Company will focus its efforts on developing software and commerce programs to enhance the profitability of schools, athletic programs and non-profit organizations. In the future, the Company will seek potential acquisitions and or licensing agreements to enable the Company to enter the franchise business of early education centers in both the United States as well as abroad. The Company will need cash to develop and test potential products and services, to acquire early learning centers and to develop software and other programs. There is no assurance that the Company will be able to pursue any or all of the new objectives, strategies and acquire early learning centers. [3] 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 clients 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 anticipated collections. The allowance and provision for bad debts are adjusted periodically based upon the Company's evaluation of historical collection experience and other relevant factors. The Company's grant revenue representing approximately 30% of its total revenue in the year ended June 30, 2000 is from the Connecticut School Readiness and Day Care Grants. The Company does not require collateral in connection with its accounts receivable. Accounts receivable of $48,000, representing 59% of accounts receivable at June 30, 2000 is from the state of Connecticut. F-13 NOTE A - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) [4] Use of estimates: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts therein of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. [5] Cash and cash equivalents: Cash equivalents include short-term investments with original maturities of three months or less. [6] Financial instruments: The fair value of accounts receivable approximates book value. The determination of the fair value of accounts payable, amount due to stockholders/directors, and other notes payable is not practicable since the amounts are past due, delinquent and settlement is subject to a substantial amount of negotiation. [7] 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. [8] Intangible assets: Intangible assets represent cost in excess of the fair value of the net assets in centers purchased. Such cost includes direct incremental amount incurred in connection with the finding and acquisition of new centers. Costs incurred to effect the Company's debt financing activities have been deferred. The cost in excess of net assets acquired and acquisition costs are amortized over a 15 year life on a straight-line basis. The costs related to financing activities are amortized using a method approximating the effective interest method, over the term of the related indebtedness. [9] Impairment of long-lived assets: The Company assesses the carrying amount of all long-lived assets on a periodic basis to determine if adjustment to the useful life or to the unamortized balance is warranted. Such evaluation is based on the expected utilization of the long-lived assets and the projected undiscounted future cash flows of the operations in which the long-lived assets are used. F-14 NOTE A - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) [10] Earnings (loss) per share: Basic earnings (loss) per share has been computed based upon the weighted average common stock outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. For the year ended June 30, 2000, the weighted average number of diluted common shares outstanding of 76,994,706 includes a weighted average of 62,659,333 common shares issuable upon conversion of Series A Convertible Preferred Stock (Note J) and 4,323,188 weighted average shares from other dilutive securities consisting of a convertible note, stock options, warrants, Series B Convertible Preferred Stock and contingently issuable shares (Note K[1] and [2]). The computation of diluted earnings per share does not assume the conversion or exercise of securities that would have an anti-dilutive effect on earnings (loss). Such securities consist of 5,568,814 warrants and 20,000 options at June 30, 2000. [11] Employee stock options: The Company has elected, as permitted by Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", to account for its employee stock compensation arrangements under the provisions of Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees" (the "APB No. 25"). Accordingly, if the exercise price of the Company's employee stock options equals or exceeds market price of the underlying stock on the date of grant, no compensation expense (i.e., intrinsic value) is recognized and the pro forma effects on net income (loss) as if the fair value of the options been expense is disclosed. [12] Income taxes: The Company accounts for income taxes utilizing the asset and liability approach requiring the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the bases of assets and liabilities for financial reporting purposes and tax purposes and operating loss carryforwards. [13] Recent accounting pronouncements: In December 1999, the Securities and Exchange Commission (the "Commission") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which is to be applied beginning with the fourth fiscal quarter of fiscal years beginning after December 15, 1999, to provide guidance related to revenue recognition. The Company has reviewed the application of the Staff Accounting Bulletin to the Company's financial statements, however, any potential accounting changes are not expected to result in a material change in the amount of revenues we ultimately expect to realize. F-15 NOTE A - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) [13] Recent accounting pronouncements: (continued) In March 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 44 (Interpretation 44), "Accounting for Certain Transactions Involving Stock Compensation". Interpretation 44 provides criteria for the recognition of compensation expense in certain stock-based compensation arrangements that are accounted for under APB No. 25. Interpretation 44 is effective July 1, 2000, with certain provisions that are effective retroactively to December 15, 1998 and January 12, 2000. Interpretation 44 is not expected to have an impact on the Company's financial statements. The accompanying financial statements reflect the adoption of the Interpretation 44 from its effective dates wherever applicable. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires the Company to recognize all derivatives as either assets or liabilities and measure these instruments at fair value. It further provides criteria for derivative instruments to be designated at fair value, cash flow and foreign currency hedges and establishes respective accounting standards for reporting changes in the fair value of the derivative instruments. Upon adoption, the Company will be required to adjust hedging instruments to fair value in the balance sheet and recognize the offsetting gains or losses as adjustments to be reported in net income or other comprehensive income, as appropriate. The Company is evaluating its expected adoption date and currently expects to comply with the requirements of SFAS 133 in fiscal year 2001. The Company does not expect the adoption will be material to the Company's financial position or results of operations since the Company had not participated in such activities. In September 2000, FASB issued SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 140 replaces SFAS 125, "Accounting for Transfers and Servicing and Extinguishments of Liabilities". It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions. SFAS 140 is effective at varying dates ranging for fiscal years ending after December 15, 2000 and events occurring after March 31, 2001. The adoption of SFAS 140 will not have material impact on the accompanying financial statements. F-16 NOTE B - EQUIPMENT AND IMPROVEMENTS Equipment and improvements consist of the following: June 30, Useful ----------------------------------------- Lives 2000 1999 1998 1997 ------------ --------- -------- -------- ---------- Furniture and fixtures 3 to 5 years $ 115,000 $114,000 $187,000 $ 782,000 Office equipment 5 years 25,000 10,000 131,000 217,000 Vehicles 5 years 49,000 Leasehold improvements 7 to 10 years 47,000 47,000 123,000 828,000 Assets held under capital lease 5 to 22 years 45,000 67,000 67,000 2,509,000 Construction in progress 328,000 --------- -------- -------- ---------- 232,000 238,000 508,000 4,713,000 Less accumulated depreciation 142,000 110,000 215,000 928,000 --------- -------- -------- ---------- 90,000 128,000 293,000 3,785,000 Less assets held for sale, net (Note D) (124,000) (339,000) --------- -------- -------- ---------- $ 90,000 $128,000 $169,000 $3,446,000 ========= ======== ======== ==========
Depreciation expense was $44,000, $49,000, $435,000 and $467,000 for the years ended June 30, 2000, 1999, 1998 and 1997 respectively. Accumulated depreciation of assets held under capital lease was $35,000, $35,000, $22,000 and $449,000 as of June 30, 2000, 1999, 1998 and 1997, respectively. NOTE C - INTANGIBLE ASSETS Intangible assets consist of the following: June 30, 2000 1999 1998 1997 Cost in excess of fair value of net assets acquired $ 530,000 Capitalized start-up costs 150,000 Capitalized financing costs $ 349,000 $ 349,000 $ 364,000 360,000 Capitalized acquisition costs 14,000 118,000 --------- --------- --------- --------- 349,000 349,000 378,000 1,158,000 Less accumulated amortization 349,000 349,000 369,000 286,000 --------- --------- --------- --------- 0 0 9,000 872,000 Less assets held for disposition 0 0 (5,000) (229,000) --------- --------- --------- --------- $ 0 $ 0 $ 4,000 $ 643,000 ========= ========= ========= ========= Amortization expense was $0, $4,000, $408,000 and $202,000 for the years ended June 30, 2000, 1999, 1998 and 1997, respectively. F-17 NOTE D - ASSETS HELD FOR SALE At the end of June 30, 1998 and 1997, the following assets were classified in the accompanying balance sheet as assets held for sale: June 30, 1998 1997 Equipment and improvements, net of accumulated depreciation $ 124,000 $ 339,000 Intangibles, net of accumulated amortization and other noncurrent assets 5,000 270,000 ------------ ------------ $ 129,000 $ 609,000 ============ ============ Assets held for sale at June 30, 1997 were sold in July 1997 for cash proceeds of $675,000 and $190,000 of liabilities, including a capital lease obligation of $98,000, were canceled or assumed by the buyer, the Company realized a gain of $256,000 on the transaction. During the year ended June 30, 1998 the Company also disposed of $2,963,000 of other assets, consisting primarily of $2,888,000 of equipment and assets under capital lease, by either sale or abandonment. In connection with these transactions, $2,143,000 of liabilities consisting primarily of capitalized lease obligations of $2,061,000 were canceled or assumed by the buyer. The Company received net cash proceeds of $225,000 and recognized a loss of $595,000 on these transactions. Also, during the year ended June 30, 1998, the Company recognized a loss of $213,000 pertaining to intangible assets disposed of in September 1999. As a result of the transactions, the Company recognized a loss of $552,000, classified as loss on dispositions of centers, in the year ended June 30, 1998. In December 2000, sales of three of the centers were rescinded and the rights to acquire the centers were assigned to a third party (see Note P[1]). The assets held for disposition as of June 30, 1998 were given to a noteholder in exchange for the cancellation of notes payable in the amount of $129,000 in September 1999. NOTE E- ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following: June 30, -------------------------------------------- 2000 1999 1998 1997 ---------- ---------- ---------- --------- Accrued salaries and wages $ 23,000 $ 182,000 $ 266,000 $ 199,000 Accrued consulting services (former officer and stockholder) 420,000 240,000 60,000 Past due withholding taxes including interests and penalties 915,000 780,000 700,000 85,000 Accrued interest 248,000 1,142,000 469,000 129,000 Professional fees 307,000 350,000 Other 61,000 104,000 115,000 339,000 ---------- --------- ---------- --------- $1,554,000 $2,978,000 $1,790,000 $ 812,000 ========== ========== ========== ========= F-18 NOTE F - NOTES PAYABLE Notes payable consist of the following. All notes payable outstanding as of June 30, 2000 are in default. June 30, -------------------------------------------------------- 2000 1999 1998 1997 ----------- ----------- ----------- ------------ Convertible notes, past due May 1997, bearing interest at 12%, convertible into common stock at $2.50 per share (1994 Private Placement) (a) $ 210,000 $ 210,000 $ 210,000 Short term and demand notes, past due March through June 1997, bearing interest ranging between 8% and 12% (b) $ 418,000 1,005,000 1,005,000 1,005,000 Convertible demand note, bearing interest at 12%, convertible into common stock at $.05 per share (c) 66,000 66,000 66,000 Promissory notes payable, due to earlier of the closing of a public offering of common stock or March 24, 1998 bearing interest at 10% (1997 Private Placement) (d) 350,000 1,375,000 1,375,000 1,375,000 Less discount related to warrants issued in connection with promissory notes (e) (1,375,000) Short term and demand notes, past due, bearing interest ranging between 8% and 12% (f) 79,000 300,000 300,000 Promissory notes due on demand, bearing interest at 10%(g) 20,000 20,000 Bridge loans, past due, bearing interest at 10% (h) 151,000 Note payable, past due, bearing interest at 8%. (i) 82,000 82,000 64,000 Notes payable, due in monthly installments of $2,827, through January 2002, bearing interest at 8% (j) 129,000 152,000 Notes payable, due in monthly installments through August 2002 of $2,525, bearing interest at 8% (k) 128,000 Other Notes payable with interest ranging from 7% to 14.9% ( l ) 95,000 Bank Loans Payable (m) 103,000 103,000 55,000 ----------- ----------- ----------- ---------- $ 949,000 $ 3,312,000 $ 3,252,000 $1,711,000 =========== =========== =========== ==========
(a) Includes $110,000 payable to officers/stockholders and $100,000 to a stockholder/former director. All of the notes were exchanged for Series B Convertible Stock and warrants in June 2000 (Note K). (b) Short term and demand notes payable issued with 837,650 warrants to purchase common stock at exercise prices ranging from $.05 to $8.00, expiring in October 1998 through May 2003, which warrants were valued at F-19 NOTE F - NOTES PAYABLE (CONTINUED) $1,649,000 using the Black-Scholes option-pricing model based on the following assumptions: risk free interest rates ranging from 5.91% to 6.76%, volatility ranging from .355 to 2.631, dividend yield of 0, expected term ranging from 2 years to 6.6 years. Maturities of the notes ranged from demand through six months. Notes totalling $581,000 were exchanged for Series B Convertible Stock and warrants in June 2000, and $6,000 of principal payments were made. The balance at June 30, 2000, consist primarily of one note for $400,000 bearing interest at 10% that the holder has conditionally exchanged for Series B convertible preferred stock and warrants to purchase common stock. As the conditions have not yet been fulfilled, the principal balance is still outstanding as of June 30, 2000 (Note K[2]). The $18,000 obligation is payable at $3,000 per month, and is interest free. (c) In June 2000 the noteholder instructed the Company to convert the note and accrued interest thereon into common stock in accordance with the terms of the note. The Company has not yet issued the common stock and the principal balance and $25,000 of accrued interest is included in liabilities to be paid with common stock. (d) Notes issued in a private placement in March 1997 with 687,500 redeemable common stock warrants with an exercise price of $5.00, expiring in May 2001, which warrants were valued at $2,442,000 using the Black-Scholes option-pricing model using the following assumptions: risk free rate of 6.54% volatility of .384, dividend yield of 0, expected term of 4.1 years. In the third quarter of fiscal year ended June 30, 2000, notes totaling $975,000 and 206,250 warrants to purchase common stock were cancelled pursuant to the lawsuit settlement with the Company's former underwriters and certain of their principals. Two other notes, $25,000 each, were exchanged for Series B convertible preferred stock in June 2000 (Note K). (e) Represents value of warrants net of $457,000 classified as discount in excess of face value of debt in the statement of stockholders' deficit, as noted in (d) above. (f) Short term and demand notes payable issued with 186,000 warrants to purchase common stock at exercise prices ranging from $.05 to $.75, expiring in October 1998 through May 2003, which warrants were valued at $67,000 using the Black-Scholes option-pricing model based on the following assumptions: risk free interest rates ranging from 4.54% to 6.16%, volatility ranging from 2.632 to 3.113, dividend yield of 0, expected term ranging for 2 to 5.8. Notes totalling $221,000 were exchanged for Series B convertible stock and warrants in June 2000 (Note K). (g) These demand notes payable remains outstanding as of June 30, 2000. (h) Bridge financing issued with 75,450 shares of common stock and 75,450 warrants to purchase common stock with an exercise price of $.25, expiring September through November 2000 which warrants were valued at $15,000 using the Black-Scholes option-pricing model based on the following assumptions: risk free rates of 6.33%, volatility of 3.00, dividend yield of 0, expected term of 2 years. This loan balance was exchanged for Series B convertible stock and warrants in June 2000 (Note K). F-20 NOTE F - NOTES PAYABLE (CONTINUED) (i) As part of the abandonment of a facility, a $50,000 Note was issued in April 1998 to the landlord. (Note D). The principal was increased by $14,000 and $18,000 in the years ended June 30, 1998 and 1999, respectively, in exchange for rent for the period May 1998 through September 1999, when the Company vacated the premises. The Note and additional debt owed to the landlord was settled subsequent to the balance sheet date (June 30, 2000) (Note P[2]). (j) This note, was secured by a facility held for disposal at June 30, 1998, the secured assets were turned over to the lender in full satisfaction of the note in 1999. (k) This note was secured by a facility, held for sale at June 30, 1997. The assets were sold in the first quarter of 1998 and $106,000 of the proceeds were accepted by the Noteholder as full settlement of the $128,000 balance. (l) These notes were settled from the proceeds of sale of assets in the year ended June 30, 1998. (m) The bank loans were settled in the third quarter of the year ended June 30, 2000 with $35,000 cash payments and exchange of Series B convertible stock and warrants. NOTE G - CAPITALIZED LEASE OBLIGATION The Company has entered into several agreements to lease equipment, buildings and leasehold improvements (Note B). The lease terms vary from 5 to 10 years and imputed interest ranges between 9.25% and 10%. The following is a schedule by years of future minimum lease payments for capital leases together with the present value of the net minimum lease payments as of: June 30, -------------------------------------------------- 2000 1999 1998 1997 Year Ended ---------- ---------- ---------- ---------- June 30, ---------- 1998 $ 436,000 1999 $ 18,000 383,000 2000 $ 18,000 18,000 383,000 2001 $ 13,000 18,000 18,000 383,000 2002 2,000 6,000 5,000 348,000 Thereafter 2,396,000 ---------- ---------- ---------- ---------- Total minimum lease payments 15,000 42,000 59,000 4,329,000 Less amount representing interest 2,000 5,000 10,000 1,974,000 ---------- ---------- ---------- ---------- Present value of net minimum lease payments 13,000 37,000 49,000 2,355,000 Less current portion 11,000 14,000 13,000 321,000 ---------- ---------- ---------- ---------- Long-term portion $ 2,000 $ 23,000 $ 36,000 $2,034,000 ========== ========== ========== ==========
F-21 NOTE G - CAPITALIZED LEASE OBLIGATION (CONTINUED) In July 1997 and April 1998, capital lease obligations of $98,000 and $1,020,000 respectively, were assumed by the buyers in connection with the sale of the related facilities by the Company (Note D). In April 1998 a capital lease obligation of $1,041,000 was terminated and the assets leased were returned to the lessor (Note D). Amortization of assets held under capital leases is included in depreciation expense. NOTE H - INCOME TAXES At June 30, 2000, 1999, 1998 and 1997 the principal components of the net deferred tax assets are as follows: June 30, -------------------------------------------------------- 2000 1999 1998 1997 ----------- ----------- ----------- ----------- Current deferred tax assets (liabilities): Net operating loss carryforwards $ 4,935,000 $ 5,772,000 $ 5,150,000 $ 3,938,000 Intrinsic value of warrants - consulting services 796,000 796,000 796,000 776,000 Intrinsic value of warrants - debt discount 894,000 894,000 894,000 442,000 Salary to officer/stockholder 63,000 63,000 Consulting fees to officer/stockholder 168,000 96,000 24,000 Liability exchanged for stock issued/ issuable 166,000 258,000 228,000 Vacation accrual 6,000 8,000 42,000 34,000 Deferred revenue (1,000) (37,000) (46,000) Accounts receivable 2,000 5,000 6,000 22,000 Accrued interest (includes payable to controlling stockholders) 100,000 458,000 188,000 52,000 ----------- ----------- ----------- ----------- Total current deferred tax assets (liabilities) 6,899,000 8,421,000 7,426,000 5,242,000 ----------- ----------- ----------- ----------- Loss on assets held for sale 259,000 Deferred rent 9,000 24,000 15,000 56,000 ----------- ----------- ----------- ----------- Total noncurrent deferred tax assets (liabilities) (net) 9,000 24,000 274,000 56,000 ----------- ----------- ----------- ----------- Total deferred tax assets (liabilities) (net) 6,908,000 8,445,000 7,700,000 5,298,000 Less valuation allowance 6,908,000 8,445,000 7,700,000 5,298,000 ----------- ----------- ----------- ----------- Net deferred tax assets $ 0 $ 0 $ 0 $ 0 =========== =========== =========== ===========
A reconciliation of income tax (benefit) expense to amounts computed using effective statutory rates is as follows: F-22 NOTE H - INCOME TAXES (CONTINUED) June 30, ---------------------------------------------------------- 2000 1999 1998 1997 ----------- ------------ ------------- ------------- Income tax (benefit) expense at statutory rates $ 971,000 $ (717,000) $ (2,758,000) $ (3,791,000) Gain on settlement of debt with controlling stockholders 526,000 Nondeductible expenses: Amortization of discount on debt in excess of intrinsic value 5,000 356,000 479,000 Amortization of consulting fees in excess of intrinsic value 28,000 143,000 Penalties on withholding taxes 36,000 38,000 Net operating loss utilization (1,533,000) ----------- ----------- ----------- ------------ 0 (674,000) (2,374,000) (3,169,000) Valuation allowance 0 674,000 2,374,000 3,169,000 ----------- ----------- ----------- ----------- $ 0 $ 0 $ 0 $ 0 =========== =========== =========== ===========
The Company reported an extraordinary gain of $3,354,000 (including $1,316,000 gain relating to controlling stockholders in the fiscal year ended June 30, 2000 (Note K)). The extraordinary gain is excludable from federal taxable income because the Company is insolvent; however, the Company's net operating loss carryover is reduced by the amount of the extraordinary gain so excluded. Thus, as of June 30, 2000, the Company had, for federal income tax purposes, net operating loss carryforwards of approximately $12,000,000 expiring in years 2011 through 2020. Section 382 of the Internal Revenue Code contains provisions which limits the loss carryforwards available if significant changes occur in stockholder ownership interest. Management believes that such limitations apply as a result of changes in stockholder ownership interests which have occurred in the past and anticipated changes in the future. Accordingly, the Company would be significantly limited in the utilization of its net operating losses in any year. NOTE I - STOCK OPTIONS AND WARRANTS The Company has a 1993 Stock Option Plan (the "Plan") authorizing the issuance of up to 210,000 nonqualified options to purchase common stock at an exercise price of no less than 85% of the market price (110% in the case of an option granted to an optionee owning more than 10% of the voting stock of the Company) (a "10% stockholder"). Under the Plan, the options vesting is determined by the Board of Directors. All options expire five years after date of grant or upon termination of employment. F-23 NOTE I - STOCK OPTIONS AND WARRANTS (CONTINUED) In addition the Company has a 1996 Stock Option Plan "the 1996 Plan". The 1996 Plan, as amended, provides for the granting of both incentive and nonqualified options to purchase common stock of the Company. The term of incentive options granted under the 1996 Plan may not exceed ten years (five years for a 10% Stockholder). The option price for incentive stock options can not be less than 100% of the fair market value of the shares of common stock at the time the option is granted (110% for a 10% Stockholder). Option terms are set by the Compensation Committee in its discretion. The option price for nonqualified options may not be less than 85% of the fair market value of the common stock. The total number of shares in the 1996 Plan is 400,000 shares. The following table summarizes stock option activity for the years ended June 30: 2000 1999 1998 1997 -------- --------- ----------- --------- Outstanding at beginning of the year 410,000 424,733 535,700 195,700 Weighted average exercise price $ .06 $ .09 $ 5.41 $ 1.43 Outstanding at end of the year 410,000 410,000 424,733(1) 535,700 Weighted average exercise price $ .06 $ .06 $ .09 $ 5.41 Exercisable at end of the year 410,000 361,075 283,175 283,200 Grants during the year 220,000 380,000 Range of exercise prices $.05 to $.31 $ 7.00 Exercised during the year 8,333 Expirations during the year 6,400 330,967 40,000 Average remaining contractual life 34 months 22 months 34 months 50 months (1) In December 1997, the exercise price of 285,000 options with a weighted average exercise price of $5.32 was reduced to $.05. In addition to the Plan, 35,000 options to purchase units at $4.00 unit outstanding at July 1, 1996, expired in May 1997. Each unit under option consisted of .88 shares of the Company's common stock, plus a warrant to purchase .44 additional shares of common stock for $2.00. If compensation expense for the Company's stock-based compensation plans had been determined based on their fair value, the Company's net income (loss) and net income (loss) per share including pro forma results would have been the amounts indicated below: Year Ended June 30, -------------------------------------------------------- 2000 1999 1998 1997 ----------- ------------ ------------ ------------ Net income (loss): As reported $ 2,427,000 $(1,793,000) $(6,896,000) $(10,006,000) Pro forma $ 2,367,000 $(1,853,000) $(7,056,000) $(10,244,000) Net income (loss) per share: As reported: Basic $ 0.24 $(0.18) $(1.62) $(2.53) Diluted $ .03 $(0.18) $(1.62)$ $(2.53) Pro forma: Basic $ 0.24 $(0.19) $(1.66)$ $(2.59) Diluted $ .03 $(0.19) $(1.66)$ $(2.59) F-24 NOTE I - STOCK OPTIONS AND WARRANTS (CONTINUED) The pro forma effect on net income (loss) for the years 2000, 1999, 1998 and 1997 may not be representative of the pro forma effect on net income (loss) of future years due to, among other things: (i) the vesting period of the stock options and the (ii) fair value of additional stock options in future years. For the purpose of the above table, the fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 1998 1997 ------- ------- Dividend yield 0% 0% Expected volatility 2.777 .396 Risk-free interest rate 5.99 6.33 Expected life in years 3.0 3.0 The weighted average fair value at date of grant for options granted during the years 1998 and 1997 were $.08 and $2.38, respectively, using the above assumptions. The following summarizes the outstanding warrants: June 30, Expiration ----------------------------------------------- Date 2000 1999 1998 1997 Warrants issued with initial public offering ---------- ----------- ---------- ---------- ---------- ("IPO") at $5.00 per share 4/30/01 2,012,500 2,012,500 2,012,500 2,012,500 Warrants issued with conversion of pre-IPO securities at $5.00 per share 4/30/01 1,000,000 1,000,000 1,000,000 1,000,000 Warrants in connection with pre IPO stock at $4.00 per share (a) 5/98 0 0 0 39,624 Warrants in connection with pre IPO stock at $4.00 per share (a)(b)(i) 5/05 67,800 67,800 67,800 67,800 Warrants in connection with pre IPO indebtedness at $.62 - $.70 per share 7/00 - 7/02 5,500 5,500 5,500 5,500 Warrants in connection with pre IPO stock at $2.00 per share 2/98 0 0 0 25,315 Warrants in connection with pre IPO stock at $2.00 per share 2/98 - 7/00 134,279 134,279 134,279 156,292 Warrants in connection with pre IPO stock at $2.00 per share (c) 5/03 100,732 100,732 100,732 100,732 Warrants issued in connection with short-term and demand notes at $.05 (h) 8/1/2001 22,000 22,000 22,000 22,000 Warrants issued in connection with borrowings from officers/directors at $.05 - $.06 (b)(f)(i) 5/1/2005 219,946 219,946 219,946 Warrants issued in connection with short-term and demand notes at $.12(h) 9/99 - 9/00 13,000 43,000 43,000 Warrants issued in connection with borrowings from officers/directors at $.18 (f) 5/15 77,000 77,000 77,000
(carried forward) F-25 NOTE I - STOCK OPTIONS AND WARRANTS (CONTINUED) June 30, Expiration ------------------------------------------- Date 2000 1999 1998 1997 Warrants issued in connection with short-term and demand notes at $.25 - $.31 (h) 11/99 - 5/03 290,000 307,250 307,250 307,250 Warrants issued in connection with short-term and demand notes at $.25 - $.31 (h) 10/00 - 11/00 60,000 60,000 60,000 Warrants issued in connection with short-term and demand notes at $.25 (h) 9/00 - 11/00 75,450 75,450 Warrants issued in connection with short-term and demand notes at $.25 - $.31 (h) 5/01 500,000 500,000 Warrants issued in connection with borrowings from officers/directors at $.25 - $.31 (f)(g) 5/05 35,720 35,720 35,720 Warrants issued in connection with short-term and demand notes at $.37 - $.44 (h) 6/02 15,000 15,000 15,000 Warrants issued in connection with borrowings from officers/directors at $.37 - $.44 (f)(h) 5/05 17,000 17,000 17,000 Warrants issued in connection with short-term demand notes at $.50 - $.50 (h) 7/02 - 5/03 53,000 53,000 53,000 Warrants issued in connection with borrowings from officers/directors at $.50 - $.56 (d)(e) 5/05 56,000 56,000 56,000 56,000 Warrants issued in connection with borrowings from officers/directors at $.50 - $.56 (f) 5/05 61,000 61,000 61,000 Warrants issued in connection with short-term and demand notes at $.62 - $.75(h) 7/02 15,000 15,000 15,000 Warrants issued in connection with borrowings from officers/directors at $.62 - $.75 (d)(e) 5/05 42,000 42,000 42,000 42,000 Warrants issued in connection with borrowings from officers/directors at $.62 - $.75 (f) 5/05 49,000 49,000 49,000 Warrants issued in connection with short-term and demand notes at $8.00 (h) 10/98 8,400 8,400 Warrants issued with private placement of debt at 5/6/01 481,250 687,500 687,500 687,500 $5 (h) Warrants issued in exchange for goods and services of $.05 9/99 - 5/03 50,000 85,000 85,000 50,000 Warrants issued in connection with pre IPO borrowings $.28 9/00 75,000 75,000 75,000 75,000 Warrants issued in exchange for goods and services at $.25 - $.31 6/02 - 5/05 236,000 240,000 240,000 240,000 Warrants issued in exchange for goods and services at $.25 - $.31 9/99 - 5/05 273,200 273,200 273,200 Warrants issued in connection with Series B preferred shares at $.11 (g) 3/31/02 436,183 ---------- --------- --------- --------- 5,973,560 5,829,877 6,262,827 5,395,913 ========== ========= ========= =========
In July 2000, the Company entered into a one year employment contract at an annual compensation of $48,000 plus 50,000 options to purchase shares of common stock at $1.00 assuming a 20:1 future reverse stock split to a newly named Vice President of curriculum development. In October 2000, the Company granted .125% of the outstanding shares of the Company on a fully diluted basis to an employee and agreed to grant additional options up to 5% (inclusive of the initial grant) of the outstanding shares of common stock of the Company on a fully diluted basis, based on time devoted by the employee. F-26 NOTE I - STOCK OPTIONS AND WARRANTS (CONTINUED) (a) In June 1997, the terms of these warrants were modified; the exercise price was reduced to $.50 and the expiration date was extended to May 1998. (b) In May 1998, the terms of these warrants were modified; the expiration date was extended to May 2003. (c) In May 1998, the terms of these warrants were modified; the exercise price was reduced to $.25 and the expiration date was extended to May 2003. (d) In December 1997, the exercise price was reduced to $.05. The resulting additional interest expense was not material. (e) 98,000 warrants valued at $70,000 using the Black Scholes Method using the following assumptions: risk free rate of 6.46%, volatility ranging from 2.784 to 2.802, dividend yield of 0 and expected life in years of 5. (f) 459,666 warrants valued at $98,000 using the Black Scholes Method using the following assumptions: risk free rate ranging from 5.53% to 6.29%, volatility ranging from 1.787 to 2.796, dividend yield of 0, and expected life in years ranging from 2.8 to 7.6. (g) See Note J for information regarding valuation of warrants. (h) See Note F for information regarding valuation of warrants. (i) In May 2000, the life of all options and warrants (aggregating 967,666) held by employees officers and directors were extended 24 months and a cashless exercise option was authorized. The resulting compensation expense required under interpretation 44 was not material. NOTE J - CONVERTIBLE PREFERRED STOCK In February 2000, the Company authorized the issuance 600,000 shares of Series A convertible preferred stock (the "Series A") and in June 2000, the Company authorized issuance 900,000 shares of Series B convertible preferred stock (the "Series B"). In February 2000, the Company issued 600,000 shares of Series A for $300,000 to two investors, who are currently officers and directors of the Company. Each share has a stated value of $.50, and may be converted at the option of the holder, into the number of shares of common stock equal to the number of fully diluted outstanding shares of common stock as of February 24, 2000 divided by .10 and then dividing the quotion obtained by 600,000 (total number of shares of common stock issuable upon conversion 180,083,190). On matters requiring the consent of the holders of the Company's common stock, each share of Series A is entitled to the number of votes equal to the number of shares of common stock in which it is convertible into. The Series A is senior as to liquidation, and if dividends are declared on common stock, is entitled to the same dividends as would have been made with respect to the number of shares of common stock the holder would have received had it converted all of its Series A shares. F-27 NOTE J - CONVERTIBLE PREFERRED STOCK (CONTINUED) On June 30, 2000, the Company issued 386,183 shares of Series B in full settlement of $4,564,000 of Company debt and 50,000 shares at Series B to a note holder, whose release of the debt is subject to certain conditions. The shares have been recorded at their estimated fair value of $2.48 per share and a gain has been recognized for the difference between the recorded amount of the debt and the fair value of the shares issued (Note K). Each share of Series B has a stated value of $10, and automatically converts into the number of shares of common stock equal to $10 divided by 85% of the average of the per share closing bid and asked prices (or last sale price) of the Company's common stock for the last five trading days preceding the date of conversion (the "Conversion Date"). The Conversion Date is the later of January 1, 2001, or the date on which a sufficient number of shares of common stock is authorized under the Company's Restated Articles of Incorporation to permit the conversion into common stock, all of the Company's then outstanding convertible securities. Management has reflected the issuance of the Series B within the capital deficit section of the balance sheet as of June 30, 2000, since the approval of the shareholders is considered perfunctory as the Board of directors represents sufficient voting interests of the common stock to assure the increase in the authorized number of shares to allow the conversion. On matters requiring the consent of the holders of the Company's common stock, each share of Series B is entitled the number of votes equal to the number of shares of common stock upon conversion. The Series B is junior to Series A and senior to common stock as to liquidation, and if dividends are declared on common stock, is entitled to the same dividends as would have been made with respect to the number of shares of common stock the holder would have received had it converted all of its Series B shares. The beneficial conversion feature of the Series B was accounted for using the intrinsic value method set forth in FASB Emerging Issues Task Force Issue No. 98-5. Accordingly, a beneficial conversion feature of $770,000 was recorded on the Series B, to be amortized in a manner similar to a preferred stock dividend through the conversion period, or January 1, 2001. Since the shares were issued on June 30, 2000, no preferred dividends were recorded for the year then ended. In connection with the Series B, each shareholder was issued one warrant to purchase common stock for each Series B issued, exercisable at 120% of the average of the closing bid and asked prices for the common stock for the five days in which trading has occurred immediately preceding the later of (1) April 30, 2000 and (2) the earlier of (i) the 20th business day following the date on which a reverse split of the common stock becomes effective, and (ii) January 1, 2001. The Series B warrants were valued using the Black-Scholes, option-pricing model with the following assumptions: no dividend yield, expected volatility of 3.00, risk free interest rate of 6.5% and an expected term of 3 years, the value of warrants of $13,000 is included in the consideration given to the creditors (See Note K). NOTE K - EXTRAORDINARY GAIN ON SETTLEMENT OF DEBT During the fiscal year ended June 30, 2000, the Company negotiated the settlement of amounts due to various trade creditors, officer and directors, bank note holders and other note holders at amounts lower than their recorded F-28 NOTE K - EXTRAORDINARY GAIN ON SETTLEMENT OF DEBT (CONTINUED) amounts. The various creditors received cash, Series B convertible preferred stock with warrants to purchase common stock (Note J), or a combination thereof. The cash used for the payment was primarily the net proceeds of the litigation with the Company's underwriters (Note N). The Series B convertible preferred stock was valued at an estimated fair market value of $2.48 per share. The valuation was primarily based on the sale of 600,000 shares of Series A convertible preferred stock in February 2000 for a total cash consideration of $300,000 and its assumed conversion to the Company's common stock as stipulated in the Certificate of Designation, and adjusted for the gain on settlement on debt. The table summarizes the types of debt forgiven, the consideration given, and the gain calculated. Series B Convertible Recorded Preferred Amount or ------------------- Total Face Cash Number of Number of Value of Value Gain on Type Value Paid Shares Value Warrants Warrants Paid Settlement - ------------------------ ---------- -------- --------- -------- --------- --------- ---------- ---------- Accounts payable $ 553,000 $ 16,000 53,120 $132,000 53,120 $ 2,000 $ 150,000 $ 403,000 Accrued rent 299,000 33,000 82,000 33,000 1,000 83,000 216,000 Bank notes payable 103,000 35,000 4,000 10,000 4,000 45,000 58,000 Note holders, including accrued interest of $696,000 1,799,000 141,063 351,000 141,063 5,000 356,000 1,443,000 ---------- -------- ------- -------- ------- --------- --------- ---------- Total $2,754,000 $ 51,000 231,183 $575,000 231,183 $ 8,000 $ 634,000 2,120,000 ========== ======== ======= ======== ======= ========= ========= Less legal costs incurred 82,000 ---------- $2,038,000 ==========
(1) The table does not include the issuance of 155,000 shares of Series B convertible preferred stock and 155,000 warrants to an officer/stockholder and her spouse who is also a stockholder and was a director of the Company in settlement of $1,902,000 of debt, consisting of notes payable of $110,000, loans payable of $652,000, accrued interest of $403,000, accrued salary of $227,000 and consulting fees payable of $510,000. Concurrent with the agreement to exchange their debt, the officer entered into an agreement whereby the Company agreed to issue the officer common stock equal to 5% of the Company's fully diluted common stock, excluding the dilutive effect of the Series B convertible preferred stock. The liability for the common shares valued at $201,000, is included in liabilities to be paid with common stock (Note O). The $1,517,000 representing the difference between the face value of the debt and the estimated fair value of the Series B convertible preferred stock received ($385,000) less the $201,000 estimated fair value of the common stock to be received has been recorded as a capital contribution. F-29 NOTE K - EXTRAORDINARY GAIN ON SETTLEMENT OF DEBT (CONTINUED) (2) The table does not include a note holder with a principal due of $400,000 and accrued interest of $86,000 who received 50,000 shares of Series B convertible preferred stock valued at $124,000 which has been charged to interest and finance expense. No gain has been recognized as the note holder's release of the debt is subject to certain conditions, including among others, the conversion of the Series B convertible preferred stock into common stock and the issuance of additional common shares pursuant to a consulting agreement signed concurrently with the transaction. As no substantive services are required pursuant to the agreement, the estimated value of $147,000 for the additional common shares issuable to the noteholder were also charged to interest and finance expense. The liability for the common shares is included in liabilities to be paid with common stock (Note O). In addition, the Company agreed to pay certain amounts as specified in the agreement, upon liquidation preferences of both the Series A convertible preferred stock and the Series B convertible preferred stock, not to exceed the amount of indebtedness converted into Series B convertible preferred stock NOTE L - COMMITMENTS AND CONTINGENCIES The Company is obligated under an operating lease for one remaining facility in West Haven, Connecticut. Future minimum annual payments under the lease are as follows: Year Ended June 30 2001 $ 125,000 2002 161,000 2003 173,000 2004 180,000 2005 180,000 Thereafter 285,000 ------------- $ 1,104,000 Rent expense approximated $236,000, $800,000, $400,000 and $1,100,000 for the years ended June 30, 2000, 1999, 1998 and 1997, respectively. NOTE M - RELATED PARTY TRANSACTIONS The debt settlement referred to in Note K[1] settled all but $350,000 of the debt owed to the officer/stockholder and her spouse. Such amount represents debt incurred on behalf of the Company during the period 1997 to 2000. The Company has agreed to use certain proceeds for repayment of the debt, specifically 100% of the proceeds received by the Company from the sale of certain centers reacquired as discussed in Note P, and 10% of the proceeds received by the Company from any equity or debt financing transaction. F-30 NOTE N - SETTLEMENT OF LITIGATION In May 1997, the Company filed a lawsuit against its underwriters and certain of their principals in a district court alleging breach of fiduciary duty, fraud, and other claims. In the third quarter of fiscal year ended June 30, 2000, the matter was settled, and the Company received $1,575,000 in cash and a release from notes payable to the underwriters and the principals in the amount of $1,266,000, including $291,000 of accrued interest. In addition, all of the warrants issued with the notes were cancelled. The $2,841,000 less $856,000 of legal and other litigation costs is included as gain on litigation. In July 1997, the Company filed a lawsuit against a lessor/builder of veterans care centers and its principals in Superior Court in Los Angeles alleging breach of contract, fraud and other claims. In June 2000, the Court awarded the Company damages of $80,000 and attorney fees in the amount of $167,000. The Company assigned the entire judgment, valued at $100,000 for the settlement of legal fees and a cash payment of $125,000 subsequent to June 30, 2000. This assignment of the judgement resulted in a gain of $90,000 in fiscal year ended June 30, 2000, for the previously recorded legal fees. NOTE O - LIABILITIES TO BE PAID WITH COMMON STOCK In April 2000, the Company entered into a consulting agreement with a note holder that requires the Company to issue the note holder, the greater of 3.8% of the Company's common stock outstanding as defined in the agreement, after taking account the effect of all Series A convertible preferred stock, but excluding the effect of any other convertible securities, or 250,000 shares after giving effect to a contemplated reverse split of the Company's common stock. The agreement was entered into concurrently with negotiations with the note holder on the exchange of the Note and accrued interest for Series B convertible preferred stock (Note K). An estimated fair market value of $147,000 has been recorded as liabilities to be paid with common stock representing the 7,223,652 shares (3.8%) of the Company's outstanding stock as defined above. On June 9, 2000, concurrent with the agreement to exchange debt with Series B convertible preferred stock the Company entered into an agreement with an officer and note holder, who is also a shareholder, that requires the Company to issue the officer the number of shares equal to 5% of the Company's common stock on a fully diluted basis, excluding the effect of any Series B conversions. An estimated fair market value of $201,000 has been recorded as liabilities to be paid with common stock representing the 9,904,310 shares (5%) of the Company's outstanding stock as defined above. The Company, pursuant to the agreement, will not issue these shares until they have amended their Restated Articles of Incorporation to authorize a sufficient number of shares of common stock to permit the conversion of all outstanding convertible securities including the shares stipulated in the agreement. The Company does not have sufficient authorized shares to permit the conversion of all outstanding shares and has not yet amended their Restated Articles of Incorporation. On June 26, 2000, a noteholder with a principal balance of $66,000 and accrued interest of $25,000, convertible into common shares at a price of $.05 per share, requested the Company to convert the note into common stock of the Company. The Company has not yet issued the 1,822,980 shares and the liability of $91,000 has been classified as liabilities to be paid with common stock. F-31 NOTE P - SUBSEQUENT EVENTS (1) On July 21, 2000, Children's Wonderland, Inc. met with a mediator and the buyer of centers from the Company with respect to its filing for rescission of the sale of its Warner Center, Oxnard and Gold River facilities (the "Centers"). This matter has been mediated and a stipulation of settlement has been reached, whereby the Company agreed to repurchase the Centers for $490,000. In December 2000, the Company entered into a recession and assignment agreement whereby the Company assigned its rights to purchase the Center to Tutor Time Learning Systems, Inc. (the Buyer). Funds necessary for the closing, including $67,000 deposited by the Company, have been placed in escrow. The closing has not been completed as certain conditions, including various landlord consents to amendments and assignments have not been received. Prior to the recession and assignment agreement discussed above, the Company assigned the purchase rights to a third party (the "Assignee"), but subsequently cancelled the assignment, incurring a cancellation fee of $150,000. The fee, reduced by any interest payable on the note described below, is payable April 12, 2001. Concurrently with the cancellation of the assignment agreement, the Assignee agreed to lend the Company up to $250,000 under the terms of a Secured Promissory Note (the "Note"). The Company received advances on the Note for the full amount of $250,000 in October 2000. The Note has an interest rate of 10%, was due on April 15, 2001, and is secured by the assets and property of the company located in, and with respect to, the Company's child care center in West Haven, CT. (See Note Q) (2) In July 2000, the Company issued 1,050 shares of Series B convertible preferred stock, 1,050 warrants and paid $98,700 in cash in settlement of debt in the amount of $132,000, consisting of an $82,000 note payable, accrued interest of $12,000 and $38,000 of other payables resulting in a gain of $30,000. (3) During the period from December 2000 through March 12, 2001, two principal stockholders and officers of the Company have advanced the Company $186,000 bearing interest at 6% and payable 24 months from the loan date. (4) In January 2001, the Company issued 550,000 shares of common stock with a market value of $6,000 to employees for services rendered. NOTE Q - SUBSEQUENT EVENTS (UNAUDITED) Under an Asset Purchase Agreement dated May 2, 2001, the Company sold its sole child care center located in West Haven, CT for a net proceeds of $455,000. Under the agreement, the Company assigned the lease of its center through the unexpired portion of the lease period. In addition, subject to meeting certain revenue criteria, the Company receive a warrant for 10,000 shares of Buyer's common stock exercisable at $5.00 per share. The warrant cannot be exercised until subsequent to the first anniversary from the date of issuance and expires in 5 years from the date of issuance. The sale of the center results in an approximate gain of $434,000 which will be reported in the fiscal year ending June 30, 2001. A portion of the proceeds were used to repay the $250,000 note discussed in P[1]. The Assignee agreed to extend the maturity date of the $150,000 cancellation fee to May 2002. Out of the proceeds, the Company paid $49,000 to the officer/stockholder and her spouse, against $350,000 of the debt owed as discussed in Note M and $60,000 to two principal stockholders and officers of the Company under Note P[3] above. F-32 CHILDREN'S WONDERLAND, INC. INDEX OF EXHIBITS ATTACHED EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 2.1 Asset Purchase Agreement, dated as of August 1, 1997, between the Registrant and Imagination Plus Child Development Center, Inc. relating to the sale of two centers in California and six centers in Colorado. 2.2 Asset Purchase Agreement, dated as of April 24, 1998, by and among the Registrant, Aloha Pacific, Inc., Kenneth Bitticks and Debby Bitticks relating to three centers in California. 3.1 Restated Articles of Incorporation and Amendments thereto, including Certificates of Determination, of the Registrant. 4.5 Form of Warrant issued with Series B Preferred Stock of Registrant. 10.29 Letter Agreement, dated June 9, 2000, among Debby Bitticks, Kenneth Bitticks and Registrant. 10.30 Lease Agreement, dated as of March 24,2000, between Resun Leasing, Incorporated and Registrant relating to property in West Haven, Connecticut. 10.31 Letter Agreement, dated April 20, 2000, among Justin Gasarch, Registrant, Robert Becker and John Clarke. 27 Financial Data Schedules. EX-2.1 3 file002.txt ASSET PURCHASE AGREEMENT, DATED AS OF AUG 1, 1997 EXHIBIT 2.1 ================================================================================ ASSET PURCHASE AGREEMENT AMONG IMAGINATION PLUS CHILD DEVELOPMENT CENTER, INC. AND CHILDREN, S WONDERLAND, INC. AUGUST I, 1997 ================================================================================ ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT ("Agreement") is entered into effective as of August 1, 1997 by and among IMAGINATION PLUS CHILD DEVELOPMENT CENTER, INC., a California corporation ("Purchaser"), on the one hand, and CHILDREN'S WONDERLAND, INC., a California corporation, (hereinafter "Seller"). RECITALS A. Seller is the owner and operator of certain licensed child care centers located in California and Colorado which do business under the name "Children's Wonderland, Inc." at the California locations listed on Schedule A-1 attached hereto ("California Centers") and the Colorado locations listed on Schedule A-2 attached hereto ("Colorado Centers"). B. Purchaser desires to purchase, and Seller desires to sell to Purchaser, all upon the terms and conditions hereinafter set forth, all of the business, properties and assets of the California Centers and the Colorado Centers. NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth and for other good and valuable consideration had and received, the parties agree as follows: ARTICLE I TRANSFER OF ASSETS. ASSUMPTION OF LIABILITIES 1.1 TRANSFER OF ASSETS. On the terms and subject to the conditions in this Agreement and on the Closing Date (as hereinafter defined), Seller will convey, transfer, assign and deliver to Purchaser all of the business, properties and assets of the California Centers and the Colorado Centers, wherever located, tangible or intangible, (collectively, the "Subject Assets") with the exception of the "Excluded Assets" as defined in Section 1.2 below. For purposes of this Agreement, the California Centers and the Colorado Centers are hereinafter sometimes collectively referred to as the "Centers". Without limiting the generality of the foregoing, the Subject Assets shall include: (a) all personal property, inventory, and equipment in accordance with lists previously furnished to Seller, and vehicles described on Schedule 1.1 located at or relating to the business of each of the Centers; (b) all of Seller's interest in all real property leases; (c) all customer lists, student contracts, toys and games and teaching materials and related aids not proprietary to Seller located and/or used at each of the Centers; (d) all books and records, including all computer programs (with the exception of the software known as "office center"), relating to the Seller's business at each of the Centers; (e) all accounts receivable attributable to the Centers after the Closing Date and prepaid deposits for services after the Closing Date; (f) the goodwill of the business for each of the Centers except that Purchaser shall have no right to use the name Children's Wonderland in connection with the operation of the Centers. 1.2 EXCLUDED ASSETS. There shall be excluded from the Subject Assets being purchased hereunder all of the following assets of Seller as of the Closing (the "Excluded Assets"). Seller's cash, and accounts receivable attributable to services provided by Seller prior to the Closing Date, and those assets, if any, listed on Schedule 1.2. 1.3 ASSUMPTION OF LIABILITIES. Purchaser shall assume and be responsible for only those obligations and liabilities of Seller listed in Schedule 1.3 (the "Assumed Obligations"). Purchaser has negotiated or will seek to negotiate new real estate lease agreements for any or all of the Centers, provided however, in the event new lease agreements cannot be consummated to Purchaser's satisfaction, Purchaser agrees to accept an assignment of the leases in their present condition. Seller agrees to cooperate with Purchaser in obtaining each Landlord's consent to an assignment of the respective leases. Seller will continue to be responsible for all of its obligations and liabilities, except for the Assumed Obligations, whether they are known or unknown and whether they arise prior to, in connection with, or subsequent to the Closing Date and Seller will promptly pay and perform each such obligation and liability as it becomes due ("Seller's Obligations"). Without limiting the generality of the foregoing, Seller's obligations shall include any and all problems, complaints and/or credits relating to Seller's operation of the Centers prior to the Closing Date. Purchaser will use reasonable efforts to assist Seller in resolving any and all such issues at Seller's expense. 1.4 METHOD OF CONVEYANCE AND TRANSFER OF SUBJECT ASSETS. The conveyance, transfer and delivery of the Subject Assets will be effected by appropriate bills of sale, endorsements, transfers, assignments and other instruments, all in such form as Purchaser reasonably requests, vesting in Purchaser, or any designated affiliate of Purchaser, good and marketable title to the Subject Assets, free and clear of any and all covenants, agreements, leases, conditions, easements, liens, charges, security interests, title retention instruments, adverse claims or interests, or other title defects, contractual defaults or restrictions of any kind or nature whatsoever except for the Assumed Liabilities (collectively, "Liens"). 1.5 FURTHER ASSURANCES. Seller, at any time and from time to time after the Closing Date, upon request of-Purchaser, will do, execute, acknowledge and deliver, all such further acts, assignments, transfers, conveyances, powers of attorney and assurances as may be reasonably required for the better conveying, transferring, and delivering to Purchaser, or to its successors and assigns, and for aiding and assisting in collecting and reducing to possession, all the Subject Assets. 2 1.6 ACCOUNTS RECEIVABLE. Accounts receivable of Seller for services provided up to the Closing Date shall remain the property of Seller, and shall be fully billed by Seller on or immediately after the Closing Date. Purchaser shall have no responsibility for the collection of Seller's accounts receivable; provided, however, that all accounts receivable received by Purchaser after the Closing Date relating to services performed by Seller up to the Closing Date shall immediately upon the receipt thereof be paid by Purchaser to Seller. 1.7 EMPLOYEES. Seller acknowledges and agrees that as of the Closing Date, Seller will no longer be conducting the Seller s business at the location of the Centers. Prior to the Closing Date, Seller will notify all of the employees engaged on a full or part time basis at any of the Centers, that their employment with Seller in connection with the Centers will end as of the Closing Date. Seller agrees that on or prior to the Closing Date it will pay or have paid all compensation and benefits (including all accrued sick leave, vacation pay and severance pay) owing to such employees through the Closing Date. Seller shall be responsible for giving any and all notices and complying with the provisions of the Worker Adjustment and Retraining Notification Act, if applicable. Purchaser shall have the right (but not the obligation) to hire any or all of Seller's employees who work at the Centers and Seller shall assist Purchaser in doing so. ARTICLE II PURCHASE PRICE AND PAYMENT; CLOSING 2.1 PURCHASE PRICE. As the entire consideration for the transfer and assignment by Seller of the Subject Assets, for the assumption by Purchaser of the Assumed Obligations and for the representations, warranties and covenants of Seller set forth herein, Purchaser, subject to the conditions set forth herein, shall pay to Seller the amount of Six Hundred Seventy Five Thousand and One Dollar (($675,001) in good funds. Of this amount, Six Hundred Seventy Five Thousand Dollars ($675,000) is allocated to the acquisition of the California Centers and One Dollar ($1) is allocated to the acquisition of the Colorado Centers. Should the acquisition of the California Centers and Colorado Centers occur on different Closing Dates, the amount of the cash consideration allocated to each group of Centers shall be paid at the respective Closing. Notwithstanding anything contained herein to the contrary, the consideration payable by Purchaser to Seller for the California Centers shall be in the form of (a) the cancellation of all indebtedness and obligations of Seller owing to Purchaser under that certain Promissory Note, of even date, in the face amount of $300,000.00 (regardless of the amount of interest accrued thereon), and related Security Agreement ("Seller Loan") and (b) the disbursement to Seller of the sum of $375,000 from the Client Trust Account ("Client Trust Account") of the law firm representing Purchaser in this transaction, i.e., Buchalter, Nemer, Fields & Younger whose address is set forth in Article X hereinbelow. Upon the mutual execution hereof, Seller will deposit the sum of $675,001.00 into the Client Trust Account, $300,000 of which will be used to fund the Seller Loan in accordance with Section 6.4 hereinbelow. 2.2 SEPARATE CLOSING. Subject to satisfaction of all conditions precedent and terms set forth in -this Agreement, the Closing related to the acquisition of the California Centers shall occur as soon as possible but in no event later than one (1) business day following the date upon which the California Department of Social Services issues licenses to operate the California Centers in the name of Purchaser, and the Closing related to the acquisition of the 3 Colorado Centers shall occur as soon as possible but in no event later than one (1) business day following the date upon which the Colorado equivalent of the California Department of Social Services issues licenses to operate the Colorado Centers in the name of Purchaser. The Purchaser may not acquire the California Centers without the Colorado Centers, or the Colorado Centers without the California Centers, without the prior written consent of Seller. At each Closing, Seller shall authorize the conveyance of all Subject Assets related to the respective acquired Centers and will deliver all documents related to such acquisitions called for by this Agreement. All taxes, pre-paid rents, and utility charges applicable to the Centers shall be pro-rated as of the date of closing for such Center. 2.3 [Intentionally Omitted]. 2.4 ALLOCATION OF PURCHASE PRICE. Purchaser will allocate the Purchase Price among the Subject Assets and the Assumed Obligations in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), based on the reasonable fair market value of each asset and the liabilities to be assumed. Purchaser will advise the Seller of the allocations when determined. Purchaser and Seller will each attach a copy of such information or forms as are required to be filed pursuant to Section 1060 of the Code to the tax returns filed covering the period in which the transfer of the Subject Assets and the Assumed Obligations occurs. Seller and Purchaser will report the sale and purchase of the Subject Assets and the assumption of the Assumed Obligations in accordance with the allocations determined by Purchaser for all federal, state and local tax purposes. Seller, and Purchaser, on the other hand, will indemnify and hold each other harmless, from and against any and all losses, liabilities and expenses, including, without limitation, attorneys' fees and additional income taxes, interest and penalties that may be incurred by the indemnified party as a result of the failure of the indemnifying party to so report the sale and purchase of the Subject Assets and the assumption of the Assumed Obligations. 2.5 TRANSFER TAXES. All applicable sales, use and transfer taxes, if any, arising by reason of the transfer of the Subject Assets and the assumption of the Assumed Obligations under this Agreement will be borne by Seller. 2.6 CLOSING. The closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Buchalter, Nemer, Fields & Younger, 601 South Figueroa Street, Suite 2400, Los Angeles, California 90017, on the dates specified in Section 2.2 hereinabove or such other date and time mutually agreeable to the parties (the "Closing Date"). If the sale and purchase of the California Centers and the Colorado Centers occurs on different dates, then the date for each sale shall be considered to be the Closing Date for purposes of all provisions of this Agreement. Should the sale of the California and/or the Colorado Centers not close by October 1, 1997, then the Seller may in its sole discretion terminate this Agreement upon written notice to Purchaser; provided, however, that upon such termination as to the California Centers the Seller Loan shall automatically accelerate and become due and payable. 4 ARTICLE III REPRESENTATIONS, WARRANTIES OF SELLER Seller, represents and warrants to Purchaser as of the date hereof and as of the Closing Date as follows: 3.1 ORGANIZATION AND STANDING. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of California and is in good standing and qualified to conduct its business in the State of Colorado. Seller has full power and authority to carry on the Seller's business at each of the Centers as and where conducted and to own or lease and operate the Subject Assets at and where owned or leased and operated by it. Seller is duly licensed and qualified and is in good standing in the States of California and Colorado, which constitutes the only jurisdiction m which the conduct of the Seller's business at the Centers and the nature of the Subject Assets requires the Seller to be so qualified. 3.2 AUTHORITY OF SELLER; CONSENTS. The execution, delivery and consummation of this Agreement by Seller has been duly authorized in accordance with all applicable laws and the Articles of Incorporation and Bylaws of the Seller, and as of the Closing Date no further corporate action will be necessary on the part of the Seller or the Board of Directors or shareholders of Seller to make this Agreement valid and binding on Seller and enforceable against Seller in accordance with its terms (subject to bankruptcy, insolvency, reorganization and other similar laws affecting creditors' fights generally and to genera/principles of equity). The execution, delivery and consummation of this Agreement by Seller (i) does not violate the Articles of Incorporation or Bylaws of Seller, (ii) does not now and will not, with the passage of time, the giving of notice or otherwise, result in a violation or breach of, or constitute a default under, any term or provision of any mortgage, deed of trust, lease, instrument, order, judgment, decree, rule, regulation, law, contract, agreement or any other restriction to which Seller is a party or to which the Seller or any of its respective assets are subject or bound, (iii) will not result in the creation of any Lien upon any of the Subject Assets, and (iv) will not result in any acceleration or termination of any loan or security interest agreement to which Seller is a party or to which Seller or any of its respective assets are subject or bound. No approval or consent of any person, firm or other entity or governmental body is or was required to be obtained by Seller for the authorization of this Agreement or the consummation by Seller of the transactions contemplated in this Agreement. 3.3 TITLE TO ASSETS; CONDITION OF ASSET. Seller owns and possesses, and will own and possess as of the Closing Date, all right, title and interest in and to the Subject Assets free and clear of any and all Liens, with the exception of the Assumed Obligations. Seller has and will have as of the Closing Date the right, power and capacity to sell, convey, transfer, assign and deliver to Purchaser the Subject Assets free and clear of any and all Liens, with the exception of the Assumed Obligations. All tangible assets included in the Subject Assets are in Seller's possession or under its control. 3.4 FINANCIAL STATEMENTS. Prior to the date of this Agreement, Seller provided Purchaser with the profit and loss statements relating to each of the Centers and covering the period July 31, 1996 through and including May 31, 1997, (collectively, the "Financial Statements"). The Financial Statements (i) 5 have been prepared in accordance with generally accepted accounting principles which have been applied on a consistent basis during the periods involved, (ii) present fairly the operations of the business of the Centers, and results of its operations, and (iii) are consistent with the books and records of Seller. 3.5 ABSENCE OF CERTAIN CHANGES. Since May 31, 1997 (the "Balance Sheet Date") and except as otherwise disclosed by Seller to Purchaser in writing: (i) there has not been any material adverse change in the business or in the condition (financial or otherwise), assets, liabilities, results of operations or prospects of the Seller's business conducted at the Centers, and (ii) there has not occurred any event or governmental regulation or order which could cause such a change, nor, to the knowledge of Seller, is the occurrence of any such event, regulation or order threatened. Without limiting the generality of the foregoing, since the Balance Sheet Date there has not been: (a) any mortgage or pledge of, or any other lien, charge or encumbrance of any kind, on any of the Subject Assets; (b) any sale or transfer of any assets, including the Subject Assets, or settlement, cancellation or release of any indebtedness owing to Seller in connection with the Seller's business as conducted at the Centers; (c) any material amendment or termination of any contract, agreement or license, to which Seller is a party in connection with the Seller's business or to which Seller or any of the Subject Assets are subject or bound; (d) any commitment made (through negotiations or otherwise) or any liability incurred to any labor union or similar organization of employees by Seller; (e) any institution by Seller of a bonus, stock option, profit-sharing, pension plan or similar arrangement or any material changes in any such existing plans; (f) any change in compensation, wages or benefits paid or payable to any employee of Seller who are involved in the business of the Centers; (g) any material adverse change in collection loss experience related to the accounts receivable arising from Seller's business conducted at the Centers; (h) any material loss, damage or destruction to the Subject Assets (whether or not covered by insurance); (i) any discharge or satisfaction by Seller of any lien, encumbrance, obligation or liability (accrued, absolute, fixed or contingent) other than those incurred in connection with the ordinary course of operations of the Seller's business; or (j) any transaction outside of the ordinary course of Seller's business related to the business of the Center. 3.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on the Balance Sheet and trade payables incurred by Seller subsequent thereto in the ordinary course of business, including the Assumed Obligations, Seller is not obligated 6 for, nor are any of the assets or properties of Seller comprising the Subject Assets subject to, any liabilities or adverse claims or obligations (whether accrued, absolute, contingent or otherwise). There are no facts known to Seller that might reasonably serve as a basis, in whole or in part, for any liabilities or obligations not disclosed in this Agreement or in the Financial Statements, or in the information relating to the Centers that has been disclosed to Purchaser. 3.7 TAXES. (a) Seller has filed all income, franchise, sales, payroll and other tax returns and reports of every nature required to be filed by it accurately reflecting all taxes owing to the United States, or any other government (domestic or foreign) or any government subdivision, state or local, or any other taxing authority (domestic or foreign), and has paid in full or made adequate provision for the payment of all taxes and duties (including penalties and interest) for which it has or may have liability, including, without limitation, taxes payable to any jurisdiction by reason of the transfer of the Subject Assets and the assumption of the Assumed Obligations pursuant to this Agreement. There is not any unassessed tax deficiency proposed or threatened against Seller, or any of them. There are no liens on the Subject Assets as a result of any tax liabilities. There are, and after the date of this Agreement will be, no taxes owing or tax deficiencies (including penalties and interest) of any kind assessed against or relating to Seller with respect to any taxable periods ending on or before, or including, the Closing Date of any of the Centers of a character or nature that would result in Liens or claims on any of the Subject Assets or on Purchaser's title to or use of the Subject Assets, or that would result in any claim against Purchaser or the Subject Assets, now or in the future. (b) There are no outstanding agreements or waivers extending the statutory period of limitations applicable to any federal, state, local, or foreign tax return of Seller for any period. No federal income tax return of Seller has been audited by the Internal Revenue Service and no state, local or foreign taxing authority has audited any tax return or report filed by Seller. 3.8 PREPAID DEPOSIT. Schedule 3.8 is a true, correct and complete listing of prepaid deposits for all clients attributable to the business conducted at the Centers. All such prepaid deposits shall remain the property of Seller and Purchaser shall have no obligation to compensate Seller for any such deposit unless it is actually paid or credited to Purchaser, in which case a like amount will be promptly paid by Purchaser to Seller. At or immediately following Closing, Purchaser will advance to the holders thereof solely for the account of Purchaser to cover obligations of the Purchaser after Closing the full amount of the prepaid deposits listed on the attached Schedule 3.8 to the extent that any such advance is a precondition to the refund of any such deposit to Seller. 3.9 PURCHASE ORDERS. Schedule 3.9 is a true, correct and complete list of all of Seller's outstanding purchase orders to vendors relating to the business of the Centers. Seller agree to update Schedules 3.9 as of the Closing. 3.10 CONTRACTS. Schedule 3.10 is a true, correct and complete list of each Written contract, agreement, lease, license, permit, governmental authority, 7 note, guaranty, instrument or understanding (collectively, "Contract(s)") and of each oral Contract, to which Seller is a party in connection with the Seller's business affecting the operations of the Centers or by which any of the Subject Assets, or the Assumed Obligations are bound or affected. A true, correct and complete copy of each written Contract and a written description of each oral Contract has been delivered to Purchaser. All of such Contracts are in full force and effect and no party is in default or breach of any of such Contracts. Purchaser shall only assume the obligations under those contracts listed on Schedule 1.3 which accrue for goods or services furnished after the Closing. Seller will promptly and fully satisfy and/or pay all Seller's Obligations. 3.11 LITIGATION. Except as set disclosed on Schedule 3.11, there are no suits, actions, legal or administrative proceedings, arbitrations or governmental investigations of any nature whatsoever pending or, to the knowledge of Seller, threatened in connection with the Seller's business or the Subject Assets. Seller has not received any notice that Seller is the subject of any governmental investigation. Seller is not subject to any order, writ, injunction or decree of any court, or of any federal, state, local or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, in connection with the business conducted at the Centers or the Subject Assets. 3.12 INSURANCE. Schedule 3.12 is a true and correct list of all the policies of insurance covering the Seller's business at the Centers and Subject Assets presently in force, including as to each (i) risk insured against, (ii) name of carrier, (iii) policy number, (iv) amount of coverage, (v) expiration date and (vi) the property, if any, insured, indicating as to each whether it insures on an "occurrence" or a "claims made" basis. All of the insurance policies set forth on Schedule 3.12 are in full force and effect as of the Closing Date and all premiums, retention amounts and other related expenses due have been paid, and Seller have not received any notice of cancellation with respect to any of the policies. Seller has not been refused any insurance in connection with the business conducted at any of the Centers or the Subject Assets by any insurance carrier. To the knowledge of Seller, there are no circumstances existing which would enable any insurer to avoid liability under Seller's policies. 3.13 EMPLOYEES. Schedule 3.13 contains a true and correct description of the following items with respect to each employee of Seller listed on such Schedule: their full name as it appears on Seller's records, their date of hire, the nature of their duties, the amount of their compensation, the date and amount of their last increase in compensation, a description of any commitments to such employees, including any loans made to such employees. 3.14 EMPLOYMENT MATTERS. (a) Except as identified on Schedule 3.14, Seller is not a party to, participant in, or bound by, any collective bargaining agreement, union contract, insurance, pension, profit sharing arrangement or material employment, bonus, deferred compensation, termination, severance or similar personnel arrangement, or any stock purchase, stock option or other stock plans or programs. (b) Seller has not received notice of any active, pending, or threatened administrative or judicial proceedings under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Fair Labor 8 Standards Act, the Occupational Safety and Health Act, the National Labor Relations Act, or any other federal, state or local law (including common law), ordinance or regulation relating to employees of Seller with respect to the business of the Centers. (c) The relation of Seller with its employees is good and there are no pending or, to the knowledge of Seller, threatened labor difficulties. 3.15 EMPLOYEE BENEFIT PLANS AND OTHER PLAN: (a) For purposes of this Section 3.15, the following definitions apply: (i) "Benefit Plan" means each deferred compensation, pension, profit-sharing and retirement plan, each plan, arrangement or policy for the provision of bonuses and/or severance benefits, each "employee benefit plan"(as defined in ERISA Section 3(3)) and each fringe benefit plan (including, without limitation, a hospitalization, insurance, stock option or stock purchase plan) that Seller maintains, contribute to, has liability with respect to, or has an obligation to contribute to; (ii) "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985; (iii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (b) Seller has not directly or indirectly acted in any manner or incurred any obligation or liability, and will not directly or indirectly act in any manner in the future or incur any obligation or liability in the future with respect to any Benefit Plan which has or could give rise to any liens on any of the Subject Assets, or which could result in any liability or obligation to Purchaser, whether arising out of the establishment, operation, administration or termination of such Benefit Plan or the transactions contemplated by this Agreement. (c) Seller has timely provided or will timely provide all notices and any continuation of health benefit coverage (including, without limitation, medical and dental coverage) required to be provided to employees, former employees or the beneficiaries or dependents of such employees or former employees, under Part 6 of Subtitle B of Title I of ERISA or, as applicable, COBRA to the extent such notices and continuation of health benefit coverage are required to be provided by reason of the events occurring prior to or on the Closing Date or by reason of the transactions contemplated by this Agreement. To the extent required by COBRA, Seller will treat its employees (and their dependents and beneficiaries) as of the Closing Date as having incurred a "qualifying event" (within the meaning of ERISA Section 603 and, as applicable, Code Section 4980B(f)(3)) on the Closing Date. Seller will continue the health benefit coverage required by COBRA. Seller will periodically, upon request, provide Purchaser with evidence, to the satisfaction of Purchaser, of compliance with the above provision. Seller will indemnify and hold harmless Purchaser and its shareholders, directors, officers, employees and agents against, any costs, expenses, losses, damages and liabilities incurred or suffered by any of them, directly or indirectly, including, without limitation, reasonable legal fees and 9 expenses, with respect to any failure of Seller to comply with the requirements of this Section 3.15 or COBRA. 3.16 LICENSES. Each of the Centers have all necessary licenses and permits required by Federal, State and other governmental and health related agencies necessary to carry on its business and not licenses have been revoked, are under suspension or have been under suspension during the past five (5) years. 3.17 CASUALTY OCCURRENCES. Except as otherwise set forth on Schedule 3.17, to the knowledge of Seller, there have been no occurrences during the last six (6) years of alleged damages to persons or property involving the education services offered by Seller including, but not limited to, the educational services offered through the Centers. 3.18 BUSINESS RELATIONS. Seller and Shareholder have no reason to believe that the customers 0f the business of the Centers will not continue to do business with Purchaser after the Closing at levels and on terms at least equal to those enjoyed by Seller. 3.19 COMPLIANCE WITH LAW. Seller has complied with all laws, regulations, rules and orders of any governmental department or agency or any other commission, board, agency or instrumentality, federal, state or local, or other requirements of law affecting the Seller's business, the Subject Assets and the Assumed Obligations and is not in default under or in violation of any provision of any federal, state or local law, regulation, rule or order affecting the Business, nor does Seller require the consent of any governmental agency to this Agreement. 3.20 LICENSES AND RIGHTS. Seller possesses all franchises, licenses, easements, permits and other authorizations from governmental or regulatory authorities (either domestic or foreign) and from all other persons or entities that are necessary to permit it to engage in the Seller's business as presently conducted in and at all locations of the Centers. 3.21 ARTICLES OF INCORPORATION AND BYLAWS. True, accurate and complete copies of the Articles of Incorporation and Bylaws or similar charter documents of Seller, together with all amendments thereto, have been delivered to Purchaser or will be delivered within 48 hours from execution of this Agreement. 3.22 BROKERAGE AND FINDER'S FEES. Seller has not incurred any liability to any broker, director or agent for any brokerage fees, finder's fees, or commissions with respect to the transactions contemplated by this Agreement except to Jeff Kahn who is entitled to receive a fee from Seller after Closing and as to which Purchaser has no obligation. 3.23 LEASES. Seller is not in default under any of the leases for the property located at the Centers, and all such leases are valid and binding obligations - of Seller. 3.24 ENVIRONMENTAL MATTERS. Seller: (a) Has not caused or allowed the generation, treatment, storage, or, disposal of hazardous substances at any of the Centers except in accordance with local, state, and federal statutes and regulations; 10 (b) Has not caused or allowed the release of any toxic or hazardous substance or substances onto, at, or near any of the Centers; (c) Is in compliance with all applicable permits, laws, rules, and regulations regarding the handling of hazardous substances located at or near the Centers as of the Closing Date; (d) Has not received inquiry or notice nor does it have any reason to suspect or believe it will receive inquiry or notice of any actual or potential proceedings, claims, or lawsuits arising in connection with the Subject Assets and/or out of its operations or business as conducted at the Centers; (e) Has not, nor has it ever been, subject to the release of any hazardous substance at any of the Centers; and (f) Is currently not operating or required to be operating under any compliance order, schedule, decree or agreement, any consent decree, order, or agreement, and/or corrective action decree, order or agreement issued or entered into under any federal, state or local statute, regulation or ordinance regarding the environment and/or health or safety in the workplace. 3.25 MATERIAL MISSTATEMENTS OR OMISSION. No representations or warranties made by Seller in this Agreement or in any document, statement, certificate, schedule, chart, list, letter, compilation or other document furnished or to be furnished to Purchaser in connection with the transactions governed by this Agreement, contain any untrue statement of a material fact, or omit to state a material fact necessary to make the statements of fact contained therein, in light of the circumstances under which they were made, not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser warrants and represents to Seller as follows: 4.1 ORGANIZATION AND GOOD STANDING OF PURCHASER. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has full power and authority to carry on its business as and where now conducted and to own or lease and operate its properties at and where now owned or leased and operated by it, and is duly qualified to do business and is in good standing in every jurisdiction in which the property owned, leased or operated by it, or the nature of the business conducted by it, makes such qualification necessary. 4.2 AUTHORITY PURCHASER. The execution, delivery and consummation of this Agreement by Purchaser has been authorized by the board of directors of Purchaser in accordance with all applicable laws and the Articles of Incorporation and Bylaws of Purchaser, and at the Closing Date no further corporate action will be necessary on the part of Purchaser to make this Agreement valid and binding on Purchaser and enforceable against Purchaser in accordance with its terms. 11 4.3 EXECUTION, DELIVERY AND BINDING EFFECT. This Agreement has been duly executed and delivered by Purchaser and constitutes a legal, valid and binding obligation of Purchaser enforceable in accordance with its terms (subject to bankruptcy, insolvency, reorganization and other similar laws affecting creditors' rights generally). 4.4 BROKERAGE AND FINDER'S FEE. Neither Purchaser nor any shareholder, officer, director or agent of Purchaser has incurred any liability to any broker, finder or agent for any brokerage fees, finder's fees or commissions with respect to the transactions contemplated by this Agreement. ARTICLE V CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER The obligations of Purchaser under this Agreement are, at its option, subject to satisfaction of the following conditions at or prior to the Closing Date: 5.1 The warranties and representations made herein by Seller to Purchaser, including, but not limited to those set forth in Article III, shall be true and correct on and as of the Closing Date with the same effect as if such warranties and representations had been made on and as of the Closing Date, and Seller shall have performed and complied with all agreements and covenants contained herein on their part required to be performed or complied with on or prior to the Closing Date, including, but not limited to those set forth in Article VII. 5.2 No investigation, proceeding or litigation, at law or in equity, by any government or regulatory commission, agency or other body or authority or by any other person, firm, corporation or other entity shall be pending on the Closing Date which challenges the consummation of the transactions contemplated by this Agreement or which claims damages against Purchaser or Seller as a result of the consummation of the transactions contemplated hereby, or which has a material adverse affect upon any of the operations of Seller related to the Centers or the Subject Assets. 5.3 With respect to each of the Centers, Purchaser shall have received such approvals, consents, authorizations, waivers and permits from any person, necessary or appropriate in order to enable Purchaser to acquire the Subject Assets and operate the Centers in the manner provided herein without the imposition of any conditions which Purchaser might reasonably consider to be significant and adverse. 5.4 All proceedings to be taken in connection with the consummation of the transactions contemplated by this Agreement, and all certificates, documents and instruments incidental thereto, shall be reasonably satisfactory in form and substance to Purchaser and its counsel and Purchaser shall have received copies of such documents and instruments as Purchaser and its counsel may reasonably request in connection with such transactions. 5.5 There shall have been no material casualty or damage to or destruction of any of the Subject Assets. 12 5.6 RECEIPT OF DOCUMENTS BY PURCHASER. Purchaser has received: (a) certified copies of resolutions duly adopted by the Board of Directors of both Seller approving this Agreement and the transactions contemplated under it; (b) Uniform Commercial Code Termination Statements and/or other documentation in form and substance satisfactory to Purchaser terminating any and all Liens that may affect any of the Subject Assets; and (c) Purchaser shall have received from Seller a certificate dated the Closing Date, in a form acceptable to Purchaser, certifying that the conditions set forth in Sections 5.1 through 5.5 have been fulfilled. (d) Opinion of counsel for Seller in a form substantially similar to the attached Schedule 5.6. 5.7 INSTRUMENTS OF TRANSFER AND DELIVERY OF THE SUBJECT ASSETS. Seller shall have delivered to Purchaser good and sufficient instruments of transfer relating to the Subject Assets. The instruments of transfer shall be in form and substance reasonably satisfactory to Purchaser and its counsel. 5.8 .LEASE ASSIGNMENT. Purchaser shall have negotiated and entered into alternative leasing arrangements for each of the Centers no later than fifteen (15) days following the mutual execution hereof, failing which Purchaser shall accept the approval of such landlord(s) to the assignment of the particular lease(s) to Purchaser without modification. ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER The obligations of Seller under this Agreement are, at its option, subject to satisfaction of the following conditions at or prior to the Closing Date: 6.1 No investigation, proceeding or litigation, at law or in equity, by any governmental or regulatory commission, agency or other body or authority or by any other person, firm, corporation or other entity shall be pending on the Closing Date which challenges the consummation of the transactions contemplated by this Agreement or which claims damages against Purchaser or Seller as a result of the consummation of the transactions contemplated hereby, or which adversely affects any of the operations of the Subject Assets. 6.2 The warranties and representations made herein by Purchaser to Seller shall be true and correct on and as of the Closing Date with the same effect as if such warranties and representations had been made on and as of the Closing Date, and Purchaser shall have performed and complied with all agreements and covenants contained herein on its part required to be performed or complied with on or prior to the Closing Date. 6.3 All proceedings to be taken in connection with the consummation of the transactions contemplated by this Agreement, and all certificates, documents and 13 instruments incidental thereto, shall be reasonably satisfactory in form and substance to Seller and its counsel and Seller shall have received copies of such documents and instruments as Seller and its counsel may reasonably request in connection with such transactions. 6.4 The funding of the Seller Loan and the delivery to the Seller of good funds in the full amount thereof as follows: (a) One Hundred Fifty Thousand Dollars ($150,000) shall be immediately disbursed to Seller from the Client Trust Account at such time as (i) all UCC-1 Financing Statement liens covering any of the Subject Assets relating to the California Centers have been released or subordinated to the UCC-1 Financing Statement lien of Purchase (Purchaser's Lien) being given to secure the Seller Loan, with the exception of that certain UCC-1 Financing Statement filed on August 4, 1994 under filing number 1994159261 in favor of Allen and Elise Deddens (the "Deddens Lien"); and (ii) a first priority lien in favor of Purchaser has been recorded against the leasehold interest of Seller in and to the Newbury Park, California Center, also being given to secure the Seller Loan. (b) One Hundred Fifty Thousand Dollars ($150,000.00) shall be immediately disbursed to Seller from the Client Trust Account at such time as (i) a first priority lien in favor of Purchaser has been recorded against the leasehold interest of Seller in and to the Lake Forest, California Center being given to secure the Seller Loan; and (ii) the Deddens Lien has been released or subordinated to Purchaser s Lien, which release or subordination, at the direction of Seller, may b accomplished by the disbursement of the required amount of Seller Loan funds from the Client Trust Account directly to the holders of the Deddens Lien. ARTICLE VII CONDUCT OF SELLER'S BUSINESS PRIOR TO CLOSING The Seller covenants and agrees that, pending the Closing and except as Purchaser shall have otherwise consented thereto in writing: 7.1 ORDINARY COURSE. The business of the Seller will be conducted only yin the ordinary course. 7.2 NO NEW AGREEMENTS. No contract, agreement, obligation, lease, license or other commitment will be entered into or assumed by or on behalf of any Seller which relates to or affects the Centers, except for normal and ordinary contracts in the ordinary course of business. 7.3 TAX RETURNS; COMPLIANCE. Seller shall duly and timely file all reports or returns required to be filed with federal, state, foreign, local and other authorities and will promptly pay all federal, state, foreign and local tax assessments and governmental charges lawfully levied or assessed upon it or its properties or upon any part thereof, except taxes or charges being contested in good faith by appropriate proceedings and for which adequate provision has been made and will duly observe and conform to all lawful requirements of any governmental authority relating to its properties or to the operation and conduct of its business and all covenants, terms and conditions upon or under which any of its properties are held. 14 7.4 MAINTENANCE. All buildings, offices and other real property and all machinery, equipment, fixtures, motor vehicles (except as otherwise specified in the attached Schedule 1.1) and other property of the Seller will be kept and maintained in good operating condition, repair and working order, ordinary wear and tear excepted. 7.5 INSURANCE. The Seller shall continue to maintain in full force and effect to and including the Closing Date(s) for all Centers, all policies of insurance now in effect, or renewals thereof or equivalent policies. 7.6 NO SALES OR MERGERS. Seller shall not enter into any other Agreements to sell the Subject Assets or any or all of the Centers. ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES, INDEMNIFICATIONS 8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding the Closing of the transactions contemplated under this Agreement, or any investigation made by or on behalf of Purchaser, the representations and warranties of Seller contained in this Agreement or in any certificate, schedule, list, or other document furnished pursuant to this Agreement, will survive the Closing. 8.2 .INDEMNIFICATION. (a) Seller covenants and agrees to indemnify, defend and hold harmless Purchaser,, its affiliates and its shareholders, directors, officers, employees and agents ("Purchaser Indemnities") from any and all costs, expenses, losses, damages and liabilities incurred or suffered, directly or indirectly, by any of them (including, without limitation, actual legal fees and expenses) arising out of, in connection with, resulting from or attributable to the following ("Indemnified Losses"): (a) the breach of, or misstatement in, any one or more of the representations or warranties of Seller made in or pursuant to this Agreement, (b) the breach of any one or more of the covenants of Seller made in or pursuant to this Agreement, (c) any claims, demands, suits, investigations, proceedings or actions by any third party containing or relating to allegations that, if true, would constitute a breach of, or misstatement in, any one or more of the representations or warranties of Seller made in or pursuant to this Agreement, and (d) any trade payables, obligations or liabilities of Seller of any nature whatsoever (whether accrued, absolute, contingent or otherwise), except the Assumed Obligations. All Indemnified Losses shall be payable on demand and without limiting Purchaser's other rights and remedies may be offset by Purchaser against any amount that might otherwise be payable by Purchaser to Seller. (b) Purchaser will indemnify and hold harmless the Seller in respect of, claims, losses, expenses, costs, obligations and liabilities they may incur by reason of Purchaser's breach of or failure to perform any of its warranties or covenants in this Agreement, or by reason of any act or omission of Purchaser, or any of its successors or assigns, after the Closing Date, that constitutes a breach or default under, or a failure to perform, any obligation or liability of the Seller under any lease, contract, order, or other agreement 15 to which it is a party or by which it is bound at the Closing Date, but only to the extent to which Purchaser expressly assumes these obligations, duties, and liabilities under this Agreement. ARTICLE IX NON-COMPETITION 9.1 NON-COMPETITION AGREEMENT. (a) As a material inducement to Purchaser to enter into this Agreement, Seller agrees for itself and each of its respective subsidiaries and affiliates that for a period of five (5) years from and after the Closing Date for each of the Centers, it will not, directly or indirectly: (i) engage in, carry on or have any interest in a child care business in the Covenant Territory (as hereinafter defined); (ii) enter into, engage in, or be employed by or consult with any child care business in the Covenant Territory; (iii) induce any customers of the Centers to refuse to continue to use the services of the Centers. As used herein, the term "Covenant Territory" shall mean a radius of three (3) miles on a straight line from each and every one of the Centers acquired pursuant to this Agreement, provided however that the Seller's existing child care facilities and the following additional locations which are under consideration for future development as child care centers are exempt from this non-competition provision: Foothills Ranch (Lake Forest, CA) -described as Pad A in the Towne Center, located at the South East corner of Towne Center Drive and Alton Parkway. Denver Tech Center in Denver, CO. on South Yosemite Blvd, between East Belleview Avenue and DCT Parkway. The parties acknowledge that the length of time pertaining to all prohibitions in this Section are reasonable and necessary for the legitimate protection of Purchaser's business and interests. (b) Seller expressly agrees and understand that the remedy at law for any breach by Seller of this Article IX will be inadequate and that the damages flowing from such breach are not readily susceptible to being measured in monetary terms. Accordingly, it is acknowledged that upon violation or threatened violation of this Article IX, Purchaser will be entitled, among other remedies, to immediate injunctive relief and may obtain a temporary restraining order and injunction restraining any breach or threatened breach without the necessity of posting bond. Nothing contained herein will be deemed to limit Purchaser's remedies at law or in equity for any breach by Seller of any of the provisions of this Agreement. 16 (c) In the event any court of competent jurisdiction determines that the specified time period or geographical area set forth in this Section 9.1 is unreasonable, arbitrary or against public policy, then a lesser time period or geographical area that is determined by the court to be reasonable, non-arbitrary and not against public policy may be enforced. (d) In the event that Seller violates any provision of this Section 9.1 as to which there is a specific time period during which Seller is prohibited from taking certain actions or engaging in certain activities, then, in such event the violation will toll the running of the time period from the date of the violation until the violation ceases. 9.2 DISCLOSURE OF CONFIDENTIAL INFORMATION. From and after the Closing Date, Seller, agrees not to disclose, disseminate, divulge, discuss, copy or otherwise use or suffer to be used, in competition with, or harmful to the interests of, Purchaser, any information (written or oral), documents, lists or other data of or respecting any aspect of the Subject Assets, the Assumed Obligations or the business of the Centers, except as (a) may otherwise be in the public domain; (b) may be necessary for tax filing and/or reporting purposes; or (c) may otherwise be required by law. ARTICLE X NOTICES All notices, requests, demands and other communications under this Agreement must be in writing and will be deemed duly given, unless otherwise expressly indicated to the contrary in this Agreement, (i) when personally delivered, (ii) upon receipt of a facsimile transmission with a confirmed transmission answer back, (iii) three (3) days after having been deposited in the United States mail, certified or registered, return receipt requested, postage prepaid, or (iv) one (1) business day after having been dispatched by a nationally recognized overnight courier service, addressed to the parties or their permitted assigns at the following addresses (or at such other address or number as is given in writing by either party to the other) when accompanied by facsimile transmission as follows: To Purchaser: Imagination Plus Child Development Center, Inc. 6043 Tampa Avenue Tarzana, CA 91356 Attention: Myron Lieberman Chairman of the Board Facsimile No.: (818) 708-1944 With a copy to: Buchalter, Nemer, Fields & Younger Suite 2400 601 South Figueroa Street Los Angeles, California 90017 Attention: Michael Wachtell, Esq. Facsimile No.: (213) 896-0400 17 To Seller: Children's Wonderland, Inc. 28310 Roadside Drive, Suite 220 Agoura, CA 91301 Attention: Debby S. Bitticks Chief Executive Officer Facsimile No.: (818) 865-8107 Gerald M. Chizever, Esq. Richman, Lawrence, Mann, Greene, Chizever, Friedman & Phillips 9601 Wilshire Boulevard Penthouse Beverly Hills, California 90210 Facsimile No.: (310) 274-2831 ARTICLE XI MISCELLANEOUS 11.1 TERMINATION OF AGREEMENT. Certain of the parties herein may terminate this Agreement as provided below: (i) the Purchaser and the Seller may terminate this Agreement by mutual written consent at any time prior to the Closing; (ii) the Purchaser may terminate this Agreement by giving written notice to the Seller at any time prior to the particular Closing (A) in the event the Seller has breached any representation, warranty, or covenant contained in this Agreement in any material respect, (B) if the particular Closing shall not have occurred on or before October 1, 1997, by reason of the failure of any condition precedent or conduct of Seller prior to Closing under Articles V and VII hereof (unless the failure results primarily from the Purchaser itself breaching any representation, warranty, or covenant in any material respect contained in this Agreement or failing to use its reasonable best efforts to satisfy the conditions precedent set forth in Article V hereof); and (iii) the Seller may terminate this Agreement by giving written notice to the Purchaser at any time prior to the Closing in the event the Purchaser has breached any representation, warranty, or covenant contained in this Agreement in any material respect, or by reason of the failure of any condition precedent under Article VI hereof (unless the failure results primarily from the Seller itself breaching any representation, warranty, or covenant in any material respect contained in this Agreement). If any party herein terminates this Agreement pursuant to this Section 11.1, all rights and obligations of the parties hereunder shall terminate without any liability of any party, except for any liability of any party then in breach and Seller's obligations under the Seller Loan will be deemed accelerated and mature as of the termination date. Further, as of such termination date, all funds held by Purchaser's attorneys may be returned to Purchaser. 18 11.2 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same document. 11.3 CAPTIONS AND SECTION HEADINGS. Captions and section headings are for convenience only, are not a part of this Agreement and may not be used in construing it. 11.4 WAIVERS. Any failure by any of the parties to comply with any of the obligations, agreements or conditions set forth in this Agreement may be waived in writing by the other party or parties, but any such waiver will not be deemed a waiver of any other obligation, agreement or condition contained herein. 11.5 AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS. Each of the parties agrees to cooperate in the effectuation of the transactions contemplated under this Agreement and to execute any and all additional documents and take such additional action as is reasonably necessary or appropriate for such purposes. 11.6 ENTIRE AGREEMENT. This Agreement, including any certificate, schedule, exhibit or other document delivered pursuant to its terms, constitutes the entire agreement between the parties hereto regarding the subject matter hereof and supersedes all previous agreements. There are no verbal agreements, representations, warranties, undertakings or agreements between the parties. This Agreement may not be amended or modified in any respect, except by a written instrument signed by the parties to this Agreement. 11.7 .GOVERNING LAW. This Agreement, the construction, interpretation and enforcement thereof and the rights of the parties thereto shall be determined under, governed by and construed in accordance with the laws of the State of California without regard to principles of conflicts of law. 11.8 ASSIGNMENT, THIRD PARTIES, BINDING EFFECT. The rights of Seller under this Agreement are not assignable nor are their duties delegable without the prior written consent of Purchaser, and any attempted assignment or delegation without such consent will be null and void. Nothing contained in this Agreement is intended to convey upon any person or entity, other than the parties and their successors in interest and permitted assigns, any rights or remedies under or by reason of this Agreement. All covenants, agreements, representations and warranties of the parties contained in this Agreement are binding on and will inure to the benefit of Purchaser and Seller, and their respective successors and permitted assigns. 11.9 EXPENSES. Each party will bear their own respective expenses, including, without limitation, legal and accounting fees, in connection with the preparation and negotiation of, and transactions contemplated under, this Agreement. 11.10 DISPUTE RESOLUTION AND JURY TRIAL WAIVER. If any legal action is brought for the enforcement of this Agreement or any provision hereof, or because of any alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any 19 other relief to which it or they may be entitled. THE PARTIES HEREBY WAIVE TRIAL BY JURY IN ANY SUCH ACTION. 11.11 REMEDIES NOT EXCLUSIVE. No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy will be cumulative and will be in addition to every remedy given under this Agreement or now or subsequently existing, at law or in equity, by statute or otherwise. The election of any one or more remedies by Purchaser, Seller or Shareholders will not constitute a waiver of the right to pursue other available remedies. IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first above written. "PURCHASER" IMAGINATION PLUS CHILD DEVELOPMENT, INC. By: /s/ ------------------------------------------ Myron Lieberman, Chairman of the Board "SELLER" CHILDREN'S WONDERLAND, INC. By: /s/ ------------------------------------------ Debby S. Bitticks, Chief Exec. Officer 2 20 SCHEDULE A-1 CHILDREN'S WONDERLAND, INC. CALIFORNIA CENTERS LOCATION 21772 Lake Forest Drive Lake Forest, CA 107 Tear Drop Court Newbury Park, CA SCHEDULE A-2 CHILDREN'S WONDERLAND, INC. COLORADO SUMMARY LEASE INFORMATION All leases are on a triple net basis.
LOCATION SIZE LEASE RENT (SQ. FT.) TERM PER MONTH 6TH & CHAMBERS 6,400 2/1/95 through 1/31/00; 2 five 2/1/97: $4,117.33 15250 E. 6th Ave. year options 2/1/98: $4,320.00 Aurora, CO 80211 2/1/99: $4,533.33 WESTMINSTER 5,320 4/1/95 through 3/31/01; 2 six 4/1/97: $2,394.00 9102 W. 88th Ave. year options 4/1/99: $2,584.63 Westminster, CO 80005 IRONTON 6,000 2/1/95 through 1/31/00; 2 five $2,100; no discussion 1400 Ironton St. year options of CPI increase Aurora, CO 80010 TOWER RD. 3,680 2/1/95 through 4/30/99; 2 five 5/1/97: $2,606.67 18707 E. Hampden Ave. year options 5/1/98: $2,760.00 Aurora, CO 80013 EDGEWATER 4,800 12/1/95 through 11/31/03; 1 $3,133.88 with annual 5207 W. 26th St. five year option CPI increases not to Edgewater, CO 80214 exceed 5% in any one year. WESTGATE 5,012 2/1/95 through 1/31/00; no 2/1/95: $2,923.67 3225 S. Wadsworth options. 8/1/97: $3,341.33 Lakewood, CO 80227
The following is a list briefly identifying the contents of the Schedules omitted from this EXHIBIT 2.1. The Registrant agrees to furnish supplementally a copy of any omitted Schedules to the Commission upon its request. SCHEDULE 1.1: Personal Property, Inventory and Equipment at the Centers SCHEDULE 1.2: Excluded Assets SCHEDULE 1.3: Assumed Obligations SCHEDULE 3.9: Outstanding Purchase Orders SCHEDULE 3.10: Contracts SCHEDULE 3.11: Litigation SCHEDULE 3.12: Insurance SCHEDULE 3.13: Employee Information SCHEDULE 3.14: Employment Bargaining or Other Agreements EX-2.2 4 file003.txt ASSET PURCHASE AGREEMENT, DATED AS OF APR 24, '98 EXHIBIT 2.2 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT ("Agreement") is entered into effective as of April 24, 1998 by and among ALOHA PACIFIC, INC., a California corporation, or its designee ("Purchaser" or "Buyer"), on the one hand and CHILDREN'S WONDERLAND, INC., a California Corporation ("Seller"), KENNETH W BITTICKS, an individual ("KBitticks"), and DEBBY BITTICKS, an individual ("DBitticks"), on the other hand. KBitticks and DBitticks are collectively referred to hereinafter as the "Bitticks". RECITALS A. Seller is the owner and operator of a licensed child care center located at 700 Esplanade Drive, Oxnard, California, 93030, and another licensed child care center located at 5855 De Soto Avenue, Woodland Hills, California, 91367 (the "Woodland Hills Center") which do business under the name "Children's Wonderland" (collectively, the "Centers"). Seller is the owner of another licensed child care center located at 2317 Gold Meadow Way, Gold River, California, which also does business as Children's Wonderland (the "Gold River Center"). KBitticks and DBitticks are the Chairman of the Board and President (Chief Executive Officer), respectively, of Seller. B. Purchaser desires to purchase, and Seller desires to sell to Purchaser, all upon the terms and conditions hereinafter set forth, all of the business, properties and assets of the Centers. C. Purchaser further desires to purchase the non-exclusive right to use the name "Children's Wonderland" and the use of all of Seller's intellectual property on the terms and conditions hereinafter set forth. D. Purchaser desires to acquire an option to purchase the Gold River Center. E. Seller desires to have an option to re-acquire the Woodland Hills Center. TERMS AND CONDITIONS NOW THEREFORE, in consideration of the mutual promises hereinafter set forth and for other good and valuable consideration had and received, the parties agree as follows: ARTICLE I TRANSFER OF ASSETS. ASSUMPTION OF LIABILITIES 1.1 TRANSFER OF ASSETS. On the terms and subject to the conditions in this Agreement and on the Closing Date (as hereinafter defined), Seller will convey, transfer, assign and deliver to Purchaser all of the business, properties and assets of the Centers, tangible or intangible (collectively the "Subject Assets"), with the exception of the "Excluded Assets" as defined in Section 1.2 below. Without limiting the generality of the foregoing, the Subject Assets shall include: (a) all personal property, inventory and equipment located at or relating to the business of each of the Centers identified in Schedule 1.1(a) attached hereto; (b) all of Seller's interest in all real property leases, vehicle and equipment leases related to each of the Centers identified in Schedule 1.l(b) attached hereto; (c) all customer lists, student contracts, toys and games and teaching materials and related aids not proprietary to Seller located and/or used at each of the Centers; (d) all books and records, including all computer programs relating to the Seller's business at each of the Centers; (e) all accounts receivable attributable to services provided at the Centers arising on and after the Closing Date and prepaid client deposits (if applicable) for services relating to the Centers arising on and after the Closing Date; (f) the goodwill of the business for each of the Centers; (g) the perpetual right of Purchaser to use the name "Children's Wonderland" in connection with the operation of the Centers and the Gold River Center, if applicable; (h) the right to use all of Seller's intellectual property, including curriculum, policies and procedures, in perpetuity, except that such intellectual property rights may not be transferred or assigned to an unrelated third party without the express written consent of Seller, which consent shall not be unreasonably withheld; and (i) All leasehold improvements located at the Centers. 1.2 USE OF THE NAME "CHILDREN'S WONDERLAND"/MANAGEMENT OF NEW CENTERS. (a) As provided for in 1.1(g) above, Purchaser shall have the perpetual right to use the name "Children's Wonderland" in connection with the operation of the Centers and the Gold River Center, which right is not assignable or transferable to an unrelated third party without the express written consent of Seller, which consent shall not be unreasonably withheld. (b) Purchaser shall have the perpetual right to use the name "Children's Wonderland" for future child care centers which Purchaser may open provided that Seller manages such Centers or provided that Purchaser pays a one-time fee in the amount of $10,000 for each such future child care center which Seller does not manage, which amount shall be payable to Seller in cash prior to utilization of the name "Children's Wonderland" at such center. Said purchase price shall only be paid to the extent and in the event Buyer utilizes the name "Children's Wonderland" on respective future centers. 2 (c) If Purchaser opens any additional centers, it shall not retain any independent company to manage any such centers until and unless Seller has been offered and has rejected the opportunity to manage such centers upon the same terms and conditions as the independent company proposes to manage such centers. Nothing contained herein shall preclude Purchaser from managing such centers itself. In any event, any center operated by and for Purchaser and which uses the "Children's Wonderland" name shall be operated in such a way as to not materially impair the goodwill, if any, associated with that name. 1.3 EXCLUDED ASSETS. There shall be excluded from the Subject Assets being purchased hereunder all of the following assets of Seller as of the Closing (the "Excluded Assets"): Seller's cash, accounts receivable attributable to services provided by Seller with respect to the Centers prior to the Closing Date and those assets, if any, listed on Schedule 1.3. 1.4 ASSUMPTION OF LIABILITIES. Purchaser shall assume and be responsible for only those obligations and liabilities of Seller attributable to the Centers after the Closing Date described in Schedule 1.4 (the "Assumed Obligations"). Purchaser does not assume any of the liabilities incurred by Seller prior to the Closing Date which are not Assumed Obligations, including, without limitation, any and all tax liabilities. 1.5 METHOD OF CONVEYANCE AND TRANSFER OF SUBJECT ASSETS. The conveyance, transfer and delivery of the Subject Assets will be effected by appropriate bills of sale, endorsements, transfers, assignments and other instruments, all in such form as Purchaser reasonably requests, vesting in Purchaser, or any designated affiliates of Purchaser, good and marketable title to the Subject Assets, free and clear of any and all covenants, agreements, leases, conditions, easements, liens, charges, security interests, title retention instruments adverse claims or interests, or other title defects, contractual defaults or restrictions of any kind or nature whatsoever, except for the liens relating to the Assumed Liabilities (collectively "Liens"). 1.6 FURTHER ASSURANCES. Seller, at any time and from time to time after the Closing Date, upon request of Purchaser, will do, execute, acknowledge and deliver, all such further acts, assignments, transfers, conveyances, powers of attorney and assurances as may be reasonably required for the better conveying, transferring, and delivering to Purchaser, or to its successors and assigns, and for aiding and assisting in collecting and reducing to possession, all the Subject Assets. 1.7 ACCOUNTS RECEIVABLE. Accounts receivable of Seller for services provided with respect to the Centers prior to the Closing Date shall remain the property of Seller ("Seller's Accounts Receivable"). Purchaser shall cooperate with Seller in the collection of Seller's Accounts Receivable, and all payments on Seller's Accounts Receivable received by Purchaser after the Closing Date shall immediately, upon the receipt thereof be paid by Purchaser to Seller. In addition, any payments on accounts receivable purchased by Purchaser hereunder which are received by Seller after the Closing Date shall immediately be paid by Seller to Purchaser. 1.8 EMPLOYEES. Seller acknowledges and agrees that, as of the Closing Date, Seller will no longer be conducting Seller's business at the location of the Centers. Prior to the Closing Date, Seller has notified the employees engaged on a full or part time basis at any of the Centers (all of whom are identified on the Seller's most recent payroll register, a copy of which is attached hereto as 3 Schedule 1.8), that their employment with Seller in connection with the Centers will terminate as of the Closing Date. Seller agrees that on the Closing Date, it will pay or have paid all compensation and benefits (including all accrued sick leave and vacation pay) owing to such employees up to the Closing Date. Seller shall be responsible for giving any and all notices and complying with the provisions of the WARN Act if applicable. Purchaser shall have the right (but not the obligation) to hire any or all of Seller's employees who work at the Centers and Seller shall assist Purchaser in doing so. 1.9 OPTION ON GOLD RIVER CENTER. Seller hereby grants to Purchaser an option to purchase the assets of the Gold River Center upon the following terms and conditions: (a) The option must be exercised by way of a notice given by Purchaser pursuant to Article X hereof within 90 business days of the Closing Date. (b) If Purchaser exercises the option, then the purchase price shall be a maximum of up to $250,000 payable as follows: (i) Cancellation of the loan made pursuant to Article 1.10(a); (ii) Purchaser shall assume the existing real property lease (subject to landlord approval) of Gold River Center and all of Seller's obligations under lease of equipment used at the Gold River Center; provided, however, that, to the extent such obligations under the assumed equipment leases exceed $75,000, Purchaser shall be entitled to offset such excess amount against the Management Fee (as defined hereafter) otherwise owing by Purchase to Seller; (iii) Subject to the terms of this Article 1.9(iii), Purchaser shall have an obligation to make a maximum of up to an aggregate of $125,000 of payments to Seller. Such payments, if any, shall be made on a monthly basis to the extent that the Net Cash Flow (as defined in Article 9.1.4 hereof) from the Gold River Center, during the 24 month period following the exercise of such option, exceeds $20,000 in any such month. To the extent that the Net Cash Flow for the Gold River Center for any such month exceeds $25,000, then Purchaser's obligation is limited to $5,000 for that month, and the excess of Net Cash Flow over $25,000 for any such month shall not carry over to the following month(s). In no event shall Purchaser have any obligation to make any further payments to Seller after the expiration of 25 months from the date on which the option is exercised. (c) No payments shall be due to Gold River Center except as set forth above. 1.10 OPTION CONSIDERATION. As of the Closing Date and as consideration for the option, Purchaser agrees to make a loan to Seller in the amount of $50,000 on the following terms and conditions: (a) The loan will be non-interest bearing; (b) The loan will be secured by all of Seller's interest in the assets of the Gold River Center, and Purchaser may file an UCC-1 Statement to that effect, and Seller shall execute a security agreement and promissory note in form satisfactory to Purchaser. 4 1.11 If Purchaser does not exercise the option to purchase the Gold River Center, the $50,000 loan made pursuant to Article 1.10 shall, at the sole discretion of Purchaser, be cancelled and offset against any Management Fee otherwise owing by Purchaser to Seller. ARTICLE II PURCHASE PRICE AND PAYMENT: CLOSING 2.1 PURCHASE PRICE. As the entire consideration for the transfer and assignment by Seller of the Subject Assets, for the assumption by Purchaser of the Assumed Obligations and for the representations, warranties and covenants of Seller set forth herein, Purchaser, subject to satisfaction or waiver of the conditions set forth herein, shall pay to Seller the net purchase amount of up to Four Hundred Seventy Thousand Dollars ($470,000), payable as follows: (a) $350,000 cash to be paid to Seller at Closing; and (b) a maximum aggregate amount of up to $120,000 to be paid by Purchaser to Seller based upon the Net Cash Flow of the Centers as described hereafter. Such $120,000 amount, if any, shall be paid on a monthly basis for 24 months from and after the Closing Date, if and to the extent that the Net Cash Flow from the Centers exceeds $40,000 for the prior month but in no event more than $5,000 per month and without any carry-over with respect to any excess cash flow (i.e., Net Cash Flow in excess of $45,000 per month). Of the Purchase Price amount, One Hundred Forty-Four Thousand ($144,000) is allocated to the acquisition of the Oxnard, California center, and Three Hundred Twenty-Six Thousand ($326,000) is allocated to the acquisition of the Woodland Hills, California center. To the extent the entire $120,000 is not earned by Seller during the aforementioned 24-month period, there shall be a proportionate reduction in the aforementioned allocation of the purchase price between the Centers. 2.2 ALLOCATION OF PURCHASE PRICE. Purchaser will allocate the purchase price amount for the Subject Assets and the Assumed Obligations in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), based on the reasonable fair market value of each asset and the liabilities to be assumed. Purchaser will advise the Seller of the allocations when determined. Purchaser and Seller will each attach a copy of such information or forms as are required to be filed pursuant to Section 1060 of the Code to the tax returns filed covering the period in which the transfer of the Subject Assets and the Assumed Obligations occur. Seller and Purchaser will report the sale and purchase of the Subject Assets and the assumption of the Assumed Obligations in accordance with the allocations determined by Purchaser for all federal, state and local tax purposes. Seller, and Purchaser, on the other hand, will indemnify and hold each other harmless, from and against any and all losses, liabilities and expenses, including, without limitation, attorneys fees and additional income taxes, interest and penalties that may be incurred by the indemnified party as a result of the failure of the indemnifying paw to so report the sale and purchase of the Subject Assets and the assumption of the Assumed Obligations. 2.3 TRANSFER TAXES. All applicable sales, use and transfer taxes, if any, arising by reason of the transfer of the Subject Assets and the assumption of the Assumed Obligations under this Agreement shall be borne by Seller. 5 2.4 CLOSING. The closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Seller, 28310 Roadside Drive, Suite 220, Agoura, California 91301, on April 30, 1998 or receipt of both Landlords' consents, whichever later occurs (the "Closing Date"). ARTICLE III REPRESENTATIONS, WARRANTIES OF SELLER AND BITTICKS Seller represents and warrants to Purchaser as of the Closing Date, as follows: 3.1 ORGANIZATION AND STANDING. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Seller has full power and authority to carry on the Seller's business at each of the Centers as and where conducted and to own or lease and operate the Subject Assets at and where owned or leased and operated by it. Seller is duly licensed and qualified and is in good standing in the State of California, which constitutes the only jurisdiction in which the conduct of Seller's business at the Centers and the nature of the Subject Assets requires the Seller to be so qualified. 3.2 AUTHORITY OF SELLER: CONSENTS. The execution, delivery and consummation of transactions contemplated in this Agreement and the other documents contemplated herein to be executed by Seller has been duly authorized in accordance with all applicable laws and the Articles of Incorporation and Bylaws of the Seller, and no further corporate action is necessary on the part of Seller, or the Board of Directors or shareholders of Seller to make this Agreement valid and binding on Seller and enforceable against Seller in accordance with its terms (subject to bankruptcy, insolvency, reorganization and other similar laws affecting creditor's rights generally and to general principles in equity). On the Closing Date, Seller shall deliver to Purchaser certified copies of its Board of Directors, resolutions authorizing the execution and performance by Seller of this Agreement. The execution, delivery and consummation of this Agreement and the other Agreements to be executed by Seller (i) does not violate the Articles of Incorporation or Bylaws of Seller, (ii) does not and will not, with the passage of time, the giving of notice or otherwise, result in a violation or breach of, or constitute a default under, any, term or provision of any mortgage, deed of trust, lease, instrument, order, judgment, decree, rule, regulation, law, contract, Agreement or any other restriction to which Seller is a party or to which the Seller or any of its respective assets are subject or bound, (iii) will not result in the creation of any Lien upon any of the Subject Assets, and (iv) will not result in any acceleration or termination of any loan or security interest agreement to which Seller is a party, or to which Seller or any of its respective assets are subject or bound. Except as set forth in Schedule 3.2 attached hereto, no approval or consent of any person, firm or other entity or governmental body is or was required to be obtained by Seller for the authorization of this Agreement or the consummation by Seller of the transactions contemplated in this Agreement. To the extent that approval of the Department of Social Services or any other governmental or regulatory agency is required in connection with the transactions contemplated herein. Seller will use its best efforts to assist Purchaser in obtaining such approval. 3.3 TITLE OF ASSETS CONDITION OF ASSETS. Except as set forth in Schedule 3.3 attached hereto, Seller owns and possesses as of the Closing Date, all right, title and interest in and to the Subject Assets free and clear of any and 6 all Liens with the exception of the Assumed Obligations. Seller has as of the Closing Date the right, power and capacity to sell, convey, transfer, assign and deliver to Purchaser the Subject Assets free and clear of any and all Liens, with the exception of the Assumed Obligations. All tangible assets included in the Subject Assets are in Seller's possession or under its control. 3.4 FINANCIAL STATEMENTS. The financial statements for the Centers and the Gold River Center for the months of July through February, are attached hereto as Schedule 3.4 (collectively the "Financial Statements"). The Financial Statements (i) have been prepared on a consistent basis during the periods involved, (ii) present fairly the operations of the business of each Center and the Gold River Center, and results of its operations, (iii) are consistent with the books and records of Seller; and (iv) reflect all necessary adjustments for the fair presentation of the Centers and the Gold River Center's financial position as of the date thereof and the results of their operations for the periods covered thereby. 3.5 ABSENCE OF CERTAIN CHANGES. Since the date of the Financial Statements and except as otherwise disclosed by Seller to Purchaser in Schedule 3.5 attached hereto: (i) there has not been any material adverse change in the business or in the condition (financial or otherwise), assets, liabilities, results of operations or prospects of the Seller's business conducted at the Centers, and (ii) there has not occurred any event or governmental regulation or order which could cause such a change, nor, to the knowledge of Seller, is the occurrence of any such event, regulation or order threatened. Without limiting the generality of the foregoing, since the date of the Financial Statements, there has not been: (a) any mortgage or pledge of, or any other lien, charge or encumbrance of any kind, on any of the Subject Assets; (b) any sale or transfer of any assets, including the Subject Assets, or settlement, cancellation or release of any indebtedness owing to Seller in connection with the Seller's business as conducted at the Centers; (c) any material amendment or termination of any contract, Agreement or license, to which Seller is a party in connection with the Seller's business or to which Seller or any of the Subject Assets are subject or bound; (d) any commitment made (through negotiations or otherwise) or any liability incurred to any labor union or similar organization of employees by Seller; (e) any material change in compensation, wages or benefits paid or payable to any employee of Seller who are involved in the business of the Centers; (f) any material adverse change collection loss experience related to the accounts receivable arising from Seller's business conducted at the Centers; (g) any material loss, damage or destruction to the Subject Assets (whether or not covered by insurance); 7 (h) an transaction outside of the ordinary course of Seller's business related to the business of the Centers; (i) any discharge or satisfaction by Seller of any lien, encumbrance, obligation or liability (accrued, absolute, fixed or contingent) other than those incurred in connection with the ordinary course of operation of the Centers; (j) any change in Seller's accounting methods or practices; (k) any purchase of fixed assets; or (l) to the best of Seller's or the Bitticks' knowledge, any other event or condition of any character which materially adversely affects the Centers or the Gold River Center. 3.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on the Financial Statements and Schedule 3.6 attached hereto, and except for trade payables incurred by Seller subsequent to the date of the Financial Statements in the ordinary, course of business, including the Assumed Obligations, none of the assets or properties of Seller comprising the Subject Assets are subject to, any liabilities or adverse claims or obligations (whether accrued, absolute, contingent or otherwise). There are no facts known to Seller that might reasonably serve as a basis, in whole or in part, for any liabilities or obligations not disclosed in this Agreement, or in the Financial Statements, or in information relating to the Centers that has been otherwise disclosed to Purchaser. 3.7 LITIGATION. There are no suits, actions, legal or administrative proceedings, arbitrations or governmental investigations of any nature whatsoever pending or, to the knowledge of Seller or the Bitticks, threatened in connection with the Seller's business at the Centers or the Subject Assets. Seller has not received any notice that Seller is the subject of any governmental investigation in connection with the Seller's business at the Centers. Seller is not subject to any order writ, injunction or decree of any court, or of any federal, state, local or other governmental department, commission, board, bureau, agency or instrumentality), domestic or foreign, in connection with the business conducted at the Centers or the Subject Assets. 3.8 EMPLOYMENT MATTERS. (a) Seller is not a party to, participant in, or bound by, any collective bargaining agreement, union contract, pension, profit sharing arrangement or material employment, deferred compensation, termination, severance or similar personnel arrangement related to the Centers' personnel. (b) Seller has not received, in connection with the Centers, notice of any, active, pending, or threatened administrative or judicial proceedings under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act: the Fair Labor Standards Act, the Occupational Safety and Health Act, the National Labor Relations Act, or any other federal, state or local law (including. common law), ordinance or regulation relating to employees of Seller with respect to the business of the Centers. 8 (c) The relation of Seller with its employees at the Centers is good and there are no pending or, to the knowledge of Seller or the Bitticks, threatened labor difficulties. 3.9 EMPLOYEE BENEFIT PLANS AND OTHER PLANS. (a) For purposes of this Section, the following definitions apply: (i) "Benefit Plan" means each deferred compensation, pension profit-sharing and retirement plan, each plan, arrangement or policy for the provision of bonuses and/or severance benefits, each "employee benefits plan" (defined in ERISA Section 3(3)) and each fringe benefit plan (including, without limitation, a hospitalization, insurance, stock option or stock purchase plan) that Seller maintains, contributes to, has liability with respect to, or has an obligation to contribute to; (ii) "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985; (iii) "ERISA" means the Employee Retirement Income Security Act of 1974 as amended; (b) Seller has not directly or indirectly acted in any manner or incurred any obligation or liability, and will not directly or indirectly act in any, manner in the future or incur any obligation or liability in the future with respect to any Benefit Plan which has or could give rise to any liens on any of the Subject Assets, or which could result in any liability or obligation o Purchaser, whether arising out of the establishment, operation, administration or termination of such Benefit Plan or the transactions contemplated by this Agreement. (c) Seller has timely, provided or will timely provide all notices and continuation of health benefit coverage required to be provided to employees, former employees or the beneficiaries or dependents of such employees or former employees, under Part 6 of Subtitle B of Title I of ERISA or, as applicable, COBRA to the extent such notices and continuation of health benefit coverage are required to be provided by reason of the events occurring prior to or on the Closing Date or by reason of the transactions contemplated by this Agreement. To the extent required by COBRA, Seller will treat its employees and their dependents and beneficiaries as of the Closing Date as having incurred a "qualifying event" (within the meaning of ERISA Section 603 and, as applicable, Code Section 4980B(f)(3)) on the Closing Date. Seller will continue the health benefit coverage required by, COBRA. Seller will periodically, upon request, provide Purchaser with evidence, to the satisfaction of Purchaser, of compliance with the above provision. Seller will indemnify and hold harmless Purchaser and its shareholders, directors, officers, employees and agents against, any costs, expenses, losses, damages and liabilities incurred or suffered by any of them, directly or indirectly, including, without limitation, reasonable legal fees and expenses, with respect to any failure of Seller to 6omply with the requirements of this Section or COBRA. 3.10 INSURANCE. Schedule 3.11 attached hereto sets forth a true and correct list of all of the policies of insurance covering the Seller's business at tee Centers and Subject Assets presently in force, including declarations pages which indicate the (i) risk insured against, (ii) name of Carrier, (iii) policy 9 number, (iv) amount of coverage, (v) expiration date and (vi) the property, if any, insured, indicating as to each whether it insures on an "occurrence" or a "claims made" basis. All of the insurance policies set forth on Schedule 3.11 are in full for and effect as of the Closing Date and all premiums, retention amounts and other related expenses due have been paid, and Seller has not received any notice of cancellation with respect to any of the policies. Seller has not been refused any insurance in connection with the business conducted at any of the Centers or the Subject Assets by any insurance carrier. To the knowledge of Seller or the Bitticks, there are no circumstances existing which would enable any insurer to avoid liability under Seller's policies. 3.11 LICENSES. Each of the Centers has all necessary licenses and permits required by Federal, State and other governmental and health related agencies necessary to carry on its business (all of which are identified on Schedule 3.12 attached hereto), and no licenses have been revoked, are under suspension or have been under suspension during the past five (5) years. 3.12 CASUALTY OCCURRENCES. There have been no occurrences during the last six (6) years of alleged damages to persons or property involving the education services offered by Seller, including, but not limited to, the educational services offered through the Centers. 3.13 BUSINESS RELATIONS. Seller has no reason to believe that the customers of the business of the Centers will not continue to do business with Purchaser after the Closing at levels and on terms at least equal to those enjoyed by Seller. 3.14 COMPLIANCE WITH LAW. Seller has complied with all laws, relations, rules and orders of any governmental department or agency or any other commission, board, agency or instrumentality, federal, state or local, or other requirements of law affecting the Seller's business, the Subject Assets and the Assumed Obligations and is not in default under or in violation of any provision of any federal, state or local law, regulation, rule or order affecting the Business, nor does Seller require the consent of any governmental agency to this Agreement. 3.15 LICENSES AND RIGHTS. Seller possess all franchises, licenses, easements, permits and other authorizations from governmental or regulatory, authorities (either domestic or foreign) and from all other persons or entities that are necessary to permit it to engage in the Seller's business as presently conducted in and at all locations of the Centers. 3.16 BROKERAGE AND FINDER'S FEES. Seller has not incurred any liability to any broker, director or agent for any brokerage fees, finder's fee, or commissions with respect to the transactions contemplated by this Agreement. 3.17 LEASES. Seller is not in default under located at the Centers, and all such leases are valid and binding obligations of Seller. 3.18 ENVIRONMENTAL MATTERS. Seller (a) has not caused or allowed the generation, treatment, storage, or disposal of hazardous substances at any of the Centers except in accordance with local, state, and federal statutes and regulations; (b) has not caused or allowed the release of any toxic or hazardous substance or substances onto, or near any of the Centers; (c) is in compliance with all applicable permits laws, rules and relations regarding the handling of hazardous substances located at or near the Centers as of the Closing Date; (d) has not received inquiry or notice nor does it have any reason to suspect or 10 believe it will receive inquiry or notice of any actual or potential proceedings, claims, or lawsuits arising in connection with Subject Assets and or out of its operations or business as conducted at the Centers: (e) has not, or has it ever been, subject to the release of any hazardous substance at any of the Centers; and (f) is currently not operating or required to be operating under any compliance order, schedule, decree .or agreement, any consent decree, order, or Agreement, and/or correction action decree, order or agreement issued or entered into under any, federal, state or local statute, regulation or ordinance regarding the environment and/or health or safe in the workplace. 3.19 MATERIAL MISSTATEMENTS OR OMISSIONS. No representations or warranties made by Seller or the Bitticks in this Agreement or in any document statement, certificate, schedule, chart, list, letter, compilation or other document furnished or to be furnished to Purchaser in connection with the transactions governed by this Agreement, contain any untrue statement of a material fact, or omit to state a material fact necessary to make the statements or fact contained therein, in light of the circumstances under which they were made, not misleading. 3.20 TAXES. As of the Closing, all tax obligations of the Seller which relate in any way to the operation or ownership of the Centers or which could directly or indirectly have an effect on or result in a lien against the Subject Assets will have been paid or satisfied by Seller. In addition, any sales or use taxes relating to the transfer of the Subject Assets made pursuant hereto shall be paid by Seller. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller as of the Closing Date as follows: 4.1 ORGANIZATION AND GOOD STANDING OF PURCHASER. Purchaser is in Good Standing under the laws of the State of California and has as of the Closing Date, the full power and authority to carry on its business as and where now conducted and where anticipated by this Agreement. 4.2 AUTHORITY OF PURCHASER. The execution, delivery and consummation of this Agreement by Purchaser has been authorized by the board of directors of Purchaser in accordance with all applicable laws and the Articles of Incorporation and Bylaws of Purchaser and no further corporate action is necessary on the part of Purchaser to make this Agreement valid and binding on Purchaser and enforceable against Purchaser in accordance with its terms. 4.3 EXECUTION, DELIVER, AND BINDING EFFECT. This Agreement has been duly executed and delivered by, Purchaser and constitutes a legal, valid and binding obligation of Purchaser enforceable in accordance with its terms (subject to bankruptcy, insolvency, reorganization and other similar laws affecting creditor's rights generally). 4.4 BROKERAGE AND FINDER'S FEES. Neither Purchaser nor any shareholder, officer, director or agent of Purchaser has incurred any liability to any broker, finder or agent for any brokerage fees, finder's fees or commissions with respect to the transactions contemplated by this Agreement. 11 ARTICLE V CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER The obligations of Purchaser under this Agreement are, at its option, subject to satisfaction of the following conditions at or prior to the Closing Date: 5.1 The Warranties and representations made herein by Seller to Purchaser, including but not limited to those set forth in Article III, shall be true and correct on and as of the Closing Date, and Seller shall have performed and complied with all agreements and covenants contained herein on their part required to be performed or complied with as of the Closing Date. 5.2 No investigation, proceeding or litigation, at law or in equity, by any governmental or regulatory commission, agency or other body or authority or by any other person, firm, corporation or other entity, shall be pending on the Closing Date which challenges the consummation of the transactions contemplated by this Agreement or which claims damages against Purchaser or Seller as a result of consummation of the transactions contemplated hereby, or which has a material adverse affect upon any of the operations of Seller related to the Centers or the Subject Assets. 5.3 With respect to each of the Centers, except as provided for in paragraph 7.9, Purchaser shall have received such approvals, consents, authorizations, waivers and permits from any person, necessary or appropriate in order to enable Purchaser to acquire the Subject Assets and operate the Centers in the manner provided herein without the imposition of any conditions which Purchaser might reasonably consider to be material and adverse. 5.4 There shall be no material casualty or damage to or destruction of any of the Subject Assets. 5.5 All proceedings to be taken in connection with the consummation of the transactions contemplated by this Agreement, and all certificates, documents and instruments incidental thereto, shall be reasonably satisfactory in form and substance to Purchaser and its counsel and Purchaser shall have received copies such documents and instruments as Purchaser and its counsel may reasonably request in connection with such transactions. 5.6 RECEIPT OF DOCUMENTS BY PURCHASER. Purchaser has received: (a) Certified copies of resolutions duly adopted by the Board of Directors of Seller approving this Agreement and the transactions contemplated under it; (b) Uniform Commercial Code Termination Statements and/or other documentation in form and substance satisfactory to Purchaser terminating any and all Liens that max affect any of the Subject Assets; (c) Purchaser shall have received from Seller a certificate dated the Closing Date, in a form acceptable to Purchaser, certifying that the conditions set forth above have been fulfilled; and 12 (d) Purchaser shall have received any other documents which Purchaser deems necessary to consummate the transactions contemplated in this Agreement. 5.7 INSTRUMENTS OF TRANSFER AND DELIVERY OF THE SUBJECT ASSETS. Seller shall have delivered to Purchaser good and sufficient instruments of transfer relating to the Subject Assets. The instruments of transfer shall be in form and substance reasonably satisfactory to Purchaser and its counsel. 5.8 LEASE AMENDMENTS AND ASSIGNMENT. On or prior to the Closing, Seller will furnish Purchaser with estoppel certificates and consents to assignment in form(s) reasonably acceptable to Purchaser, from each landlord, indicating, among other things, that (i) the Centers' lease Agreements are in full force and effect, (ii) that Seller is current in its rental obligations; and (iii) the landlord expressly consents the assignment of the applicable lease from Seller to purchaser. In addition, on or prior to the Closing, Seller will furnish Purchaser with an amendment to the Lease for the Oxnard Center providing for a waiver or deferral, on terms acceptable to Purchaser, of a $2,000 per month rent increase. If necessary in order to obtain the approval of any landlord to the assignment of any lease relating to the Centers or the Gold River Center, Seller shall agree to remain jointly and severally liable with Purchaser (or its assignee or designee), in which event Purchaser (or its assignee or designee) shall be obligated to indemnify Seller of any liability which may be imposed upon Seller as a result Seller's continuing liability under the lease(s). ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATION OF SELLER The obligations of Seller under this Agreement are, at its option, subject to satisfaction of the following conditions at or prior to the Closing Date: 6.1 No investigation, proceeding or litigation, at law or in equity, by any governmental or relation commission, agency or other body or authority or by any other person, firm, corporation or other entity shall be pending on the Closing Date which challenges the consummation of this transactions contemplated by this agreement or which claims damages against Purchaser or Seller as a result of the consummation of the transactions contemplated hereby, or which adversely affects any of the operations of the Subject Assets. 6.2 The warranties and representations made herein by Purchaser to Seller shall be true and correct on and as of the Closing Date with the same effect as if such warranties and representations had been made on and as of the Closing Date, and Purchaser shall have performed and complied with all agreements and covenants contained herein on its part required to be performed or complied with on or prior to the Closing Date. 6.3 All proceedings to be taken in connection with the consummation of the transactions contemplated by this Agreement, and all certificates, documents, and instruments incidental thereto, shall be reasonably satisfactory in form and substance to Seller and its counsel and Seller shall have received copies of such documents and instruments as Seller and its counsel may, reasonably request in connection with such transactions. 13 ARTICLE VII CONDUCT OF SELLER'S BUSINESS PRIOR TO CLOSING The Seller contains and agrees that, since the date of the most recent Financial Statement and except as Purchaser shall have otherwise consented hereto in writing: 7.1 ORDINARY COURSE. The business of Seller at the Centers has been conducted diligently in the ordinary course, and Seller has used its best efforts to preserve its ongoing business relationships. 7.2 NO NEW AMENDMENTS. No contract, agreement, obligation, lease, license or other commitment has been entered into or assumed by or on behalf of Seller which related to or affects the Centers, except for contracts in the ordinary course of business. 7.3 TAX RETURNS: COMPLIANCE. Seller has duly and timely filed all reports or returns required to be filed with federal, state, foreign, local and other authorities and has promptly paid all federal, state, foreign and local tax assessments and governmental charges lawfully levied or assessed upon it or its properties or upon any pan thereof, except taxes or charges being contested in good faith by appropriate proceedings and for which adequate provision has been made and has duly observed and conformed to all lawful requirements of any governmental authority relating to its properties or to the operation and conduct of its business and all covenants, terms and conditions upon or under which any of its properties are held. 7.4 MAINTENANCE. All buildings, offices and other real property and all machinery, equipment fixtures, motor vehicles and other property of the Seller have been kept and maintained in good operating condition, repair and working order, ordinary wear and tear excepted. 7.5 INSURANCE. The Seller has continued to maintain in full force and effect for all Centers, all policies of insurance then in effect, or renewals thereof or equivalent policy. 7.6 NO SALES OR MERGERS. Seller has not entered into any other Agreements to sell the Subject Assets or any or all of the Centers. 7.7 NO BORROWING OR CAPITAL EXPENDITURES WITHOUT PURCHASER'S CONSENT. Seller has not incurred any debt which could impact the Subject Assets. In addition, Seller has not made any capital expenditures out of the ordinary course of business. 7.8 EMPLOYEE COMPENSATION. Seller has, not made any material changes in the compensation of employees working at the Centers. 7.9 REGULATORY APPROVAL. Seller has taken whatever action as may be necessary to obtain the approval of any and all applicable governmental or regulatory, agencies for the transactions contemplated in this Agreement and for the ownership and operation of the Centers by Purchaser, except the approval of the Department of Social Services; provided, however, that immediately following the Closing Date, Seller shall use its best efforts to assist Purchaser in expeditiously obtaining such approval form the Department of Social Services. 14 ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES, INDEMNITIES 8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTS. Notwithstanding the Closing of the transactions contemplated under this Agreement, or any investigation made by or on behalf of the Purchaser, the representations and warranties of Seller contained in this Agreement or in any certificate, schedule, list, or other document furnished pursuant to this Agreement, will survive the Closing and continue for a period of two (2) years thereafter. 8.2 INDEMNIFICATION. (a) Seller covenants and agrees to indemnify, defend and hold harmless Purchaser, its affiliates and its shareholders, directors, officers employees and agents ("Purchaser Indemnities") from any and all costs, expenses, losses, damages and liabilities incurred or suffered, directly or in directly, by any, of them (including, without limitation, actual legal fees and expenses) arising out of, in connection with, resulting from or attributable to the following ("Indemnified Losses"): (1) the breach of, or misstatement in, any one or more of the representations or warranties of Seller made in or pursuant to this Agreement, (2) the breach of any one or more of the covenants of Seller made in or pursuant to this Agreement, (3) any claims, demands, suits, investigations, proceedings or actions by any third party containing or relating to allegations that, if true, would constitute a breach of, or misstatement in, any one or more of the representations or warranties of Seller or the Bitticks made in or pursuant to this Agreement and (4) any trade payables, obligations or liabilities of Seller of any nature whatsoever (whether accrued, absolute, contingent or otherwise), except the Assumed Obligations. All Indemnified Losses shall be payable on demand and without limiting Purchaser's other rights and remedies may be offset by Purchaser against any amount that might otherwise be payable by Purchaser to Seller. (b) As security for payment of any Indemnified Losses and for valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Bitticks agree that, as of the Closing Date, $400,000 principal amount of all promissory notes payable by Seller to the Bitticks (collectively the "Bitticks Notes") and all documents reflecting or consisting of security therefor (the "Bitticks Security Documents") are to be pledged or assigned as collateral to Purchaser. On the Closing Date, the originals of the Bitticks Notes shall be delivered to Purchaser along with a duly executed pledge agreement or assignment in form reasonably satisfactory to Purchaser. The pledge or assignment of the Bitticks Notes and the Bitticks Security Documents shall terminate on the receipt of a license by Purchaser from the California Department of Social Services to operate the Centers. In addition, if necessary, to enable Seller to obtain dependent financing, provided that Seller is not involved in a bankruptcy, Purchaser shall release or reassign the Bitticks Notes and the Bitticks Security Documents. Under such circumstances, Purchaser shall release or reassign. $1 of the Bitticks Notes and the Bitticks Security, Documents for each dollar in financing obtained by Seller. (c) Purchaser will indemnify, and hold harmless the Seller in respect of, claims, losses, expenses, cots, obligations and liabilities they may incur by reason of Purchaser's breach of or failure to perform an), of its warranties or covenants in this Agreement, or by reason of any act or omission of Purchaser 15 or any of it successors or assigns, after the Closing Date, that constitutes a breach under any lease, contact, order, or other agreement to which it is a party or by which it is bound at the Closing Date, but only to the extent to which Purchaser expressly assumes these obligations, duties, and liabilities under this Agreement. ARTICLE IX OTHER AGREEMENTS OF THE PARTIES 9.1 MOVEMENT SERVICE AGREEMENT. 9.1.1 RETENTION OF SELLER BY PURCHASER. For the term specified in Article 9.1.2 hereof, Purchaser agrees to retain Seller to perform "Management Services" for the Purchaser with respect to the Centers, and Seller agrees to render the Manager Services on behalf of Purchaser. For purposes of Article 9.1, Management Services shall mean any and all of the day-to-day management end operational services which were conducted by Seller with respect to the business operations of the Centers immediately prior to the Closing Date including, without limitation, the timely payment of all obligations of or relating to the Centers as they come due. Seller shall utilize its best efforts on behalf of Purchaser in satisfaction of Seller's duties hereunder and shall perform such duties in an efficient faithful and businesslike manner and in a manner which does not otherwise materially or adversely reflect upon the business reputation or integrity of Purchaser or the Centers. 9.1.2 TERM. Subject to the provisions of Article 9.1.3 hereof, the term of Seller's retention under this Article 9.1 shall be for a period of two (2) years, commencing as of the date hereof and continuing for a period of two (2) years thereafter. 9.1.3 TERMINATION OF AGREEMENT. 9.1.3.1 TERMINATION FOR CAUSE. Notwithstanding the provisions of Article 9.1.2 hereof, Purchaser may terminate the retention of Seller under Article 9.1 for Cause (as hereinafter defined), effective upon written notice to Seller. For purposes of this Article 9.1.3.1, termination for "Cause" shall mean termination because of the good faith finding by the Purchaser's Board of Directors that: (a) Seller shall have been grossly negligent in the conduct of its duties on behalf of Purchaser hereunder or shall have failed to perform the duties assigned to it hereunder, which negligence or failure to perform shall not have been cured within fifteen (15) days after delivery by Purchaser of written notice thereof to Seller; (b) Seller shall have failed to comply with any of the material provisions of Article 9.1, which breach shall not have been cured within fifteen (15) days after delivery by Purchaser of written notice thereof to Seller; (c) Seller files a petition in bankruptcy or petition or application in any tribunal for the appointment of a custodian, receiver or trustee for a substantial part of its assets or suffers the filing of such petition or application or the commencement of any such proceeding against it in 16 which an order for relief is entered or which remain undismissed for a period of thirty (30) days or more; (d) Neither KBitticks nor DBitticks is employed by Seller; or (e) Seller has received (or is credited with having received as a result of offsets by Purchaser of amounts owing by Seller to Purchaser under this Agreement) an aggregate of $250,000 in Management Fees under Article 9.1.4. 9.1.3.2 TERMINATION WITHOUT CAUSE. Notwithstanding the provisions of Article 9.1.2 hereof, Purchaser may terminate Seller's retention under Article 9.1 without cause, effective upon written notice thereof to Seller. If Purchaser so terminates Seller during the term of Article 9.1, Purchaser agrees to continue to pay Seller the amounts then required to be paid Seller as specified in Article 9.1.4. Such Management Fee shall be payable by Purchaser to Seller in accordance with the terms and conditions of Article 9.1.4. 9.1.3.3 EFFECT OF TERMINATION. Except as set forth in Article 9.3.2 hereof, Purchaser shall not be obligated to make any payments to Seller after termination of its retention pursuant to any of the provisions of Article 9.1 hereof, other than Seller's accrued Management Fees, if any, through the effective date of Seller's termination hereunder. 9.1.4 MANAGEMENT FEE. In consideration of the Management Services to be rendered by Seller to Purchaser under Article 9.1, Purchaser agrees to pay to Seller a monthly fee ("Management Fee") equal to ninety percent (90%) of the aggregate Net Cash Flow of the Centers. For purposes of this Article 9.4 and Articles 1.9 and 2.1, the term "Net Cash Flow" shall mean the aggregate expenditures) of the Centers or Gold River Center, as the case may be. Under no circumstances shall the aggregate Management Fee exceed $250,000. 9.1.5 INSPECTION OF RECORDS. Commencing as of the Closing Date and continuing until the date upon which Purchaser receives a license to operate the Centers from the Department of Social Services ("DSS Approval"), Seller will be responsible for all accounting and bookkeeping for the Centers. Purchaser will be entitled to audit the relevant records prepared by Seller in order to permit Purchaser to determine the accuracy of Seller's computation of the monthly Management Fee hereunder. All costs and expenses associated with such audit shall be borne by Purchaser, unless it is determined in Purchaser's reasonable discretion that a material computational error has been made by Seller, in which all reasonable costs and expenses incurred by Purchaser shall be borne by Seller. Effective as of the date of receipt by Purchaser of DSS Approval, all accounting and bookkeeping functions relating to the Centers may, at the sole discretion of Purchaser, be assumed by Purchaser and all reasonable costs associated with such accounting and bookkeeping functions shall thereafter be deemed to be an expense in determining Net Cash Flow of the Centers. 9.1.6 PAYMENT OF MANAGEMENT FEE. The monthly Management Fee payable by Purchaser to Seller hereunder shall be paid by the 10th day of the month immediately following the month upon which the monthly Management Fee in question was earned. 17 9.1.7 SPACE IN OXNARD. During such time as Seller is managing the Centers, Purchaser shall make space available to Seller, at no cost to Seller, at the Oxnard Center to enable Seller to manage the Centers and to conduct its other business. 9.2 NON-COMPETITION AGREEMENT. (a) As a material inducement to Purchaser to enter into this Agreement, Seller and the Bitticks agree for itself/themselves and for each of Seller's respective subsidiaries and affiliates that for a period of five (5)years from and after the Closing Date it/they will not, directly or indirectly: (i) engage in, carry on or have any interest in child care business in the Covenant Territory (as hereinafter defined); (ii) enter into, engage in, or be employed by or consul: with any child care business in the Covenant Territory; (iii) induce any customers of the Centers to refuse to continue to use the services of the Centers; (iv) solicit employees of the Centers for employment. As used herein, the term "Covenant Territory" shall mean a radius of three (3) miles on a straight line from each and every one of the Centers acquired pursuant however, that Seller's existing child care facilities to this Agreement provided; however, that Seller's existing child care facilities (and any interest the Bitticks have in such Centers) are exempt from this non-competition provision. The parties acknowledge that the length of time pertaining to all prohibitions in this Article 9.2 are reasonable and necessary for the legitimate protection of Purchaser's business and interests. (b) Seller and the Bitticks expressly agree and understand that the remedy at law for any breach by Seller or the Bitticks of this Article 9.2 will be inadequate and that the damages flowing from such breach are not readily susceptible to being measured in monetary terms. Accordingly, it is acknowledged that upon violation or threatened violation of this Article 9.2, purchaser will be entitled, among other remedies, to immediate injunctive relief and may obtain a temporary restraining order and injunction restraining any breach or threatened breach without the necessity of posting bond. Nothing contained herein will be deemed to limit Purchaser's remedies at law or in equity for any breach by Seller or the Bitticks of any of the provisions of this Agreement. (c) In the event any court of competent jurisdiction determines that the specified time period or geographical area set forth in this Article 9.2 unreasonable, arbitrary, or against public policy, then a lesser time period or geographical area that is determined by the court to be reasonable, non-arbitrary and not against public policy may be enforced. (d) In the event that Seller or the Bitticks violate any provision of this Article 9.2 as to which there is a specific time period during which Seller or the Bitticks are prohibited from taking certain actions or engaging in 18 certain activities, then, in such event the violation will toll the running of the time period from the date of the violation until the violation ceases. 9.3 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. From and after the Closing Date, Seller and Purchaser agree not to disclose, disseminate, divulge, discuss, copy or otherwise use or suffer to be used, in competition with, or harmful to the interests of the other, any information (written or oral), documents, lists or the business of the Seller and Purchaser except as (a) may otherwise be in the public domain; (b) may be necessary for tax filing and/or reporting purposes; or (c) may otherwise be required by law. 9.4 PARTIAL TERMINATION OF SECURITY INTEREST BY BITTICKS. As of the Closing Date, the Bitticks shall deliver to Purchaser a UCC-2 Financing Statement reflecting the termination/release of any and all security interests the Bitticks have in the Subject Assets. 9.5 OPTION TO REPURCHASE. 9.5.1 Seller shall have an option exercisable only within 6 months of the date hereof, to re-acquire the assets associated with the Woodland Hills Center transferred pursuant to this Agreement: 9.5.2 If Seller exercises such option, the price to be paid by Seller shall be equal to the amount of all cash paid or provided by Purchaser to Seller hereunder, including the $50,000 loan made pursuant to Article 1.10, the $350,000 cash paid pursuant to Article 2.1, all payments of Net Cash Flow made pursuant to Article 2.1, and all management fees paid pursuant to Article 9.1.4. In addition, the price shall include all capital expenditures, advances, fees and cost which purchaser may have made, paid or incurred relating to the Centers or the Gold River Center, or the acquisition thereof, prior to the time of the payment of the price. 9.5.3 If Seller exercises such option, the price must be paid in cash at the time the option is exercised and without offset of any kind. 9.6 USE OF CASH PROCEEDS RECEIVED AT CLOSING. Seller hereby acknowledges and agrees that the cash proceeds received from Purchaser on the Closing Date shall first be used to pay any and all tax liens of Seller (estimated to be $400,000), before such proceeds are used to pay any other claims or liabilities of Seller. ARTICLE X MISCELLANEOUS 10.1 All notices, requests, demands and other communications under this Agreement must be in writing and will be deemed duly given, unless otherwise expressly indicated to the contrary by this Agreement, (i) when personally delivered, (ii) upon receipt of a facsimile transmission with a confirmed transmission answer back, (iii) three (3) days after having been deposited in the United States mail, certified or registered, return receipt requested, postage prepaid, or (iv) one (1) business day after having been dispatched by a national recognized overnight courier service, addressed to the parties or their 19 permitted assigns at the following addresses (or at such other address or number as is given in writing by either parry to the other)when accompanied by facsimile transmission as follows: To Purchaser: Aloha Pacific, Inc. 610 Anacapa Street Santa Barbara, CA 93101 Attention: Peter A. Sprecher Facsimile (805) 564-4441 With a Copy To: Brent A. Reinke, Esq. Clark & Trevithick 800 Wilshire Blvd., 12th Floor Los Angeles, CA 90017 Facsimile (213) 624-9441 To Seller: Children's Wonderland, Inc. P.O. Box 6129 Oxnard, CA 93030 Attention: Debby S. Bitticks Chief Executive Officer Facsimile (805) 988-4953 With a copy to: Gerald M. Chizever, Esq. Richman, Lawrences, Mann, Chizever & Phillips 9601 Wilshire Boulevard, Penthouse Beverly Hills, CA 90210 Facsimile (310) 205-5348 10.2 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will bc deemed to be an original but all of which together will constitute one and the same document. 10.3 CAPTIONS AND ARTICLE HEADINGS. Captions and Article headings are for convenience only, are not a part of this Agreement and may not be used in construing, it. 10.4 WAIVERS. Any failure by any of the parties to comply with any of the obligations, agreements or conditions set forth in this Agreement may be waived only by a writing executed by the party for whose benefit the obligation, agreement or condition is intended, but any such waiver will not be deemed a waiver of any other obligation, agreement or condition contained herein. 10.5 AMENDMENTS. Supplements or Modifications. Each of the parties agrees to cooperate in the effectuation of the transactions contemplated under this Agreement and to execute any and all additional documents and take such additional action as is reasonably necessary or appropriate for such purposes. 20 10.6 ENTIRE AGREEMENT. This Agreement, including any certificate, schedule, exhibit or other document delivered pursuant to its terms, constitutes the entire agreement between the parties hereto regarding the subject matter hereof and supersedes all previous agreements. There are no verbal Agreements, representations, warranties, undertakings or Agreements between the parties. This Agreement may not be amended or modified in any respect, except by a written instrument signed by the parties to this Agreement. 10.7 GOVERNING LAW. This Agreement, the construction, interpretation and enforcement thereof and the rights of the parties thereto shall be determined under, governed by and construed in accordance with the laws of the State of California without regard to principles of conflicts of law. 10.8 ASSIGNMENT: THIRD PARTIES: BINDING EFFECT. The rights of Seller and Purchaser under this Agreement are not assignable nor are their duties delegable without the prior written consent of the other, which consent shall not be unreasonably withheld, and any attempted assignment or delegation without such consent will be null and void. Nothing contained in this Agreement is intended to convey upon any person or entity, other than the parties and their successors in interest and permitted assigns, any rights or remedies under or by reason of this Agreement. All covenants, Agreements, representations and warranties of the parties contained in this Agreement are binding on and will inure to the benefit of Purchaser and Seller, and their respective successors and permitted assigns. 10.9 EXPENSES. Except as otherwise provided, each parry will bear their own respective expenses, including, without limitation, legal and accounting fees, in connection with the preparation and negotiation of, and transactions contemplated under, this Agreement. 10.10 DISPUTE RESOLUTION AND JURY TRIAL WAIVER. Any dispute concerning this Agreement shall be resolved by non-appealable arbitration. Unless the parties mutually agree upon an. arbitrator, the arbitrator shall be selected by J.A.M.S./Endispute. A judgment may be entered based on an arbitration award. The arbitrator shall have the power to decide any and all issues, including any issues concerning arbitrability and shall have the power to issue legal, equitable and/or provisional relief and remedies. The arbitrator shall have full discretion to decide all procedural questions, including the nature and scope of discovery, if any. 10.11 REMEDIES NOT EXCLUSIVE. To the extent that Seller or the Bitticks breaches any obligation, representation or warranty, Purchaser may, INTER ALIA, offset the damage caused thereby against an), obligation which it may have t6 Seller. No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy will be cumulative and will be in addition to every remedy given under this Agreement or now or subsequently existing, at law or in equity, by statute or otherwise. The election of any one or more remedies by Purchaser or Seller will not constitute a waiver of the right to pursue other available remedies. 10.12 SUBMISSION OF AGREEMENT FOR REVIEW. This Agreement shall not be binding upon either party until fully executed. 21 IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first written above. "PURCHASER" By: --------------------------------------- Peter A. Sprecher, President "SELLER" By: --------------------------------------- Debby Bitticks, Chief Executive Officer "BITTICKS" ------------------------------------------- Kenneth Bitticks, an individual ------------------------------------------- Debby Bitticks, an individual 22 The following is a list briefly identifying the contents of the Schedules omitted from this EXHIBIT 2.2. The Registrant agrees to furnish supplementally a copy of any omitted Schedules to the Commission upon its request. SCHEDULE 1.1(A): Personal Property and Equipment at the Centers SCHEDULE 1.1(B): Vehicle and Equipment Leases SCHEDULE 1.3: Excluded Assets SCHEDULE 1.4: Assumed Liabilities SCHEDULE 1.8: Seller's Most Recent Payroll Register SCHEDULE 3.2: Approvals required to be obtained by the Seller SCHEDULE 3.4: Financial Statements for the Centers SCHEDULE 3.7: Litigation SCHEDULE 3.11: Insurance SCHEDULE 3.12: Necessary Licenses and Permits EX-3.1 5 file004.txt RESTATED ARTICLES OF INCORPORATION AND AMENDMENTS EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF CHILDREN'S WONDERLAND, INC. Debby S. Bitticks certifies that: 1. She is a majority of the Board of Directors of Children's Wonderland, Inc. a California corporation. 2. The Articles of Incorporation of this corporation are amended and restated to read as follows: ONE: The name of this corporation is: CHILDREN'S WONDERLAND, INC. TWO: The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporations Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporation Code. THREE: The name and address in the State of California of this corporation's initial agent for service of process is: Gerald M. Chizever, Esq., 9601 Wilshire Boulevard, Penthouse Suite, Beverly Hills, California 90210. FOUR: The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. FIVE: The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) for breach of duty to the corporation and its stockholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. SIX: (i) This corporation is authorized to issue two classes of shares, to be designated common stock and preferred stock, respectively. This corporation is authorized to issue twenty million (20,000,000) shares of common stock and five million (5,000,000) shares of preferred stock. (ii) The preferred shares may be issued in any number of series, as determined by the Board of Directors. The Board may by resolution fix the designation and number of shares of any such series. (iii) The Board may determine, alter, or revoke the rights, preferences, privileges and restrictions pertaining to any wholly unissued class or series of preferred shares. The Board may thereafter in the same manner increase or decrease the number of shares any such series (but not below the number of shares of that series then outstanding). 3. The foregoing amendment and restatement of articles of incorporation has been duly approved by the board of directors. 4. No shares have been issued. I further declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of my own knowledge. Date: November 15, 1993 /s/ ------------------------------- DEBBY S. BITTICKS Director CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF CHILDREN'S WONDERLAND, INC. Robert M. Wilson does hereby certify that: 1. He is the President and Secretary of Children's Wonderland, Inc., a California corporation. 2. The Board of Directors of Children's Wonderland, Inc. has approved the following amendment to Section (i) of Article SIX of the Articles of Incorporation of said corporation: "(i) This corporation is authorized to issue two classes of shares, to be designated common stock and preferred stock, respectively. This corporation is authorized to issue twenty million (20,000,000) shares of common stock and five million (5,000,000) shares of preferred stock. On the amendment of this Section (i), each one (1) outstanding share of common stock is combined, reconstituted and converted into 0.440261 shares of common stock." 3. The foregoing amendment has been approved by the required vote of the shareholders in accordance with Sections 902 and 903 of the California Corporation Code. The corporation has only one class of voting shares, which are the common shares. Each outstanding share is entitled to one vote. The corporation has 2,036,500 shares of common stock outstanding and, hence, the total number of common shares entitled to vote with respect to the amendment was 2,036,500. The number of voting shares voting in favor of the amendment exceeded the vote required, in that the affirmative vote of a majority, that is, more than fifty percent (50%) of the outstanding voting shares was required for approval of the amendment and the amendment was approved by the affirmative vote of more than fifty percent (50%) of the outstanding voting shares. /s/ --------------------------- Robert M. Wilson, President /s/ --------------------------- Robert M. Wilson, Secretary The undersigned declares under penalty of perjury that the matters set forth in the foregoing certificate are true and correct of his own knowledge and that this declaration was executed on December 5, 1995. /s/ --------------------------- Robert M. Wilson CERTIFICATE OF DECREASE OF THE SENIOR PREFERRED AND CERTIFICATE OF DETERMINATION OF SERIES A CONVERTIBLE PREFERRED STOCK OF CHILDREN'S WONDERLAND, INC. Debby Bitticks and Robert Wilson certify that: 1. Debby Bitticks is the President and Robert Wilson is the Secretary of Children's Wonderland, Inc. (hereinafter called the "Corporation"), a corporation organized and existing under and by virtue of the provisions of the laws of the State of California. 2. The authorized number of shares of the Corporation's Preferred Stock is 5,000,000 and the number of shares constituting Series A Convertible Preferred Stock (that is the series affected by this Certificate of Determination) is 600,000. None of the shares of that series has been issued. The 6% Senior Convertible Preferred Stock is reduced to zero and no shares are outstanding. 3. Pursuant to authority granted by the Corporation's Restated Articles of Incorporation, the resolutions set forth in Exhibit "A" attached hereto have been duly adopted and approved by the Board of Directors of the Corporation alone and no shareholder approval is required. 4. We further declare, under penalty of perjury, that the matters set forth in this Certificate are true and correct of our own knowledge. Executed in the City of Agoura, State of California, on this 19th day of February, 2000. /s/ /s/ - ---------------------------- --------------------------- Debby Bitticks, President Robert Wilson, Secretary EXHIBIT "A" TO CERTIFICATE OF DECREASE OF THE SENIOR PREFERRED AND CERTIFICATE OF DETERMINATION OF SERIES A CONVERTIBLE PREFERRED STOCK OF CHILDREN'S WONDERLAND, INC. CHILDREN'S WONDERLAND, INC., a California corporation (the "CORPORATION"), pursuant to authority conferred upon the Board of Directors of the Corporation (the "BOARD") by of the Restated Articles of Incorporation of the Corporation (the "ARTICLES OF INCORPORATION") and Section 401 of the California General Corporation, the Board has duly adopted the following resolutions: WHEREAS, no shares of the Corporation's 6% Senior Convertible Preferred Stock ("SENIOR PREFERRED") are issued and outstanding, as a result of their conversion into the Corporation's no par value Common Stock ("COMMON STOCK") in accordance with the terms of the Senior Preferred set forth in a Certificate of Determination, as amended, filed with the Secretary of State of California; and WHEREAS, the Board desires to decrease the number of authorized shares of Senior Preferred to zero and to authorize a new series of Preferred Stock, all as authorized by the Corporation's Articles of Incorporation. NOW, THEREFORE, it is RESOLVED, that the number of shares constituting the Senior Preferred is hereby reduced from 1,000,000 to zero so as to ensure that, in accordance with Section 401(f) of the California General Corporation Law, the Certificate of Determination, as amended, for the Senior Preferred is no longer in force and the Senior Preferred is no longer an authorized series of the Corporation. RESOLVED FURTHER, that, pursuant to Article Six of the Articles of Incorporation (which authorizes five million (5,000,000) shares of Preferred Stock with no par value), the Board hereby fixes and determines the designation of, the number of shares constituting, and the rights, preferences, privileges, and restrictions relating to, a series of Preferred Stock, as follows: 1. DESIGNATION; AMOUNT; STATED VALUE. From the Corporation's 5,000,000 authorized shares of Preferred Stock, no par value, 600,000 shares are hereby designated Series A Convertible Preferred Stock ("SERIES A PREFERRED") with the rights, preferences, privileges and restrictions specified herein. Each share of Series A Preferred shall have a stated value of $0.50 (the "STATED VALUE") and all shares of Series A Preferred shall have an aggregate Stated Value of $300,000. 2. RANK. The Series A Preferred shall rank prior to any other capital stock of the Corporation, unless holders of two-thirds (66 2/3%) of the Series A Preferred then outstanding give their written consent to the issuance of capital stock by the Corporation ranking senior to the Series A Preferred. 3. DIVIDENDS. If the Corporation shall at any time or from time to time after the date the first share of Series A Preferred is issued (the "ORIGINAL ISSUE DATE") declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of stock or other securities or property or rights of warrants to subscribe for securities of the Corporation or any of its subsidiaries by way of dividend or spin-off) on shares of the Common Stock, then, and in each such case, the Corporation shall declare, order, pay and make the same dividend or distribution to each holder of record of Series A Preferred as would have been made with respect to the number of shares of Common Stock the holder would have received had it converted all of its Series A Preferred Shares. 4. LIQUIDATION PREFERENCE. In the event of a liquidation or dissolution and winding up of the Corporation, whether voluntary or involuntary, the holders of record of the Series A Preferred shall be entitled to receive ratably in full, out of lawfully available assets of the Corporation, whether such assets are stated capital or surplus of any nature, an amount in cash per outstanding share of Series A Preferred equal to the sum of the Stated Value and all accrued and unpaid dividends thereon, as of the date of final distribution hereunder to such holders, before any payment shall be made or any assets distributed to the holders of the Common Stock or other capital stock of the Corporation ranking junior as to liquidation to the Series A Preferred. If, upon any liquidation, dissolution and winding up, the amount available for such payment to the holders of Series A Preferred shall not be sufficient to pay in full the amounts payable on the Series A Preferred, the holders of the Series A Preferred, and any other class or series of the Corporation's capital stock which may hereafter be created having parity as to liquidation rights with the Series A Preferred, shall share in the distribution of the amount available in proportion to the respective preferential amounts to which each is entitled. 5. VOTING RIGHTS. Each share of Series A Preferred shall entitle the holder thereof to such number of votes per share, on matters requiring the vote or consent of the holders of shares of the Common A-2 Stock, as shall equal the number of shares of Common Stock into which each share of Series A Preferred is convertible at the record date for the determination of stockholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. The holders of shares of Series A Preferred and the holders of Common Stock shall vote as one class on all matters requiring the vote or consent of the holders of Common Stock. In addition, the holders of Series A Preferred shall have one vote per share of Series A Preferred when voting separately as a class on all matters requiring the consent of the Series A Preferred. 6. CONVERSION RIGHTS. (a) Each share of Series A Preferred shall be convertible, at the option of the holder of record thereof, into the number of fully paid and nonassessable shares of Common Stock specified in Section 6 (b) (the " CONVERSION AMOUNT"). (b) The Conversion Amount for each share of Series A Preferred shall be determined as follows: (i) Using a divisor of 0.10, divide the sum of (x) the number of shares of Common Stock outstanding, as of the Original Issue Date, and (y) the number of shares of Common Stock that would be issuable, as of the Original Issue Date, as a result of the exercise or conversion, as of the Original Issue Date, of all outstanding, as of the Original Issue Date, warrants, options, convertible securities and other rights of any kind entitling the holder to acquire, at any time, shares of Common Stock from the Corporation; then (ii) Divide the quotient obtained in the immediately preceding clause (i) by 600,000. (c) In order to exercise the conversion rights set forth in Section 6(a), a holder of record of Series A Preferred shall surrender the certificate(s) representing such shares, duly endorsed to the Corporation or in blank, at the principal office of the Corporation or the Corporation's transfer agent for its Common Stock, or at such other office as the Corporation may designate, and shall give written notice to the Corporation, in form reasonably satisfactory to the Corporation, that states such holder elects to convert the Series A Preferred or a specified portion thereof, and sets forth the name or names in which the certificate or certificates for shares of Common Stock are to be issued (the "CONVERSION Notice"); PROVIDED, HOWEVER, that nothing in this Certificate of Determination shall be deemed to permit any holder of Series A Preferred to designate another person to be the holder of Common Stock issuable upon conversion of Series A Preferred if the issuance to such other person would violate Federal or state securities laws or any agreement a holder of Series A Preferred has with the Corporation regarding restrictions on transferability of any securities of the Corporation held by such holder. Within five business days after the Corporation receives the Conversion Notice, the certificate or certificates representing the Series A Preferred being converted and payment by the holder of any applicable transfer or similar taxes, the Corporation shall issue and deliver (i) a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, in the name or names and A-3 to the address or addresses specified in the Conversion Notice, subject to any restrictions on transferability, and (ii) a check in payment for any fractional shares pursuant to Section 10. At the close of business on the date on which the Corporation received the Conversion Notice, the holder of the shares of converted Series A Preferred shall cease to be a stockholder with respect thereto and all rights whatsoever with respect to such shares shall terminate (except the rights of the holder to receive shares of Common Stock and cash in respect of fractional shares), and the person or persons in whose name any certificate(s) for Common Stock are issuable upon such conversion shall be deemed to have become the holder of record of the shares represented thereby. (d) The Corporation shall cancel the certificates for Series A Preferred upon the surrender thereof and shall execute and deliver a new certificate for Series A Preferred representing the balance, if any, of the number of shares evidenced by such certificates not so converted. Each Conversion Notice shall constitute a contract between the holder of shares of Series A Preferred and the Corporation whereby the holder of such shares shall be deemed to subscribe for the amount of Common Stock which such holder shall be entitled to receive upon such conversion and whereby the Corporation shall be deemed to agree that the surrender of the certificate(s) therefor shall constitute full payment of such subscription for Common Stock to be issued upon such conversion. (e) If for any reason it is subsequently determined that the number of shares issued upon conversion of Series A Preferred is less than it should have been, the Corporation shall promptly make up this deficiency by issuing additional shares of Common Stock. 7. ADJUSTMENT OF CONVERSION AMOUNT. (a) In the event the Corporation (i) subdivides the outstanding shares of Common Stock into a larger number of shares, (ii) combines the outstanding shares of Common Stock into a smaller number of shares, or (iii) issues by reclassification of the Common Stock any shares of its capital stock (each a "CAPITAL EVENT"), then the Conversion Amount in effect on the record date for such subdivision, combination or reclassification shall be proportionately adjusted so that the record holder of any shares of Series A Preferred converted after such date shall be entitled to receive the kind and amount of shares which such holder would have owned or have been entitled to receive had such shares of Series A Preferred been converted immediately prior to such date. Such adjustments shall be made successively whenever any Capital Event shall occur. If, as a result of an adjustment made hereunder, the holder of any shares of Series A Preferred shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Corporation, the Board shall determine the allocation of the adjusted Conversion Amount between shares of such classes of capital stock or shares of Common Stock and other capital stock. (b) After each adjustment of the Conversion Amount pursuant to this Section 7, the Corporation will promptly prepare a certificate signed by the Chief Financial Officer of the Corporation setting forth the Conversion Amount as so adjusted, and a brief statement of the facts accounting for such adjustment. The Company will promptly cause a brief summary thereof to be sent by ordinary first class mail to each record holder of Series A A-4 Preferred at such holder's last address as it shall appear on the registry books of the Corporation or its transfer agent, unless the Corporation reasonably believes a holder of Series A Preferred has actual notice of the adjusted Conversion Amount and the facts accounting for such adjustment. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except to the extent a holder of Series A Preferred shall have suffered actual damages as a result thereof. The affidavit of the Secretary or an Assistant Secretary of the Corporation that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (c) As used in this Section 7, the term "Common Stock" shall mean and include the Corporation's Common Stock authorized on the Original Issue Date and shall also include any capital stock of any class of the Corporation thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Corporation; PROVIDED, HOWEVER, that the shares issuable upon conversion of the Series A Preferred shall include only shares of such class designated in the Corporation's Articles of Incorporation as Common Stock on the Original Issue Date or, in the case of any reclassification of the character referred to in Section 7(a), such shares of Common Stock as so reclassified or changed. (d) Any determination as to whether an adjustment in the Conversion Amount in effect is required pursuant to this Section 7, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Series A Preferred and the Corporation if made by the Board. 8. RESERVATION OF SHARES; PAYMENT OF TAXES. (a) The Corporation covenants that it will promptly amend its Articles of Incorporation to provide for a sufficient number of authorized shares of Common Stock for conversion of the Series A Preferred and will, thereafter, at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon conversion the Series A Preferred, such number of shares of Common Stock as shall be issuable upon the conversion of all outstanding Series A Preferred. The Corporation covenants that all shares of Common Stock which shall be issuable upon conversion of the Series A Preferred shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than those which the Corporation shall promptly pay or discharge), subject to Section 8 (b). (b) The Corporation shall pay all documentary, stamp or similar taxes or other governmental charges that may be imposed with respect to the issuance of the Series A Preferred, or the issuance or delivery of any shares of Common Stock upon conversion of the Series A Preferred; PROVIDED, HOWEVER, that, if the shares of Common Stock are to be delivered in a name other than the name of the holder of record of the certificate representing any Series A Preferred being converted, then no such delivery shall be made unless the person requesting the same had paid to the Corporation the amount of transfer taxes or charges incident thereto, if any. A-5 9. STATUS OF REACQUIRED SHARES. The shares of Series A Preferred which have been issued and reacquired in any manner by the Corporation shall have the status of authorized and unissued shares of Preferred Stock and may be reclassified and reissued as a part of a new series of Preferred Stock to be created by resolution or resolutions of the Board. 10. NO FRACTIONAL SHARES. The Corporation shall not issue fractional shares of Common Stock upon any conversion of Series A Preferred but shall pay, in lieu thereof, an amount in cash as the Board shall determine. 11. DETERMINATION OF THE BOARD. Whenever any provision hereof requires a determination to be made by the Board, such determination shall be conclusive, if made in good faith, and shall be set forth in a Board resolution. 12. NOTICES. Any notice required by any provision hereof to be given to the holders of Series A Preferred shall be deemed given on the third business day after mailing, first class mail, postage prepaid, or on the day of delivery if sent by overnight courier, receipt confirmed, in each instance in an envelope address to each holder of record of Series A Preferred at such holder's address appearing on the books of the Corporation. RESOLVED, FURTHER, that the President and the Secretary of the Corporation are each hereby authorized and directed to prepare and file a Certificate of Determination in accordance with this resolution and as required by law. A-6 < CERTIFICATE OF DETERMINATION OF SERIES B CONVERTIBLE PREFERRED STOCK OF CHILDREN'S WONDERLAND, INC. John Clarke and Robert Wilson certify that: 1. John Clarke is the Chief Executive Officer and Robert Wilson is the Secretary of Children's Wonderland, Inc. (hereinafter called the "Corporation"), a corporation organized and existing under and by virtue of the provisions of the laws of the State of California. 2. The authorized number of shares of the Corporation's Preferred Stock is 5,000,000 and the number of shares constituting Series B Convertible Preferred Stock (that is the series affected by this Certificate of Determination) is 900,000. None of the shares of that series has been issued. The Corporation has issued and outstanding 600,000 shares of its Series A Convertible Preferred Stock. 3. Pursuant to authority granted by the Corporation's Restated Articles of Incorporation, the resolutions set forth in Exhibit "A" attached hereto have been duly adopted and approved by the Board of Directors of the Corporation and the holders of all of the outstanding shares of the Corporation's Series A Convertible Preferred Stock. No other shareholder approval is required. 4. We further declare, under penalty of perjury, that the matters set forth in this Certificate are true and correct of our own knowledge. Executed in the City of Agoura, State of California, on this 22nd day of June, 2000. /s/ /s/ - ------------------------------------ --------------------------------- John Clarke, Chief Executive Officer Robert Wilson, Secretary EXHIBIT "A" TO CERTIFICATE OF DETERMINATION OF SERIES B CONVERTIBLE PREFERRED STOCK OF CHILDREN'S WONDERLAND, INC. Pursuant to authority conferred upon the Board of Directors (the "BOARD") of Children's Wonderland, Inc., a California corporation (the "Corporation"), by the Restated Articles of Incorporation of the Corporation (the "ARTICLES OF INCORPORATION") and Section 401 of the California General Corporation Law, the Board has duly adopted the following resolutions: WHEREAS, 600,000 shares of the Corporation's Series A Convertible Preferred Stock ("Series A Preferred") are issued and outstanding; and WHEREAS, the Board desires to authorize a new series of Preferred Stock, all as authorized by the Corporation's Articles of Incorporation. NOW, THEREFORE, it is RESOLVED, that, pursuant to Article Six of the Articles of Incorporation (which authorizes five million (5,000,000) shares of Preferred Stock with no par value), the Board hereby fixes and determines the designation of, the number of shares constituting, and the rights, preferences, privileges, and restrictions relating to, a series of Preferred Stock, as follows: 1. DESIGNATION; AMOUNT; STATED VALUE. From the Corporation's 5,000,000 authorized shares of Preferred Stock, no par value, 900,000 shares are hereby designated Series B Convertible Preferred Stock ("SERIES B PREFERRED") with the rights, preferences, privileges and restrictions specified herein. Each share of Series B Preferred shall have a stated value of $10.00 (the "STATED VALUE") and all shares of Series B Preferred shall have an aggregate Stated Value of $9,000,000. 2. RANK. The Series A Preferred shall rank prior to the Series B Preferred. The Series B Preferred shall rank prior to any other capital stock of the Corporation other than the Series A Preferred, provided, however, that the Board may designate one or more new series of Preferred Stock ("New Preferred Stock"), without the consent of the holders of the Series B Preferred, which shall rank prior to the Series B Preferred and which may have rights and powers superior to those of the Series B Preferred. 3. DIVIDENDS. If the Corporation shall at any time or from time to time after the date the first share of Series B Preferred is issued (the "ORIGINAL ISSUE DATE") declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of stock or other securities or property or rights or warrants to subscribe for securities of the Corporation or any of its subsidiaries by way of dividend or spin-off) on shares of the Corporation's no par value Common Stock ("Common Stock"), then, and in each such case, the Corporation shall declare, order, pay and make the same dividend or distribution to each holder of record of Series B Preferred as would have been made with respect to the number of shares of Common Stock the holder would have received had all of its Series B Preferred shares been converted. 4. LIQUIDATION PREFERENCE. In the event of a liquidation or dissolution and winding up of the Corporation, whether voluntary or involuntary, the assets of the Corporation shall be distributed first to the holders of record of the Series A Preferred in the amount to which they are entitled, and then to the holders of the New Preferred Stock, if any, and then to the holders of record of the Series B Preferred, who shall be entitled to receive ratably in full, out of the remaining and lawfully available assets of the Corporation, whether such assets are stated capital or surplus of any nature, an amount in cash per outstanding share of Series B Preferred equal to the sum of the Stated Value and all accrued and unpaid dividends thereon, as of the date of final distribution hereunder to such holders of the Series B Preferred, and then to the holders of the Common Stock or other capital stock of the Corporation ranking junior as to liquidation to the Series B Preferred. If, upon any liquidation, dissolution and winding up, the amount available for such payment to the holders of Series B Preferred shall not be sufficient to pay in full the amounts payable on the Series B Preferred, the holders of the Series B Preferred, and any other class or series of the Corporation's capital stock which may hereafter be created having parity as to liquidation rights with the Series B Preferred, shall share in the distribution of the amount available in proportion to the respective preferential amounts to which each is entitled. 5. VOTING RIGHTS. Each share of Series B Preferred shall entitle the holder thereof to such number of votes per share, on matters requiring the vote or consent of the holders of shares of the Common Stock, as shall equal the number of shares of Common Stock into which each share of Series B Preferred is convertible at the record date for the determination of stockholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. In addition, the holders of Series B Preferred shall have one vote per share of Series B Preferred when voting separately as a class on all matters requiring the consent of the Series B Preferred. 2 6. CONVERSION. (a) Each share of Series B Preferred will automatically be converted into the number of fully paid and nonassessable shares of Common Stock specified in Section 6(b) (the "CONVERSION AMOUNT") effective on the later of (i) January 1, 2001 or (ii) the date on which a sufficient number of shares of Common Stock is authorized under the Corporation's Restated Articles of Incorporation to permit the conversion into Common Stock of all of the Corporation's then outstanding convertible securities. (b) The Conversion Amount for each share of Series B Preferred shall be equal to $10.00 divided by 85% of the average of the per share closing bid and asked prices (or, if such prices are not available, then the last sale price) for the Common Stock during the five (5) days in which trading has occurred immediately preceding the date (the "CONVERSION DATE") as of which the Series B Preferred is deemed to be converted into Common Stock (the "CONVERSION PRICE"). In the event the Common Stock is not being publicly traded as of the Conversion Date, a fair market value of the Common Stock, as determined in good faith by the Board, shall be applied in lieu of the average of the closing bid and asked prices for the Common Stock. (c) Prior to the fifth (5th) day following the Conversion Date, the Corporation shall mail to the holders of the Series B Preferred a notice stating the Conversion Price and the date as of which the Series B Preferred was deemed to be redeemed and converted into Common Stock. Nothing in this Certificate of Determination shall be deemed to permit any holder of Series B Preferred to designate another person to be the holder of Common Stock issuable upon conversion of Series B Preferred if the issuance to such other person would violate Federal or state securities laws or any agreement a holder of Series B Preferred has with the Corporation regarding restrictions on transferability of any securities of the Corporation held by such holder. Within ten (10) business days after the Conversion Date, the Corporation shall issue and deliver (i) a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, in the name or names of the holder and to the last address or addresses in the records of the Corporation, and (ii) a check in payment for any fractional shares pursuant to Section 10. At the close of business on the Conversion Date, the holder of the shares of converted Series B Preferred shall cease to be a stockholder with respect thereto and all rights whatsoever with respect to such shares shall terminate (except the rights of the holder to receive shares of Common Stock and cash in respect of fractional shares), and the person or persons in whose name any certificate(s) for Common Stock are issuable upon such conversion shall be deemed to have become the holder of record of the shares represented thereby. (d) The outstanding certificates for Series B Preferred shall be deemed to be converted and cancelled as of the Conversion Date and actual delivery to the Corporation of the certificates representing the Series B Preferred shall not be a condition thereof. (e) If for any reason it is subsequently determined that the number of shares issued upon conversion of Series B Preferred is less than it should have been, the Corporation shall promptly make up this deficiency by issuing additional shares of Common Stock. 3 7. ADJUSTMENT OF CONVERSION AMOUNT. (a) In the event the Corporation (i) subdivides the outstanding shares of Common Stock into a larger number of shares, (ii) combines the outstanding shares of Common Stock into a smaller number of shares, or (iii) issues by reclassification of the Common Stock any shares of its capital stock (each a "CAPITAL EVENT"), then the Conversion Amount in effect on the record date for such subdivision, combination or reclassification shall be proportionately adjusted so that the record holder of any shares of Series B Preferred converted after such date shall be entitled to receive the kind and amount of shares which such holder would have owned or have been entitled to receive had such shares of Series B Preferred been converted immediately prior to such date. Such adjustments shall be made successively whenever any Capital Event shall occur. If, as a result of an adjustment made hereunder, the holder of any shares of Series B Preferred shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Corporation, the Board shall determine the allocation of the adjusted Conversion Amount between shares of such classes of capital stock or shares of Common Stock and other capital stock. (b) After each adjustment of the Conversion Amount pursuant to this Section 7, the Corporation will promptly prepare a certificate signed by the Chief Financial Officer of the Corporation setting forth the Conversion Amount as so adjusted, and a brief statement of the facts accounting for such adjustment. The Company will promptly cause a brief summary thereof to be sent by ordinary first class mail to each record holder of Series B Preferred at such holder's last address as it shall appear on the registry books of the Corporation or its transfer agent, unless the Corporation reasonably believes a holder of Series B Preferred has actual notice of the adjusted Conversion Amount and the facts accounting for such adjustment. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except to the extent a holder of Series B Preferred shall have suffered actual damages as a result thereof. The affidavit of the Secretary or an Assistant Secretary of the Corporation that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (c) As used in this Section 7, the term "Common Stock" shall mean and include the Corporation's Common Stock authorized on the Original Issue Date and shall also include any capital stock of any class of the Corporation thereafter authorized which shall not be designated a series of Preferred Stock or limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Corporation; PROVIDED, HOWEVER, that the shares issuable upon conversion of the Series B Preferred shall include only shares of such class designated in the Corporation's Articles of Incorporation as Common Stock on the Original Issue Date or, in the case of any reclassification of the character referred to in Section 7(a), such shares of Common Stock as so reclassified or changed. (d) Any determination as to whether an adjustment in the Conversion Amount in effect is required pursuant to this Section 7, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Series B Preferred and the Corporation if made by the Board. 4 8. RESERVATION OF SHARES; PAYMENT OF TAXES. (a) The Corporation covenants that it will use commercially reasonable efforts to amend its Articles of Incorporation to provide for a sufficient number of authorized shares of Common Stock for conversion of the Series B Preferred and will, thereafter, at all times use commercially reasonable efforts to reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon conversion the Series B Preferred, such number of shares of Common Stock as shall be issuable upon the conversion of all outstanding Series B Preferred. The Corporation covenants that all shares of Common Stock which shall be issuable upon conversion of the Series B Preferred shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than those which the Corporation shall promptly pay or discharge), subject to Section 8 (b). (b) The Corporation shall pay all documentary, stamp or similar taxes or other governmental charges that may be imposed with respect to the issuance of the Series B Preferred, or the issuance or delivery of any shares of Common Stock upon conversion of the Series B Preferred; PROVIDED, HOWEVER, that, if the shares of Common Stock are to be delivered in a name other than the name of the holder of record of the certificate representing any Series B Preferred being converted, then no such delivery shall be made unless the person requesting the same had paid to the Corporation the amount of transfer taxes or charges incident thereto, if any. 9. STATUS OF REACQUIRED SHARES. The shares of Series B Preferred which have been issued and reacquired in any manner by the Corporation shall have the status of authorized and unissued shares of Preferred Stock and may be reclassified and reissued as a part of a new series of Preferred Stock to be created by resolution or resolutions of the Board. 10. NO FRACTIONAL SHARES. The Corporation shall not issue fractional shares of Common Stock upon any conversion of Series B Preferred but shall pay, in lieu thereof, an amount in cash as the Board shall determine. 11. DETERMINATION OF THE BOARD. Whenever any provision hereof requires a determination to be made by the Board, such determination shall be conclusive, if made in good faith, and shall be set forth in a Board resolution. 12. NOTICES. Any notice required by any provision hereof to be given to the holders of Series B Preferred shall be deemed given on the third business day after mailing, first class mail, postage prepaid, or on the day of delivery if sent by overnight courier, receipt confirmed, in each instance in an envelope address to each holder of record of Series B Preferred at such holder's address appearing on the books of the Corporation. 5 RESOLVED, FURTHER, that the President and the Secretary of the Corporation are each hereby authorized and directed to prepare and file a Certificate of Determination in accordance with this resolution and as required by law. 6 EX-4.5 6 file005.txt FORM OF WARRANT ISSUED WITH SERIES B PREFERRED EXHIBIT 4.5 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS RELATING TO SUCH SECURITIES OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO CHILDREN'S WONDERLAND, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. COMMON STOCK PURCHASE WARRANT NO. __ June __, 2000 CHILDREN'S WONDERLAND, INC., a corporation organized under the laws of the State of California (the "Company"), hereby certifies that, for value received, _________________________________, or registered assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company at any time after all of the Holder's Series B Convertible Preferred Stock of the Company (the "Series B Preferred") have been converted into shares of Common Stock, as defined below, and before 5:00 p.m., New York City time, on March 31, 2002 (the "Expiration Date"), _____ fully paid and nonassessable shares of Warrant Stock (as hereinafter defined), no par value, at a purchase price per share set forth below (such purchase price per share as adjusted from time to time as herein provided is referred to herein as the "Purchase Price"). The number and character of such shares of Warrant Stock and the Purchase Price are subject to adjustment as provided herein. The Expiration Date shall be extended by the number of days, if any, by which the Company's amendment of its Restated Articles of Incorporation (for the increase of its authorized number of shares of Common Stock to permit the exercise of all of the Company's convertible securities outstanding) is delayed beyond December 31, 2001. The Purchase Price shall be equal to 120% of the average of the closing bid and asked prices (or, if such prices are not available, then the last sale price) for the Common Stock, on the public market in which it is then being traded, for the five (5) days in which trading has occurred immediately preceding the later of (1) April 30, 2000, and (2) the earlier of (i) the 20th business day following the date on which a reverse split of the Common Stock becomes effective, and (ii) January 1, 2001. In the event the Common Stock is not being publicly traded as of such Purchase Price determination date, a fair market value of the Common Stock, as determined in good faith by the Company's Board of Directors, shall be applied in lieu of the average of the closing bid and asked prices for the Common Stock. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term Company shall include Children's Wonderland, Inc. and any corporation which shall succeed or assume the obligations of such company hereunder. (b) The term "Common Stock" includes (i) the Company's Common Stock, $.01 par value per share, as, authorized on the date of the Agreement, and (ii) any other securities into which or for which any of the securities described in (i) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holder at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 3 or otherwise. (d) The term "Warrant Stock" means the shares of Common Stock and Other Securities owned or to be owned upon exercise of this Warrant. 1. EXERCISE. 1.1. PRECONDITIONS TO EXERCISE. Except in the case of a cashless exercise permitted below, before this Warrant can be exercised, the following shall occur: (a) Subject to Section 1.l(c), the Holder shall notify the Company in writing that the Holder is considering exercising this Warrant. As soon as practicable after receiving such notice, the Company shall advise the Holder of the investor suitability requirements, if any, that must be satisfied by the Holder as a condition of such exercise. (b) If the Holder satisfies the Company regarding the Holder's suitability to exercise this Warrant, the Company will, subject to Section 1.l(c), provide the Holder with such information regarding the Company and an investment in the Warrant Stock as the Company can obtain without unreasonable effort or expense (the "Warrant Exercise Materials"), in order to permit the Holder to determine whether to purchase Warrant Stock upon exercise of this Warrant. (c) The Company may, at any time, in its sole discretion, decide to provide the Holder with the Warrant Exercise Materials. Subject to satisfying investor suitability requirements, the Warrants will be exercisable for 30 days (or such longer period as the Company permits) after delivery of the Warrant Exercise Materials to the Holder. The Company shall be deemed to have satisfied the requirements of Section 1.l(b), if it has complied with this Section 1.l(c) within six months prior to receiving a notice from the Holder pursuant to Section 1.l(a). (d) The requirements of this Section 1 may be waived by the Company. 1.2. FULL EXERCISE. (a) This Warrant may be exercised in full only by the Holder by surrender of this Warrant, with the form of subscription agreement required by the Company, duly completed and executed by the Holder, to the Company at its principal office or at the office of its Warrant agent (as provided in Section 6), accompanied by payment, as permitted below, of the amount obtained by multiplying the number of shares of Warrant Stock for which this Warrant is then exercisable by the Purchase Price then in effect. 2 (b) Payment for the Warrant Stock may be made wholly or partly in cash or by allowing the Company to deduct from the number of shares of Warrant Stock, deliverable upon exercise of this Warrant, a number of such shares which has an aggregate Fair Market Value determined as of the date of exercise of this Warrant equal to the aggregate Purchase Price of the Warrant Stock. (c) Fair Market Value of a share of Warrant Stock as of the date of exercise of this Warrant (the "Determination Date") shall mean: (d) If the Warrant Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ ") National Market System, then the average of the closing or last sale price, respectively, reported for the five business days immediately preceding the Determination Date. (e) If the Warrant Stock is not traded on an exchange or on the NASDAQ National Market System but is traded in the over-the-counter market, "pink sheets" or other similar organization (including the Bulletin Board), then the average of the closing bid and asked prices (or, if such prices are not available, then the last sale price) reported for the five (5) days in which trading has occurred immediately preceding the Determination Date. (f) If the Warrant Stock is not traded as provided above, then the price determined in good faith by the Board of Directors of the Company whose determination shall be final. 1.3. DELIVERY OF STOCK CERTIFICATES, ETC. ON EXERCISE. The Company agrees that the shares of Warrant Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full, and in any event within 10 business days thereafter, the Company will cause to be issued in the name of and delivered to the Holder, or as the Holder (upon payment by such Holder of any applicable transfer taxes) may direct, subject to compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Warrant Stock to which the Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash equal to such fraction multiplied by the then fair market value of one full share, as determined by the Company in its sole discretion, together with any other stock or other securities and property (including cash, where applicable) to which the Holder is entitled upon such exercise. 2. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. 2.1. REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Warrant 3 Stock issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which the Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if the Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 3. 2.2. DISSOLUTION. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets in a transaction contemplated by Section 2. l(c), the Company, simultaneously with such dissolution, shall distribute or cause to be distributed to the Holder the stock and other securities and property (including cash, were applicable) which would be receivable by the Holder if the Holder had exercised this Warrant in full immediately prior to such dissolution, less an amount of stock, other securities, property and cash with a value equal to the Purchase Price. 2.3. CONTINUATION OF TERMS. Upon any reorganization, consolidation, merger or transfer referred to in this Section 2, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant. 3. EXTRAORDINARY EVENTS REGARDING WARRANT STOCK. In the event that the Company shall (a) issue additional shares of the Warrant Stock as a dividend or other distribution on outstanding Warrant Stock, (b) subdivide its outstanding shares of Warrant Stock, or (c) combine its outstanding shares of the Warrant Stock into a smaller number of shares of the Warrant Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Warrant Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Warrant Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 3. The number of shares of Warrant Stock that the Holder shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Warrant Stock that would otherwise (but for the provisions of this Section 3) be issuable on such exercise by a fraction of which (a) the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 3) be in effect, and (b) the denominator is the Purchase Price in effect on the date of such exercise. 4. RESERVATION OF STOCK, ETC. ISSUABLE ON EXERCISE OF WARRANT. The Company will at all times use commercially reasonable efforts to reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, all shares of Warrant Stock from time to time issuable on the exercise of this Warrant. 5. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security 4 reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company will execute and deliver, in lieu thereof, a new Warrant of like tenor. 6. WARRANT AGENT. The Company may, by written notice to each Holder, appoint an agent having an office in New York, NY for the purpose of issuing Warrant Stock (or Other Securities) on the exercise of this Warrant or for exchanging or replacing this Warrant, or any of the foregoing, and, thereafter, any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 7. TRANSFER ON THE COMPANY'S BOOKS. Until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 8. NOTICES, ETC. All notices and other communications from the Company to the Holder or the Holder to the Company shall be delivered by hand (which shall include overnight delivery by Federal Express or similar service) or mailed by first class registered mail, postage prepaid, to the Company at its principal office and to the Holder at such address as may have been furnished to the Company in writing by the Holder or, until the Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. Notices shall be deemed given upon receipt, when delivered by hand, and 48 hours after mailing, when mailed. 9. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the laws of New York. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above. CHILDREN'S WONDERLAND, INC. By: ----------------------------------- Name: John R. Clarke Title: Chief Executive Officer 5 Exhibit A FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Warrant Stock CHILDREN'S WONDERLAND, INC. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of CHILDREN'S WONDERLAND, INC. with full power of substitution in the premises. ====================== ============================ ======================= Transferees Percentage Transferred Number Transferred - ---------------------- ---------------------------- ----------------------- - ---------------------- ---------------------------- ----------------------- - ---------------------- ---------------------------- ----------------------- ====================== ============================ ======================= Dated: ---------------------- --------------------------------------- Signed in the presence of: (Signature must conform to name of Holder as specified on the face of the warrant) - ----------------------------- (Name) --------------------------------------- (Address) ACCEPTED AND AGREED: --------------------------------------- [TRANSFEREE] (Address) --------------------------------------- - ----------------------------- (Address Cont.) (Name) 6 EX-10.29 7 file006.txt LETTER AGREEMENT, DATED JUNE 9, 2000 EXHIBIT 10.29 CHILDREN'S WONDERLAND, INC. P.O. BOX 6129 OXNARD, CA 93031-6129 June 9, 2000 Debby Bitticks and Kenneth Bitticks c/o Children's Wonderland, Inc. P.O. Box 6129 Oxnard, CA 93031-6129 Dear Debby and Ken: Reference is made to that certain Settlement Agreement and Release of All Claims ("Settlement Agreement"), dated in or about March, 2000, pursuant to which certain litigations initiated by Children's Wonderland, Inc, (the "Company") and the two of you ("Debby" and "Ken"), in your capacity as officers of the Company, against the Royce Parties, as defined in the Settlement Agreement, were settled and general releases were agreed to among the parties as part of such Settlement Agreement. As used in this letter, "you" refers to Debby and Ken. The Company and you agree as follows: 1. The Company indemnifies and holds you harmless and agrees to defend you from and against any loss, damage or liability as set forth in this paragraph 1. In furtherance thereof, the Company will pay you for all reasonable costs, fees and expenses, including reasonable legal expenses, which you may incur in the future in connection with the defense of any lawsuit initiated by any of the Royce Parties or any of the Company's shareholders or creditors against either of you, except for (1) lawsuits based on claims unrelated to the subject matter of the Settlement Agreement, the litigations covered by the Settlement Agreement or this Agreement and (2) lawsuits which would not have arisen but for the gross negligence or willful misconduct of either of you. 2. The Company will use certain proceeds, described below, to reimburse either of you, but in any event at a minimum reimbursement rate of $15,000 per month, for $350,000 of accountable credit card debt ("Credit Card Debt") which you have incurred to date to pay for expenses of the Company and, after the date hereof until the amount of the Credit Card Debt is reimbursed to you in full, the Company will use such proceeds to pay all of the interest and penalty charges accruing on the outstanding Credit Card Debt. The Company will apply the following proceeds toward reimbursement to you of the Credit Card Debt and the interest and penalty charges accruing thereon (as described in the preceding sentence): (a) promptly upon receipt, 100% of the proceeds received by the Company (net of expenses related thereto) from the sale by the Company of up to three Ms. Debby Bitticks and Kenneth Bitticks June 9, 2000 Page 2 care centers located in California which the Company, after the date hereof, acquires from an entity named Aloha Pacific; and (b) 10% of the proceeds received by the Company (net of expenses related thereto) from any equity or debt (to the extent permitted by the Lender(s)) financing transaction completed by the Company after the date hereof. The Company agrees to use best efforts to immediately re-sell one or more care centers located in California which the Company acquires from Aloha Pacific. With respect to the possible acquisitions by the Company of the care centers from Aloha Pacific, Robert Becker and John Clarke, by signing below, agree to fund the difference between $400,000 and the funds available to the Company (if less than $400,000) at the time the Company decides to acquire such three care centers from Aloha Pacific. 3. The Company will issue to Debby the number of shares of the Company's common stock ("Common Stock"), after giving effect to a reverse split of the Common Stock, which is equal to 5.0% of the total outstanding Common Stock on the date hereof on a fully diluted basis after taking into account the conversion of all of the Company's Series A Convertible Preferred Stock outstanding but not taking into account the conversion of any other convertible securities which the Company has outstanding or is obligated to issue, including the Company's Series B Preferred Stock. The Company will not be obligated to issue the shares of Common Stock to you as contemplated in the preceding sentence until such time as the Company has amended its Restated Articles of Incorporation to authorize a sufficient number of shares of Common Stock to permit the conversion of the Company's outstanding convertible securities, or any other convertible securities which it is obligated to issue and to permit such issuance of shares to you. In addition, the Company will permit the cashless exercise of all of Ken's outstanding options and warrants to purchase Common Stock. 4. The obligations of the Company set forth in the foregoing paragraphs 1, 2 and 3 are conditioned upon (i) the completion of the exchange for Units (consisting of the Company's Series B Convertible Preferred Stock and Warrants to purchase its Common Stock) of all of the Company's outstanding debt to you (jointly or severally held) (the "Total Debt"), except for the Credit Card Debt (the Total Debt minus the Credit Card Debt is referred to herein as the "Primary Debt"), upon the terms set forth in that certain Confidential Subscription Agreement of the Company, dated March 3, 2000, (ii) the execution and delivery by each of you of General Releases relating to all obligations of the Company other than the Credit Card Debt and the Company's obligations under this Agreement, and (iii) the execution and filing by each of you of appropriate UCC-3 and/or other termination statements to release the liens relating only to the Primary Debt against the Company. 5. You agree that, once we have reimbursed you for the Credit Card Debt and paid all penalty and interest charges as provided above, you will promptly execute and deliver to the Company each of your General Releases of all obligations of the Company and Ms. Debby Bitticks and Kenneth Bitticks June 9, 2000 Page 3 execute and file appropriate UCC-3 and/or other termination statements so that all liens held by either of you against the Company will be terminated. 6. Promptly upon execution of this Agreement, the Company will negotiate with Debby in good faith the terms of a two-year employment agreement to serve as the Company's President, pursuant to which it is currently contemplated that, in return for your services to the Company, Debby will be entitle to an ANNUAL salary or of a MINIMUM of $100,000 per year accruing until Company has raised $2,000,000 or sufficient funds. You and we agree that the terms set forth in this Agreement will have no force or effect unless this Agreement is executed by both Robert Becker and John Clarke below. Very truly yours, CHILDREN'S WONDERLAND, INC. By: /s/ ----------------------------------------- Name: John Clarke Title: Chairman and CEO APPROVED BY: /s/ - -------------------------------- Name: Robert Wilson Title: Director /s/ - -------------------------------- Name: Robert Becker Title: Principal Shareholder /s/ - -------------------------------- Name: John Clarke Title: Principal Shareholder Ms. Debby Bitticks and Kenneth Bitticks June 9, 2000 Page 4 ACCEPTED AND AGREED ON THE DATE FIRST WRITTEN ABOVE: /s/ /s/ - ---------------------------- ------------------------------- DEBBY BITTICKS KENNETH BITTICKS EX-10.30 8 file007.txt LEASE AGREEMENT, DATED AS OF MARCH 24,2000 EXHIBIT 10.30 LEASE AGREEMENT This lease agreement (herein the "Agreement"), made and entered into as of the 24th day of March, 2000, by and between Resun Leasing, Incorporated (herein Lessor"), and Children's Wonderland, Inc. (herein "Lessee"). WITNESSETH: Lessor hereby leases and rents to Lessee and Lessee hereby leases and rents from Lessor, upon the following terms and conditions, the personal property (herein the "Property") described in annexed Schedule A. 1. TERM. The term of this Agreement shall be eighty-two (82) months to begin on the date the Property is delivered and accepted (herein the "Commencement Date") by the Lessee and to end on the same day of the eighty-second (82nd) successive calendar month following the Commencement Date. Lessee will provide Lessor a certificate of acceptance, in a form similar to Schedule B, attached hereto, outlining such Commencement Date. 2. RENTAL. The monthly rental will be as follows: (4) payments at $6,000.00, followed by (3) payments at $8,000.00 followed by (3) payments at $10,000.00, followed by (12) payments at 13,000.00 followed by (12) payments at $14,000.00 followed by (48) payments at $15,000.00 (herein the "Rent"), which sum plus an amount equal to the sum of all applicable taxes, fees and assessments, will be due in advance starting on the Commencement Date and will continue to be due for the remainder of the term on the same day for each successive calendar month thereafter. Lessor will invoice Lessee for each monthly rental installment. 3. NET LEASE. This Agreement is a net lease and Lessee's obligations to pay all Rent due under the Agreement and the rights of the Lessor or its assignee in, and to, such Rent shall be absolute and unconditional under all circumstances, notwithstanding: (i) any setoff, abatement, reduction, counterclaim, recoupment, defense or other right which Lessee may have against Lessor, its assignees, the manufacturer or seller of the Property, or any other person for any reason whatsoever; (ii) any defect in condition, operation, fitness for use, or any damage to, or destruction of the Property; (iii) any interruption or cessation of use or possession of the Property; or (iv) any insolvency, bankruptcy reorganization or similar proceedings instituted by or against Lessee. 4. SECURITY DEPOSIT. Lessee shall pay the sum of (NOT APPLICABLE) (herein the "Security Deposit"), to be held by Lessor without liability to Lessee for interest, as security for Lessee's faithful performance of the terms and conditions of this Agreement, as well as to indemnify Lessor, to the extent thereof, for any damages, cost, expenses or attorney fees which Lessor may incur by reason of Lessee's default hereunder. In the event of Lessee's default, Lessor may apply the Security Deposit in payment of its cost, expenses and attorney fees in enforcing the terms of this Agreement and to indemnify Lessor against any damages sustained by Lessor, provided however, nothing herein contained shall be construed to mean that the recovery of damages by Lessor shall be limited to the amount of the Security Deposit. In the event all or any portion of the Security Deposit is applied as aforesaid, Lessee shall deposit additional amounts with Lessor so that the Security Deposit shall always be maintained at its original amount. Provided Lessee is not in default hereunder, upon the termination of this Agreement, and the return of the Property to Lessor in the condition required by Section 17 hereof, any unexpended balance of the Security Deposit shall be returned to the Lessee. 5. SET-UP AND DELIVERY. Upon Lessor's receipt of this executed Agreement, Lessor will order the Property for the Lessee based on agreed upon specifications and drawings. Lessee will bear all costs and responsibilities and perform all obligations including but not limited to arranging for delivery and installation of the Property, unless otherwise indicated on Schedule A. Lessor will be responsible for payment of the purchase price of the Property. If delivery and installation of the Property is delayed more than sixty (60) days from the date the Property is ready to be shipped to the Lessee's site and such delay is not the Lessor's fault, the term of the Agreement and the Rent will commence on such sixtieth (60th) day. 6. TIME LIMITATIONS. Lessee hereby agrees that Lessor's charges and rental rates provided herein will be subject to revision by Lessor in the event Lessee requests alterations in the design or specifications of the Property after the execution of this Agreement. 7. LOCATION OF PROPERTY. Lessee shall use the Property in the operation of its business at the location specified on Schedule B and the Property shall not be removed from such location without Lessor's prior written consent. Provided approval to relocate the Property is given, Lessee shall bear all costs associated with such relocation. If the Property shall be located on a site not owned by Lessee, Lessee shall obtain for the benefit of Lessor, a Landlord's waiver in a form acceptable to Lessor. Lessee shall provide Lessor with the following information: (i) the name and address of the owner of record of the premises; (ii) the legal description of the Premises. 8. LESSEE'S INTEREST. The Property shall at all times remain the sole and exclusive property of Lessor, and Lessee shall have no right, title or interest therein, except for those rights expressly granted by this Agreement. Lessee agrees to execute and deliver to Lessor such documents and instruments as are requested by Lessor in order to preserve and protect the Property and Lessor's interests therein. 9. COMPLIANCE WITH REGULATIONS. Lessee at its own cost and expense, shall comply with and conform to all regulations, rules, ordinances, and requirements of any municipal, county, state or federal authority in all matters and things affecting the Property, including laws governing toxic waste, hazardous substances and other environmental risks. In addition, at its own cost and expense, Lessee shall arrange for hookup to any utility connection required, purchase all permits required to situate the Property and obtain necessary zoning variances required by any municipal, county, state or federal authority. In the event compliance with any governmental or quasi-governmental agencies require Lessor to change its design of the Property or any part thereof, Lessor's charges and rental rates may be adjusted to give effect to any changes in Lessor's cost resulting therefrom. 10. LESSEE'S INSPECTION. Upon delivery of the Property, Lessee shall inspect the same within twenty-four (24) hours following delivery and provide Lessor written notice specifying defects in or other proper objections to the Property. If Lessee fails to provide such notice, within 24 hours following the date of 2 delivery, it shall be conclusively presumed as between Lessor and Lessee that Lessee has inspected the Property and that the same is in good condition and repair and acceptable for lease hereunder. 11. LESSOR'S INSPECTION. Lessor, at all times during normal business hours, shall have the right to enter upon the premises where the Property is located for the purpose of inspection and observing its use. 12. ALTERATIONS. Lessee shall make no alterations, additions or improvements to the Property without the prior written consent of Lessor. All additions and improvements of whatsoever kind or nature shall become the property of Lessor. Lessor, at its option, may require Lessee, at Lessee's cost and expense, to remove any additions and improvements made to the Property and restore the same to its original condition, subject only to normal wear from ordinary use. The storage or transportation of any hazardous substances in the Property is not permitted and the effects of such substances on the Property shall not be considered ordinary wear and tear. If the Property is determined to have been used to store any such substances, the Lessee will be required to purchase the Property at a rate to be determined by the Lessor. 13. WAIVER AND INDEMNIFICATION. Lessee hereby waives and releases all claims against Lessor for loss of or damage to all property, goods, wares and merchandise in, upon or about the Property, and for injuries to Lessee, Lessee's agents and third persons, irrespective of the cause of such loss, damage or injury. Lessee agrees to indemnify and hold harmless Lessor from and against any and all losses, liabilities, costs, expenses (including attorney fees), claims, actions, and demands arising out of the maintenance, possession or use of the Property by Lessee, its employees, agents or any person invited, suffered or permitted by Lessee to use or be in, on or about the Property. 14. INSURANCE. During the term of this Agreement or any extension thereof, Lessee shall maintain in force comprehensive general liability insurance written by a responsible insurance company or companies in an amount not less than One Million Dollars ($1,000,000) combined single limit insuring Lessee and naming Lessor as additional insured with respect to liability against loss from injury or damage arising out of the ownership, possession, maintenance or use of the Property. The Lessee shall also maintain property damage insurance in the amount specified on Schedule A and name Lessor as loss payee with respect to the Property. It is Lessee's responsibility to furnish Lessor with current certificates evidencing the effectiveness of such insurance. Such insurance policy or policies shall provide that any cancellation, modification or alteration shall not be effective as to Lessor unless Lessor shall have been provided written notice at least thirty (30) days prior to the effective date of any such cancellation, modification or alteration. The Lessee may elect to have the Lessor provide such insurance coverage by indicating on Schedule A. The rates outlined on Schedule A will be billed to the Lessee on a monthly basis. If the Lessor does not receive a certificate within forty-five (45) days after execution of this Agreement or if such policy expires and is not renewed, the Lessor will provide such coverage on behalf of the Lessee at the rates specified on Schedule A. The Lessor can not provide primary liability coverage for locations occupied as daycare facilities. 15. LOSS AND DAMAGE. Until the Property is returned to Lessor, Lessee assumes all risk of loss or damage to the Property and agrees to indemnify and hold Lessor harmless from any loss resulting from theft, destruction or damage to the 3 Property. Should any of the Property damaged be capable of repair, this Agreement shall not terminate, but at Lessee's cost and expense the Property shall be repaired and restored to its condition existing prior to such damage. In the event any of the Property is damaged beyond repair or is lost, stolen or wholly destroyed, this Agreement shall cease and terminate as to such Property as of the date of the event, accident or occurrence causing such loss or destruction, and Lessee shall pay Lessor within ten (10) days thereafter, an amount equal to the replacement value of the Property as of the date of the event, accident or occurrence causing the loss, damage or destruction of the Property. Lessee shall be entitled to the benefit of the proceeds from any insurance recovery received by Lessor, up to an amount equal to that paid to Lessor pursuant to this Section. 16. NOTICE OF INJURY. Within twenty-four (24) hours after its occurrence, Lessee shall give Lessor written notice, including complete details, of any injury to person or property, which injury in any way relates to the Property. 17. MAINTENANCE AND RETURN. Lessee, at its own cost and expense, shall maintain the Property and every part thereof in good operating order, repair, condition and appearance. Lessee is responsible for routine maintenance, cleaning and cosmetic appearances of all mechanical equipment (e.g. cleaning air conditioning coils and changing filters on a regular basis are considered maintenance). Lessee shall not affix any advertising, signs or other insignia to the exterior or interior of the Property without the prior written consent of Lessor. Unless otherwise specified on Schedule A, at the termination of this Agreement, or any renewal thereafter, the Lessee will be responsible for dismantling and delivering the Property to Lessor's nearest storage facility. The Lessor must approve, in writing, the contractors who will be performing such services. If the Lessor performs the dismantle and return on behalf of the Lessee, the Lessee will pay the Lessor's cost plus 15% within five (5) days following the date the Property is returned to Lessor. The Lessee is responsible for surrendering the Property in as good condition as upon original delivery to Lessee, reasonable wear and tear excepted. In the event the Property is not in good condition, normal wear and tear excepted, the Lessee will be responsible for paying all costs to repair such damages. 18. LIENS. Lessee, at its own cost and expense, shall at all times keep the Property free of and from all liens, encumbrances, attachments, levies, claims, charges and assessments, and shall pay and discharge prior to delinquency, all fines, taxes and other charges levied or assessed against the Property or Lessee. Lessor may, in its sole discretion, pay in whole or in part any liens, encumbrances, attachments, levies, claims, charges and assessments against the Property, and Lessee shall be immediately liable to Lessor for the amount thereof and shall pay the same upon demand. 19. LESSEE'S DEFAULT. If Lessee shall fail to pay the Rent or any other sum due hereunder when due, or if Lessee fails to observe, keep or perform any other term, condition or provision of this Agreement, or if Lessee ceases doing business as a going concern, or if Lessee becomes insolvent or makes an assignment for the benefit of creditors, or if a petition is filed by or against Lessee under the Bankruptcy Code or under any similar statute, including a petition for reorganization, arrangement or extension, or if Lessee applies for or consents to the appointment of a receiver, trustee, conservator or liquidator of Lessee, or if such receiver, trustee, conservator or liquidator is appointed 4 without the application or consent of Lessee, or if a creditor of Lessee or any other person or entity attaches or levies execution against the Property, or if Lessee makes a bulk transfer of its furniture, fixtures, furnishings, or other equipment or inventory, Lessor shall have the right to exercise any one or more of the following remedies. a) To declare all unpaid Rent and other charges immediately due and payable and to recover the balance of the Rent and other charges reserved hereunder, with Lessor retaining title to the Property. b) To sue for all Rent and other charges due hereunder as same shall accrue; c) With or without notice, demand or legal process, to retake possession of the Property hereunder (Lessee hereby authorizes and empowers Lessor to enter upon the premises wherever the Property may be found) and (i) retain the Property and all Rent and other charges paid hereunder and recover from the Lessee the amount of the unpaid Rent and other charges hereunder for the balance of the stated term; (ii) re-lease the Property and recover from the Lessee the amount by which the balance of Rent and other charges reserved hereunder for the balance of the stated term exceeds the net amount received by Lessor from such re-leasing for the same period; or (iii) sell the Property and recover from the Lessee the amount by which the balance of Rent and other charges reserved hereunder for the balance of the stated term and residual value of the Property exceeds the net amount received by Lessor from such sale. As used in this sub-division, the residual value shall be deemed to be the estimated value of the Property at the end of the stated term of this Agreement. Lessor may specifically enforce this provision which is a material inducement to Lessor in entering this Agreement; d) With or without notice, demand or legal process, to enter upon the premises wherever the Property may be found and render the same unusable; e) To recover damages from Lessee. Lessee recognizes that any holding over by Lessee after the time it is required to surrender the Property may cause Lessor to lose or prevent Lessor from obtaining substantial business opportunities, the value of which Lessor cannot presently ascertain. In order to limit Lessee's liability to Lessor therefore, Lessor and Lessee agree that Lessee shall pay Lessor as liquidated damages the sum of one-thirtieth (1/30th) of the monthly rental described in Section 2 of this Agreement plus the sum of Fifty Dollars ($50.00) for each day of holding over by Lessee; f) To terminate this Agreement and require Lessee to pay Lessor within twenty-four (24) hours after written demand, a sum of money equal to the amount, if any, by which the then cash value of the Rent reserved under this Agreement for the balance of the term exceeds the then cash reasonable rental value of the Property (including applicable taxes) for the balance of the lease term; g) To terminate this Agreement; and/or h) To pursue any other remedy at law or in equity. 5 Notwithstanding any repossession or any other action taken by Lessor, Lessee shall be and remain liable for the full performance of all obligations required of Lessee under this Agreement. All remedies of Lessor are cumulative and may be exercised concurrently or separately. Lessor may exercise any or all of the foregoing remedies as to all or any part of the Property. Lessor shall not be deemed to have terminated this Agreement, or the liability of Lessee to pay the Rent thereafter accruing, or waived Lessee's liability for damage, by instituting any proceeding for claim and delivery, by re-leasing the Property or otherwise. Nothing herein contained shall be construed as obligating Lessor to lease the Property. In the event Lessor retakes possession of the Property and re-leases same, Lessee shall have no right or authority to collect Rent from a new lessee occupying the Property. 20. BANKRUPTCY. Neither this Agreement nor any interest therein is assignable or transferable by operation of law. 21. LIMITATION OF LIABILITY. Under no circumstances shall Lessor be liable to Lessee for any special, incidental or consequential damages resulting from the lease of the Property, including, but not limited to, loss of business or profits. 22. LESSOR'S EXPENSES. Lessee shall pay Lessor all costs and expenses, including attorney fees, incurred by Lessor in exercising any of its rights or remedies hereunder or enforcing any of the terms, conditions or provisions hereof. 23. LESSEE'S ASSIGNMENT. Lessee shall not assign, transfer, pledge or hypothecate this Agreement, the Property or any part thereof or any interest therein, or sublet or rent the Property or any part thereof, or permit the Property or any part thereof to be used by anyone other than Lessee or Lessee's employees without the prior written consent of Lessor. A consent to any of the foregoing prohibited acts applies only in the given instance and is not a consent to any subsequent like act by Lessee or any other person. Subject to the foregoing, this Agreement shall inure to the benefit of, and is binding upon, the successors and assigns of the parties hereto, and any such assignment, transfer, pledge or hypothecation of this Agreement, the Property or any part thereof or any interest therein, without the prior written consent of Lessor shall be void. 24. LESSOR'S ASSIGNMENT. Lessor may assign this Agreement and its assignee may assign same. All rights of Lessor hereunder shall be succeeded to by any assignee hereof and said assignee's title to this Agreement, to the Rent and other charges herein provided for to be paid, and in and to the Property shall be free from all defenses, setoffs or counterclaims of any kind or character which Lessee may be entitled to assert against Lessor; it being understood and agreed that any assignee of Lessor does not assume the obligations of Lessor herein named. 25. PERSONAL PROPERTY. This Property is, and shall at all times be and remain, personal property notwithstanding the fact that the Property or any part thereof may now be, or hereafter become, in any manner affixed, attached to, embedded in, or permanently resting upon, real property or any building thereon, or attached in any manner to a permanent structure by means of cement, plaster, nails, bolts, screws or otherwise. In the event for purposes of taxation the 6 Property is treated by any governmental agency as real property, then Lessee shall be solely responsible for payment of all taxes assessed against the Property as real property. Any costs incurred to register or license the Property or any part thereof pursuant to the laws of any state affecting the licensing and registration of motor vehicles or trailers, shall be paid by Lessee. 26. LATE CHARGE. Should Lessee fail to pay any part of the Rent herein reserved or any other sum required by Lessee to be paid to or for the benefit of Lessor within ten (10) days after the due date, Lessee shall pay to Lessor interest on such delinquent payment, computed from the date first due until paid, at the highest legal rate permitted by the laws of the State of California. 27. NON WAIVER. No covenant or condition of this Agreement can be waived except by the written consent of Lessor. Forbearance or indulgence by Lessor in any regard whatsoever shall not constitute a waiver of the covenant or condition to be performed by Lessee to which the same may apply, and, until complete performance by Lessee of said covenant or condition, Lessor shall be entitled to pursue any remedy available under this Agreement, by law or in equity, despite Lessor's forbearance or indulgence. 28. HOLDING OVER, EXTENSION OR SALE. Should Lessee desire to purchase the Property or extend this Agreement beyond the term provided in Section 1 hereof, Lessee shall provide Lessor written notice ninety (90) days prior to the end of the term of this Agreement. Providing there have been no events of default, the sale price or the monthly rental rate beyond the term provided in Section 1 shall be set at fair market value, unless otherwise specified in Schedule B. Such purchase or extension of this Agreement shall be documented in a mutually acceptable format. 29. TERMINATION. This Agreement may be terminated by either party, effective as of the expiration of the term provided in Section 1, if three (3) months prior written notice is given. If this Agreement is not so terminated it shall continue in full force and effect for successive months, at the monthly Rent, plus 10 %, until three (3) months written termination notice is given by either party. 30. NOTICES. Any notice or communication given or required to be given hereunder shall be deemed sufficiently given if delivered personally or mailed by registered or certified mail, postage prepaid, to Lessor at the following address: RESUN LEASING, INCORPORATED 22810 QUICKSILVER DRIVE DULLES, VA 20166 and to Lessee at the following address: CHILDREN'S WONDERLAND, INC. P.O. BOX 6129 OXNARD, CA 93031-6129 or to such other address or addresses as may hereafter be furnished in writing by either party to the other, and shall be deemed to have been given as of the date personally delivered or deposited in the United States Mail. 7 31. JOINT AND SEVERAL LIABILITY. If more than one Lessee is named in this Agreement, the liability of each shall be joint and several. 32. ORIGINAL AGREEMENT. There shall be one original of this Agreement executed by all the parties and marked "Original" on the first page thereof. Any duplicate original of this Agreement shall be marked "Duplicate Original" on the first page thereof. 33. CHOICE OF LAW. This Agreement and its performance shall be governed exclusively by the laws of the Commonwealth of Virginia. 34. WARRANTIES. LESSEE ACKNOWLEDGES AND AGREES THAT LESSOR HAS MADE NO WARRANTIES OR REPRESENTATIONS, EITHER EXPRESS OR IMPLIED, RELATING TO ANY OF THE MATTERS CONTAINED IN THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE CONDITION OF THE PROPERTY, ITS MERCHANTABILITY OR ITS FITNESS FOR ANY PARTICULAR PURPOSE. 35. TITLES. The titles of the Sections of this Agreement are solely for the convenience of the parties, and are not to be used as an aid in the interpretation of the terms and conditions thereof. 36. ENTIRE AGREEMENT. The foregoing constitutes the full and complete Agreement between the parties, and all other oral or written agreements in relation to the subject matter of this Agreement are hereby rescinded. 37. BINDING EFFECT. THIS AGREEMENT SHALL BECOME THE LEGAL AND BINDING OBLIGATION OF THE LESSOR AND LESSEE ONLY UPON EXECUTION OF THIS AGREEMENT BY AUTHORIZED REPRESENTATIVES OF EACH PARTY, AT THEIR PRINCIPAL PLACES OF BUSINESS. NO OTHER CONTRACT AND NO AGREEMENT, CONSIDERATION OR STIPULATION MODIFYING OR CHANGING THE TENOR HEREOF SHALL BE RECOGNIZED AS BINDING UNLESS APPROVED IN LIKE MANNER. 8 IN WITNESS HEREOF, the parties hereto have duly executed this Agreement on the date set forth below. LESSOR: RESUN LEASING, INCORPORATED ------------------------------------------------------------------------ SIGNATURE: /s/ ---------------------------------------------------------------------- PRINT NAME: BARRY A. ROMAN --------------------------------------------------------------------- TITLE: PRESIDENT -------------------------------------------------------------------------- DATE: 10-18-00 --------------------------------------------------------------------------- LESSEE: CHILDREN'S WONDERLAND, INC. ----------------------------------------------------------------------- SIGNATURE: /s/ -------------------------------------------------------------------- PRINT NAME: JOHN R. CLARKE ------------------------------------------------------------------- TITLE: CEO ------------------------------------------------------------------------ DATE: 8/28/00 ------------------------------------------------------------------------- ALL RIGHT, TITLE AND INTEREST OF RESUN LEASING, INCORPORATED ("RESUN LEASING") HEREUNDER HAS BEEN PLEDGED TO, AND IS SUBJECT TO THE SECURITY INTERESTS OF BT COMMERCIAL CORPORATION, AS AGENT, PURSUANT TO THAT CERTAIN AMENDED AND RESTATED CREDIT AGREEMENT, DATED AS OF SEPTEMBER 26, 2000, AMONG RESUN LEASING, BT COMMERCIAL CORPORATION, AS AGENT, AND THE LENDERS FROM TIME TO TIME PARTY THERETO, AS AMENDED, RESTATED OR OTHERWISE MODIFIED FROM TIME TO TIME. RESUN LEASING SHALL HAVE NO RIGHT TO TRANSFER ITS RIGHT, TITLE OR INTEREST HEREUNDER TO ANY PARTY EXCEPT PURSUANT TO AND IN ACCORDANCE WITH THE PROVISIONS OF THE RELEVANT CREDIT DOCUMENTS. 9 Schedule A to Lease Agreement dated March 24, 2000, "Agreement" by and between RESUN LEASING, INCORPORATED, "Lessor" and CHILDREN'S WONDERLAND, INC., "Lessee" The Property consists of the following units: (1) 12,000 square foot, single story daycare center comprised of (16) modular units, serial numbers: 10014, 10015, 10017, 10024, 10025, 10026, 10027, 10029, 10030, 10031, 10032, 10033, 10034, 10039, 10045, and 10055. Pursuant to Section 5 and 17 of the Agreement, the Lessee agrees to be responsible for the following charges: Pursuant to Section 14 of the Agreement, insurable value for property damage coverage: $1,200,000 If Lessor will insure the Property, the Lessee will be charged: Not Applicable, Lessee to insure. INITIALS: LESSEE /s/ ------------ LESSOR /s/ ------------ 10 Schedule B to Lease Agreement dated March 24, 2000, "Agreement" by and between RESUN LEASING, INCORPORATED, "Lessor" and CHILDREN'S WONDERLAND, INC., "Lessee" 1. ITEMS OF PROPERTY. The Lessee hereby certifies that the Property, as outlined in Schedule A, has been delivered to the location indicated below, inspected by the Lessee, found to be in good order and accepted pursuant to the terms and conditions of the Agreement as of the date indicated below: 2. LOCATION OF PROPERTY: VETERANS ADMIN. HOSPITAL - ---------------------------------- 950 CAMPBELL AVENUE - ---------------------------------- WEST HAVEN, CT 06516 - ---------------------------------- 3. ACCEPTANCE AND COMMENCEMENT DATE: MARCH 1, 2000 4. The term of the Agreement will start on the Commencement Date indicated above. AGREED AND ACKNOWLEDGED: CHILDREN'S WONDERLAND, INC. - ---------------------------------- By: /s/ ----------------------------- Name: JOHN R. CLARKE --------------------------- Title: CEO -------------------------- Date: 8/28/00 --------------------------- 11 RIDER TO LEASE AGREEMENT BETWEEN RESUN LEASING, INCORPORATED, AS LESSOR AND CHILDREN'S WONDERLAND, INC., AS LESSEE DATED AS OF MARCH 24, 2000 The terms and conditions of the printed form lease are hereby amended and modified as follows: PARAGRAPH 1 - Replace the first sentence with the following: "The term of this Agreement shall be eighty-two (82) months, to begin on April 1, 2000 (herein the "Commencement Date") and to end on January 31, 2007." PARAGRAPH 4 - This paragraph is deleted. PARAGRAPH 5 - This paragraph is deleted. PARAGRAPH 7 - The last two sentences of this paragraph are deleted. PARAGRAPH 10 - This paragraph is deleted. PARAGRAPH 17 - Add after the last sentence, "Notwithstanding the foregoing, Lessee shall have the option of dismantling and delivering the Property to Lessor's nearest storage facility or paying Lessor to perform the dismantling and return on behalf of Lessee as provided herein, in which case, however, the amount Lessee shall pay Lessor for such dismantling and return shall not exceed $50,000.00." PARAGRAPH 37 - Add after the last sentence, "Notwithstanding the foregoing, this Agreement shall not be effective until the Lessor secures right of possession to the location specified on Schedule B for a period ending not earlier than February 1, 2007 and transfers such right of possession to the Lessee at no cost or expense, pursuant to documentation reasonably acceptable to the Lessee, such that, provided Lessee complies with the terms of this Agreement, Lessee will be entitled to the full benefit and enjoyment of the Property throughout the term of the Lease without interference." LESSOR: LESSEE: RESUN LEASING, INCORPORATED CHILDREN'S WONDERLAND, INC. By: /s/ By: /s/ ------------------------- ------------------------- Name: Name: Title: Title: 12 EX-10.31 9 file008.txt LETTER AGREEMENT, DATED APRIL 20, 2000 EXHIBIT 10.31 CHILDREN'S WONDERLAND, INC. P.O. BOX 6129 OXNARD, CA 93031-6129 April 20, 2000 Mr. Justin Gasarch 29 Beach road Monmouth Beach, NJ 07750 Dear Mr. Gasarch: Children's Wonderland, Inc. (referred to as "we", "us" or the "Company") hereby retains you (Justin Gasarch) and you hereby agree to be retained by us to render advisory services (the "Services") in matters relating to real estate and the development of pre-school clients for our Internet strategy. This Agreement is effective for a period of twelve months from the date set forth above. During such period, you will provide us with the Services as may reasonably be requested of you from time to time by us, provided that you will not be required to undertake duties not reasonably within the scope of the Services contemplated hereunder. The time required of you to provide the Services is not expected to be substantial and you will not be obligated to spend any specific amount of time in providing the Services. All consultation may be provided by you via telephone, facsimile and e-mail from your regular place of business. You agree to keep confidential any information which you have been notified by the Company as being confidential and which in fact is non-public and otherwise treated as confidential. In consideration for your agreement to provide the Services to us, we will become obligated to issue to you or your designee, simultaneously with your execution of this Agreement and your (or your assignee's) subscription to our Units ("Units") (consisting of our Series B Convertible Preferred Stock and Warrants), the number of shares of our Common Stock, after giving effect to a reverse split of our Common Stock, which is the higher of (i) 250,000 or (ii) 3.8% of the total outstanding Common Stock on the date hereof after taking into account the conversion of all of our Series A Convertible Preferred Stock outstanding but not taking into account the conversion of other convertible securities which we have outstanding, including any of our Series B Convertible Preferred Stock. You agree that we will not issue the shares of Common Stock to you as contemplated in the preceding sentence until such time as we have amended our Restated Articles of Incorporation to authorize a sufficient number of shares of Common Stock to permit the conversion of our outstanding convertible securities and to permit such issuance of shares to you. In the event we have not closed on our offering of Units within the time frame (plus any optional extensions) described in our Subscription Agreement, dated March 3, 2000, this Agreement will be voided and be of no force and effect and any subscription of Units by you or your assignee will also be null and void. Mr. Justin Gasarch April 20, 2000 Page 2 We will register the shares of Common Stock, which we are obligated to issue to you or your designee pursuant to the preceding paragraph, under the Securities Act of 1933, as amended, on or prior to the six-month anniversary of the date hereof; provided, however, that such six-month anniversary will be extended by such number of days, if any, by which our becoming current with our reporting obligations under the Securities Exchange Act of 1934 (which status we will use best efforts to attain as soon as practicable) is delayed beyond the five-month anniversary of the date hereof. As a condition to this Agreement, you and Gray Gull Realty Co. (and any of your other assignees) will each deliver General Releases to us in connection with our offering of the Units. We agree to hold such General Releases in escrow, and they will not be enforceable, until we have registered your shares as contemplated in the foregoing paragraph and the Series B Preferred Stock to be received by you and/or your assignee is converted into our Common Stock. In addition, provided that you and your assignee also agree, John Clarke and Robert Becker, as holders of all of our outstanding Series A Convertible Preferred Stock, agree that, in the event of a liquidation, dissolution or winding up of the Company, the Series A Convertible Preferred Stock will be entitled to 37.5%, and you and your assignee will be entitled to 62.5%, of the total of the payments made by the Company resulting from such liquidation, dissolution or winding up with respect to the liquidation preferences of both the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock held by you or your assignee and also agree in such event that you or your assignee will be entitled to payment of the full principal amount of your and your assignee's subscription to the Units before any payments are made on the Series A Convertible Preferred. The provisions of the preceding sentence will apply only if such shares held by you or your assignee have not been transferred to a third party and if such shares and the Series A Convertible Preferred Stock have not been converted into shares of our Common Stock. By signing below, John Clarke and Robert Becker agree to vote their shares of the Company's capital stock in favor of carrying out the intent and purpose of the foregoing paragraphs. We acknowledge that you may conduct business other than as a consultant and may also provide consulting advice to others. Nothing herein contained shall be construed to limit or restrict you from rendering the same or similar services to others, or in rendering similar advice to others, as long as such business or advice is not competitive with that of the Company. You shall be responsible for the payment of all federal, state and local taxes, including F.I.C.A. and income taxes, payable on any compensation paid by the Company to you hereunder. It is expressly understood and agreed that your relationship to Company is that of an independent contractor and that neither this Agreement nor the Services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship between Company and you. You shall have no authority to act for, represent or bind Company in any manner, except as may be agreed to expressly by Company in writing from time Mr. Justin Gasarch April 20, 2000 Page 3 to time and you and the Company are and shall remain independent parties bound by the provisions hereof. This Agreement embodies the entire agreement between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof. Neither you nor we may assign this Agreement or any rights created hereunder. You may not delegate the performance of any of your duties hereunder. Any such purported delegation or assignment shall be void. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to principles of conflicts of law. If you are in agreement with the terms set forth above, please sign a copy of this letter and return the signed copy to us. Very truly yours, CHILDREN'S WONDERLAND, INC. By: /s/ ------------------------------ Name: Debby Bitticks Title: President By: /s/ ------------------------------ Name: Robert Becker Title: Principal Shareholder By: /s/ ------------------------------ Name: John Clarke Title: Principal Shareholder AGREED as of the date set forth above: /s/ - ------------------------------------- JUSTIN GASARCH EX-99 10 file009.txt FINANCIAL DATA SCHEDULES TYPE> EX-27 SEQUENCE> 2 DESCRIPTION> FDS -- TEXT> ARTICLE> 5 PERIOD-TYPE> 12-MOS (in thousands) FISCAL-YEAR-END> JUNE-30-2000 PERIOD-END> JUNE-30-2000 CASH> 16 SECURITIES> 0 RECEIVABLES> 82 ALLOWANCES> 0 INVENTORY> 0 CURRENT-ASSETS> 528 PP&E> 232 DEPRECIATION> (142) TOTAL-ASSETS> 622 CURRENT-LIABILITIES> 3,317 BONDS> 0 PREFERRED-MANDATORY> 0 PREFERRED> 614 COMMON> 10,761 OTHER-SE> (14,511) TOTAL-LIABILITY-AND-EQUITY> 622 SALES> 1,259 TOTAL-REVENUES> 1,259 CGS> 0 TOTAL-COSTS> 1,946 OTHER-EXPENSES> (1,905) LOSS-PROVISION> 0 INTEREST-EXPENSE> 828 INCOME-PRETAX> 389 INCOME-TAX> (0) INCOME-CONTINUING> 0 DISCONTINUED> 0 EXTRAORDINARY> 2,038 CHANGES> 0 NET-INCOME> 2,427 EPS-BASIC> 0.24 EPS-DILUTED> 0.03 27-1 TYPE> EX-27 SEQUENCE> 2 DESCRIPTION> FDS -- TEXT> ARTICLE> 5 PERIOD-TYPE> 12-MOS (in thousands) FISCAL-YEAR-END> JUNE-30-1999 PERIOD-END> JUNE-30-1999 CASH> 6 SECURITIES> 0 RECEIVABLES> 49 ALLOWANCES> (13) INVENTORY> 0 CURRENT-ASSETS> 51 PP&E> 238 DEPRECIATION> (110) TOTAL-ASSETS> 286 CURRENT-LIABILITIES> 8,539 BONDS> 0 PREFERRED-MANDATORY> 0 PREFERRED> 0 COMMON> 10,761 OTHER-SE> (19,037) TOTAL-LIABILITY-AND-EQUITY> 286 SALES> 1,236 TOTAL-REVENUES> 1,236 CGS> 0 TOTAL-COSTS> 2,015 OTHER-EXPENSES> 177 LOSS-PROVISION> 0 INTEREST-EXPENSE> 837 INCOME-PRETAX> (1,793) INCOME-TAX> 0 INCOME-CONTINUING> 0 DISCONTINUED> 0 EXTRAORDINARY> 0 CHANGES> 0 NET-INCOME> (1,793) EPS-BASIC> (0.18) EPS-DILUTED> (0.18) 27-2 TYPE> EX-27 SEQUENCE> 2 DESCRIPTION> FDS -- TEXT> ARTICLE> 5 PERIOD-TYPE> 12-MOS (in thousands) FISCAL-YEAR-END> JUNE-30-1998 PERIOD-END> JUNE-30-1998 CASH> 206 SECURITIES> 0 RECEIVABLES> 79 ALLOWANCES> (15) INVENTORY> 0 CURRENT-ASSETS> 319 PP&E> 508 DEPRECIATION> (215) TOTAL-ASSETS> 671 CURRENT-LIABILITIES> 7,165 BONDS> 0 PREFERRED-MANDATORY> 0 PREFERRED> 0 COMMON> 10,729 OTHER-SE> (17,259) TOTAL-LIABILITY-AND-EQUITY> 671 SALES> 4,840 TOTAL-REVENUES> 4,840 CGS> 0 TOTAL-COSTS> 8,373 OTHER-EXPENSES> 58 LOSS-PROVISION> 552 INTEREST-EXPENSE> 2,753 INCOME-PRETAX> (6,896) INCOME-TAX> (0) INCOME-CONTINUING> 0 DISCONTINUED> 0 EXTRAORDINARY> 0 CHANGES> 0 NET-INCOME> (6,896) EPS-BASIC> (1.62) EPS-DILUTED> (1.62) 27-3 TYPE> EX-27 SEQUENCE> 2 DESCRIPTION> FDS -- TEXT> ARTICLE> 5 PERIOD-TYPE> 12-MOS (in thousands) FISCAL-YEAR-END> JUNE-30-1997 PERIOD-END> JUNE-30-1997 CASH> 72 SECURITIES> 0 RECEIVABLES> 246 ALLOWANCES> (55) INVENTORY> 0 CURRENT-ASSETS> 421 PP&E> 4,713 DEPRECIATION> (928) TOTAL-ASSETS> 5,823 CURRENT-LIABILITIES> 5,146 BONDS> 0 PREFERRED-MANDATORY> 0 PREFERRED> 0 COMMON> 9,749 OTHER-SE> (11,106) TOTAL-LIABILITY-AND-EQUITY> 5,823 SALES> 5,698 TOTAL-REVENUES> 5,698 CGS> 0 TOTAL-COSTS> 12,656 OTHER-EXPENSES> 219 LOSS-PROVISION> 0 INTEREST-EXPENSE> 2,829 INCOME-PRETAX> (10,006) INCOME-TAX> (0) INCOME-CONTINUING> 0 DISCONTINUED> 0 EXTRAORDINARY> 0 CHANGES> 0 NET-INCOME> (10,006) EPS-BASIC> (2.53) EPS-DILUTED> (2.53) 27-4 -----END PRIVACY-ENHANCED MESSAGE-----