AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 5 TO FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE CHILDREN'S INTERNET, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 7374 88-0370247 ---------------------------- ---------------------------- ---------------------- (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) |
5000 Hopyard Rd., Suite 320
PLEASANTON, CALIFORNIA 94588
(925) 737-0144
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Sholeh Hamedani
The Children's Internet, Inc.
5000 Hopyard Rd., Suite 320
Pleasanton, California 94588
(925) 737-0144
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER OF
AGENT FOR SERVICE OF PROCESS)
Copies to:
Oswald & Yap
16148 Sand Canyon Avenue
Irvine, CA 92618
(949) 788-8900
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS MAXIMUM MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PRICE PER SHARE[1] PRICE REGISTRATION FEE
-------------------- ------------ ------------------ ------------------ ----------------
Common Stock,
par value $0.001 5,118,500[2] $ 2.00 $10,237,000 $942
Total 5,118,500 $ 2.00 $10,237,000 $942
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[1] Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) and (o) to the Securities Act of 1933. The selling stockholders will sell at a price $2.00 per share, provided that in the event that our shares become quoted on the OTC Bulletin Board or some other securities market, selling stockholders may sell their shares at then-prevailing prices or in privately negotiated transactions.
[2] Consists of 1,118,500 shares of common stock being registered for sale by the selling stockholders and 4,000,000 shares of common stock being registered for sale in a direct public offering by the Company.
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement share thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
SUBJECT TO COMPLETION, DATED APRIL 6, 2004
THE CHILDREN'S INTERNET, INC.
PROSPECTUS
5,118,500 SHARES OF COMMON STOCK
The information in this prospectus is not complete and may be amended. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
We are offering for sale a maximum of 4,000,000 shares of our common stock in a self-underwritten offering directly to the public. There is no minimum amount of shares that we must sell in our direct offering, and therefore no minimum amount of proceeds will be raised. No arrangements have been made to place funds into escrow or any similar account. Upon receipt, offering proceeds will be deposited into our operating account and used to conduct our business and operations. We are offering the shares without any underwriting discounts or commissions. The purchase price is $2.00 per share. If all of the shares offered by us are purchased, the proceeds to us will be $8,000,000.
This is our initial public offering and no public market currently exists for shares of our common stock.
We are also registering 1,118,500 shares of common stock for sale by certain of our stockholders. The selling stockholders may offer and sell the shares from time to time in negotiated transactions at $2.00 per share. In the event that our shares become quoted on the OTC Bulletin Board, selling stockholders may sell their shares at then-prevailing prices or in privately negotiated transactions.
The offering will terminate 12 months after this registration statement is declared effective by the Securities and Exchange Commission. However, we may extend the offering for up to one year following the twelve-month offering period.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD INVEST IN OUR COMMON STOCK ONLY IF YOU CAN
AFFORD TO LOSE YOUR ENTIRE INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Our principal executive offices are located at
5000 Hopyard Rd., Suite 320, Pleasanton, California 94588.
Our telephone number is (925) 737-0144.
THE DATE OF THIS PROSPECTUS IS ___________________, ____.
THE CHILDREN'S INTERNET, INC.
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The information contained in this prospectus is accurate only as to the date of this prospectus, regardless of the time of delivery of the prospectus or of any sale of the common stock.
PROSPECTUS SUMMARY............................................ 5 RISK FACTORS.................................................. 9 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS............. 14 USE OF PROCEEDS............................................... 9 DIVIDEND POLICY............................................... 15 CAPITALIZATION................................................ 9 DILUTION...................................................... 9 SELECTED FINANCIAL DATA....................................... 10 PLAN OF OPERATION............................................. 16 BUSINESS OF THE COMPANY....................................... 25 ONLINE PROMOTION.............................................. 45 FREE CD DISTRIBUTION.......................................... 46 PRICING CONSIDERATIONS........................................ 47 MANAGEMENT.................................................... 52 EXECUTIVE COMPENSATION........................................ 45 SELLING STOCKHOLDERS.......................................... 56 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 50 DESCRIPTION OF SECURITIES..................................... 61 MARKET FOR COMMON EQUITY...................................... 61 PLAN OF DISTRIBUTION.......................................... 63 INDEMNIFICATION............................................... 65 LEGAL MATTERS................................................. 66 EXPERTS....................................................... 66 WHERE YOU CAN FIND MORE INFORMATION........................... 66 Outside Back Cover Page |
Dealer Prospectus Delivery Obligation
Until _______, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligations to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PROSPECTUS SUMMARY
This summary highlights selected information in this prospectus, but it may not contain all of the information that is important to you. To better understand this offering, and for a more complete description of the offering, you should read this entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements, which are included elsewhere in this prospectus.
In this prospectus, the terms "The Children's Internet," "we," "us," and "our" refer to The Children's Internet, Inc., a Nevada corporation, and, unless the context otherwise requires, "common stock" refers to the common stock, par value $.001 per share, of The Children's Internet, Inc.
THE CHILDREN'S INTERNET, INC.
We were incorporated in the State of Nevada on September 25, 1996 as D.W.C. Installations. On July 3, 2002, Shadrack Films, Inc. purchased 1,166,755 newly issued shares of our common stock for $150,000, thereby obtaining a majority ownership interest and becoming our parent company.
We changed our name to The Children's Internet, Inc. on December 27, 2002. We are a development stage company and currently have no revenues, only minimal assets, and have incurred losses since our inception.
On September 10, 2002, we entered into an agreement with a related party, Two Dog Net, Inc., a software development company based in Fresno, California, to be the exclusive marketers of their proprietary Internet service for pre-school to junior high school age children called The Children's Internet(R). We plan to introduce and market The Children's Internet(R), a comprehensive Internet service designed specifically for children that allows them to have safe, yet unrestricted access to the Internet. The Children's Internet(R) allows real time access to pre-selected educational resources and entertaining websites while restricting access to inappropriate websites and information. The proprietary, patent-pending security software, Safe Zone Technology(R) offers security against Internet predators and Internet content that is inappropriate for children. The service provides secure, affordable live Internet access, as well as secure e-mail and chat, homework help, games, news, super portals to educational resources and access to web pages that have been pre-approved for educational and entertaining values.
Through our agreement with Two Dog Net, we will offer subscriptions to The Children's Internet(R) service. We plan to conduct an initial media test to introduce our services to the public via a 30-minute infomercial in 2003. The infomercial was produced by Two Dog Net over a two-year period and is ready to air and is available for our use through our agreement.
We have related parties as follows:
- Our President, Chief Executive Officer, and one of our Directors, Sholeh Hamedani, is the sole shareholder of our parent company, Shadrack Films, Inc. Ms. Hamedani was also President of Two Dog Net, Inc., the licensor of The Children's Internet(R) technology
until August 1, 2002. Ms. Hamedani also owns approximately 10% of
the total outstanding shares of Common Stock of Two Dog Net, Inc.
- Ms. Hamedani's father, Nasser Hamedani, is the current President,
Chairman and majority shareholder of Two Dog Net, Inc.
OUR DIRECT PUBLIC OFFERING
We are offering for sale up to a maximum of 4,000,000 shares of our common stock directly to the public. There is no underwriter involved in this offering. We are offering the shares without any underwriting discounts or commissions. The purchase price is $2.00 per share. If all of the shares offered by us are purchased, the proceeds to us will be $8,000,000.
This is our initial public offering and no public market currently exists for shares of our common stock. We can offer no assurance that an active trading market will ever develop for our common stock.
The offering will terminate 12 months after this registration statement is declared effective by the Securities and Exchange Commission. However, we may extend the offering for up to one year following the twelve-month offering period.
THE SELLING STOCKHOLDERS
We are also registering 1,118,500 shares of our common stock held by certain of our stockholders. A list of the securities being registered in this prospectus and the people and entities that own them appears in the "Selling Stockholders" section of this prospectus. Selling stockholders may sell their shares at $2.00 per share until our securities are quoted on the over-the-counter Bulletin Board. Thereafter, selling stockholders may sell their shares at market prices or at privately negotiated prices.
HOW TO CONTACT US
Our executive offices are located at 5000 Hopyard Rd., Suite 320, Pleasanton, California 94588. Our telephone number is (925) 737-0144.
SUMMARY OF THE OFFERING
Total shares of common stock outstanding prior to the offering 2,287,755
Shares of common stock being offered by us 4,000,000
Shares of common stock being offered by selling stockholders 1,118,500
Total shares of common stock outstanding after the offering 6,287,755
$8,000,000
Gross proceeds: All proceeds from the sale of 1,118,500
Direct offering; if maximum is sold shares held by the selling stockholders will
Selling stockholders go directly to the selling
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stockholders
Use of proceeds Proceeds from the sale of the
shares will be used to
implement our marketing and
sales plan, for technical
operations, and to provide
general operating capital.
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SUMMARY FINANCIAL DATA
The following table sets forth our summary consolidated financial data. This information should be read in conjunction with the financial statements and the notes to those financial statements appearing elsewhere in this prospectus.
For the year For the year
ended ended For the period from
December December September 25, 1996
31, 31, (inception) through
2003 2002 December 31, 2003
(audited) (audited) (audited)
----------- ------------- -------------------
STATEMENT OF OPERATIONS DATA
Net sales $ 0 $ 0 $ 0
Operating expenses: $478,000 $392,000 $879,000
Operating loss ($478,000) ($392,000) (879,000)
Net Loss ($478,000) ($392,000) ($879,000)
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Total assets $ 0 Current liabilities $304,000 Total stockholders' deficit ($304,000) |
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CONSIDER CAREFULLY THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. THESE RISK FACTORS CONSTITUTE ALL THE MATERIAL RISKS (EXCLUDING THE RISKS FACED BY ANY TYPICAL ISSUER OR OFFERING) IDENTIFIED BY OUR MANAGEMENT THAT WE FACE BASED ON OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE. ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS OR OUR FUTURE PERFORMANCE.
OUR AUDITOR HAS EXPRESSED SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN. AN INABILITY TO CONTINUE AS A GOING CONCERN WOULD LIKELY LEAD TO A LOSS OF YOUR ENTIRE INVESTMENT.
Our independent certified public accountant's report on our financial statements for the period from September 25, 1996 to December 31, 2003 contains an explanatory paragraph indicating that we had no established source of revenue which raises substantial doubt about our ability to continue as a going concern. We cannot assure you that any independent certified public accountant's report on our future financial statements will not include a similar explanatory paragraph if we are unable to raise sufficient funds or generate sufficient cash from operations to cover the cost of our operations. The existence of the explanatory paragraph may adversely affect our relationship with prospective customers and suppliers and could harm our business.
WE ARE A DEVELOPMENT STAGE COMPANY THAT MAY NOT REACH PROFITABILITY.
Even though incorporated on September 25, 1996, we had no business plan from inception through September 9, 2002. We began conducting operations on September 10, 2002, when we contracted for the rights to sell The Children's Internet(R) product from Two Dog Net. In late November 2002, we readied all systems for operations. As of December 31, 2003, we had not earned any revenues. We may never reach profitability due to our possible inability to attract subscribers, our possible inability to compete with competitors, our possible failure to generate sufficient revenues from subscribers, errors and/or interruptions in our service, our possible inability to expand our internal financial, administrative and product development systems to accommodate our potential growth, and our possible inability to attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks.
WE HAVE INCURRED LOSSES IN THE PAST AND EXPECT TO CONTINUE TO INCUR LOSSES, WHICH COULD BE SIGNIFICANT AND IMPACT THE VALUE OF OUR STOCK.
As of December 31, 2003, we had an accumulated deficit of $879,000. We expect to derive our revenues solely from sales of subscriptions to The Children's Internet(R) service. We will significantly increase our operating expenses related to expanding our sales and marketing operations to promote sales of subscriptions to The Children's Internet(R) service. To the extent such expenses precede or are not subsequently followed by increased revenues, these expenses will make us unprofitable. Our planned expense levels will be based in part on our expectations concerning future revenue and, to a large extent, depend upon the success of our marketing
efforts to attract subscribers. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall.
OUR OPERATING RESULTS ARE ENTIRELY DEPENDENT ON REVENUES FROM TWO DOG NET'S PRODUCT, THE CHILDREN'S INTERNET(R) SERVICE, AND OUR BUSINESS COULD BE MATERIALLY HARMED BY FACTORS THAT ADVERSELY AFFECT TWO DOG NET AND ITS PRODUCTS.
We currently offer one product through our agreement with Two Dog Net, The Children's Internet(R) service. There are no other products available through our agreement at the present time, nor do we anticipate being able to offer other products for at least the next twelve months, if not longer. Accordingly, our future operating results depend entirely on the demand for The Children's Internet(R) service by future customers, including new and enhanced releases that are subsequently introduced. If our competitors release new products that are superior to our products in performance or price, or we fail to enhance our products and introduce new products in a timely manner, demand for our products may decline. A decline in demand for our products as a result of competition, technological change or other factors would significantly reduce any revenues we may earn. Additionally, any events adversely affecting Two Dog Net will also affect us as we are entirely dependent on our agreement with Two Dog Net for any revenues. If Two Dog Net were to cease its operations, we would need to find alternative sources of revenues, which we may be unable to do. In such an event, we could be forced to cease operations entirely.
ONCE WE OBTAIN SUBSCRIBERS, WE MAY NOT BE ABLE TO MEET OUR SUBSCRIBER'S VOLUME OF USE, LEADING TO THE LOSS OF SOME SUBSCRIBERS AND A REDUCTION IN OUR REVENUES.
We are dependent on being able to effectively serve our subscribers' volume of use on The Children's Internet(R) website and service. The performance of our website and service is critical to our reputation, our ability to achieve market acceptance of our product, and our ability to attract subscribers. An increase in the volume of use of our website and service could strain the capacity of the software or hardware we deploy which could lead to slower response time or system failures, and adversely affect our business and potential for revenue generation. In addition, as the number of Web pages and users increase, there can be no assurance that our product and infrastructure will be able to scale accordingly. We also face technical challenges associated with higher levels of personalization and localization of content delivered to users of our service, which adds strain to our development and operational resources.
WE ARE DEPENDENT ON THIRD PARTIES FOR INTEGRAL COMPONENTS OF OUR SERVICE. ANY DISRUPTION IN SERVICES BY THESE THIRD PARTIES MAY LEAD TO A REDUCTION IN THE VALUE OF OUR STOCK.
We are dependent upon private third party providers to provide the principal Internet connection for The Children's Internet(R) service. As The Children's Internet(R) service is currently our only product and will be distributed to our customers solely over the Internet, any disruption in the Internet access provided by third-party providers such as EmeryTech Data Center, the data center hosting our servers, would prevent our customers from accessing The Children's Internet(R). Additionally, any failure of third-party providers to handle higher volumes of user traffic would limit the number of customers to which we would be able to provide The Children's Internet(R) service. If we are not able to provide service to our customers due to any such disruptions in Internet access or any inability to handle higher volumes of user traffic, any customers that we
may get could cancel their subscriptions. Also as it would not be obvious that such disruptions were due to the failings of third parties, word-of-mouth and negative publicity about any such failures would likely impede our ability to obtain new subscribers. As we are currently solely dependent on subscriptions for revenues, this would reduce any revenues we may be able to generate.
WE ARE DEPENDENT ON OUR SOLE OFFICER AND ONE OF DIRECTOR, SHOLEH HAMEDANI AND OUR OTHER PERSONNEL. IF WE ARE UNABLE TO RETAIN THEM, OR IF WE ARE UNABLE TO ATTRACT ADDITIONAL PERSONNEL, OUR BUSINESS MAY FAIL.
We currently have four employees and one consultant. Our performance is substantially dependent on the performance of our senior management and key technical personnel, in particular Sholeh Hamedani, our President, Chief Executive Officer, Chief Financial Officer, and Director. We do not carry key person life insurance on any of our employees. The loss of the services of any of senior management or other key employees would force us to incur potentially significant costs in seeking replacement personnel. Additionally, as none of our employees are currently receiving compensation, but are instead only accruing unpaid salaries, it would be very difficult or impossible for us replace them. We anticipate that we will need to hire additional personnel in the areas of technology and development, customer support, finance and administration and operations. As a result, our future success will depend heavily on our ability to quickly attract qualified employees to sufficiently staff key functional areas supporting the business. Competition for such personnel is intense, and there can be no assurance that we will be successful in achieving a staffing plan in all of our key functional areas within a time frame that is consistent with our overall business plan. There is no assurance that we will be able to retain our key managerial and technical employees or that we will be able to attract and retain additional highly qualified technical and managerial personnel in the future. Our inability to retain and attract the necessary technical and managerial personnel would limit our ability to complete the administrative and technical tasks necessary to carrying out our business plan and we would no longer be able to conduct operations.
AS WE HAVE LIMITED FINANCIAL, TECHNICAL, MARKETING AND DISTRIBUTION RESOURCES, WE MAY HAVE DIFFICULTY COMPETING WITH OTHER COMPANIES PROVIDING INTERNET SERVICES FOR CHILDREN.
Most of our existing competitors, as well as a number of potential new competitors, have significantly greater financial, technical, marketing and distribution resources then we do. Our management believes that the principal competitive factors in our anticipated markets are brand recognition, ease of use, comprehensiveness of available content, customization by the consumer, quality and responsiveness of search results, availability of high-quality, focused value added services, and required technology to offer access to end users with fewer interruptions. There can be no assurance that we will be able to compete successfully.
IMPAIRMENT OF INTELLECTUAL PROPERTY RIGHTS COULD ALLOW COMPETITORS TO MINIMIZE ANY ADVANTAGE THAT THE PROPRIETARY TECHNOLOGY MAY GIVE US OR PREVENT US FROM OFFERING THE CHILDREN'S INTERNET(R) SERVICE.
Two Dog Net currently has a patent application pending for its technology that may preclude or inhibit competitors from entering the market that we serve. However, we cannot be sure that
Two Dog Net will receive this patent or any other patents. While it is our practice to enter into agreements with all employees and some of our customers and suppliers to prohibit or restrict the disclosure of proprietary information, we cannot be sure that these contractual arrangements or the other steps we take to protect Two Dog Net's proprietary rights will prove sufficient to prevent illegal use of Two Dog Net's proprietary rights or to deter independent, third-party development of similar proprietary assets.
In the event that the proprietary technology may be found to infringe the intellectual property rights of others, we may not be able to continue offering The Children's Internet(R) service.
Effective copyright, trademark, trade secret and patent protection may not be available in every country in which our products and services are offered. In the future we could become involved in legal disputes relating to the validity or alleged infringement of our intellectual property rights or those of a third party. Intellectual property litigation is typically extremely costly and can be disruptive to business operations by diverting the attention and energies of management and key technical personnel. In addition, any adverse decisions could subject us to significant liabilities, require us to seek licenses from others, prevent us from using, licensing or selling certain of our products and services, or cause severe disruptions to operations or the markets in which we compete which could decrease profitability.
THE OFFERING PRICE OF OUR COMMON STOCK COULD BE HIGHER THAN THE MARKET VALUE, CAUSING INVESTORS TO SUSTAIN A LOSS OF THEIR INVESTMENT.
The price of our common stock in this offering has not been determined by any independent financial evaluation, market mechanism or by our auditors, and is therefore, to a large extent, arbitrary. Our audit firm has not reviewed management's valuation, and therefore expresses no opinion as to the fairness of the offering price as determined by our management. As a result, the price of the common stock in this offering may not reflect the value perceived by the market. There can be no assurance that the shares offered hereby are worth the price for which they are offered or that they have any market value whatsoever.
WE WILL NEED ADDITIONAL FINANCING TO FULLY IMPLEMENT OUR BUSINESS PLAN, AND IF WE FAIL TO OBTAIN ADDITIONAL FUNDING IT WILL IMPACT OUR ABILITY TO SUSTAIN OUR OPERATIONS AND WOULD LIKELY REDUCE THE VALUE OF YOUR INVESTMENT.
Our management currently anticipates that the net proceeds of the offering, if the maximum amount is raised, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 24 months. At the present time, we have no working capital and anticipate that Shadrack Films, Inc., our majority shareholder, will continue to fund our working capital needs and we will continue to accrue a liability due to Shadrack Films for such costs. However, Shadrack Films is under no obligation to continue providing us with working capital and we can offer no assurance that Shadrack Films will provide these funds as they could discontinue doing so at any time. If less than the maximum amount is raised, we will need to raise additional capital to further fund our marketing efforts and to provide additional working capital. We may also need to raise additional funds in the future to fund more aggressive promotions and more rapid expansion, to develop newer or enhanced services, to respond to competitive pressures or to acquire complementary technologies or services. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership
of the purchasers in this offering will be reduced and such securities may have rights, preferences or privileges senior to those of the rights of our common stock. There can be no assurance that additional financing will be available on terms favorable to us or at all. If adequate funds are not available or not available on acceptable terms, we may not be able to fund its expansion, promote our product, develop or enhance services respond to competitive pressures, or possibly even continue operations. Any such inability would reduce our ability to generate revenues and would ultimately reduce the value of your investment.
THERE IS NO ESTABLISHED PUBLIC MARKET FOR OUR STOCK AND A PUBLIC MARKET MAY NOT BE OBTAINED OR BE LIQUID AND INVESTORS MAY NOT BE ABLE TO SELL THEIR SHARES.
There is no established public market for the common stock being offered under this prospectus. While we intend to apply for quotation of our common stock on the over-the-counter Bulletin Board system, there is no guarantee that we will qualify for quotation on the Bulletin Board system. Therefore, purchasers of our common stock in this offering may be unable to sell their shares on any public trading market or elsewhere.
OUR MANAGEMENT AND AFFILIATES HAVE SIGNIFICANT CONTROL OF OUR BUSINESS, WHICH THEY COULD EXERCISE AGAINST YOUR BEST INTEREST.
Our President, Chief Executive Officer, and Director, Sholeh Hamedani, through her sole ownership of Shadrack Films, Inc., owns 1,166,755 shares or 51% of our current total outstanding shares of 2,287,755 giving her the ability to control all matters submitted to our stockholders for approval and to control our management and affairs. Matters that would require stockholder approval include the following:
- election and removal of directors;
- merger or consolidation of our company; and
- sale of all or substantially all of our assets.
We would have to sell approximately 50,000 shares in this offering in order to reduce the percentage owned by management to less than 50% of the total outstanding shares. If all 4,000,000 shares are sold in this offering, management would own approximately 19% of the total outstanding shares.
WE DO NOT HAVE A LEASE ON OUR OFFICE SPACE AND IF WE LOSE THIS OFFICE AND STORAGE SPACE IT WILL SIGNIFICANTLY DISRUPT OUR OPERATIONS.
Our offices are furnished to us by our parent company, Shadrack Films, Inc. of which Sholeh Hamedani, our President, Chief Financial Officer, and a Director, is the sole shareholder. We only have verbal permission, revocable at any time, from Shadrack Films, Inc. to use this office space. In the event we could no longer use this office space, we would have to find alternative office. This would significantly disrupt our operations as well as require additional operating capital that we may not have available. We would not be able to operate our business without adequate office space.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates," "believes," "plans," "expects," "future," "intends," and similar expressions to identify these forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described in "Risk Factors" and elsewhere in this prospectus. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results.
USE OF PROCEEDS
The net proceeds available to us from the sale of the shares in this offering are estimated to be approximately $7,955,000 if the maximum offering is sold, after deducting offering expenses (estimated to be $45,000). The intended use of the net proceeds at various funding levels as percentages of the maximum offering is outlined below.
PERCENT OF PROCEEDS RECEIVED
---------------------------------------------------------------------------------------------------
Use of Proceeds 10% 25% 50% 75% 100%
---------------- ------------------ ------------------ ----------------- ---------------
Marketing and Advertising $490,000 65% $1,290,000 65% $2,440,000 61% $3,540,000 59% $4,580,000 59%
Technical Operations $200,000 26% $ 476,000 24% $1,000,000 25% $1,400,000 24% $1,946,000 24%
Reserve for Contingencies $ 5,000 1% $ 39,000 2% $ 115,000 3% $ 415,000 7% $ 629,000 8%
Working capital and general
corporate purposes $ 60,000 8% $ 150,000 8% $ 400,000 10% $ 600,000 10% $ 800,000 10%
TOTAL $755,000 $1,955,000 $3,955,000 $5,955,000 $7,955,000
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We may not receive any proceeds in this offering. The net proceeds available to us from the sale of the shares in this Offering are estimated to be approximately $7,955,000 if the maximum offering is sold, after deducting offering expenses (estimated to be $45,000).
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the future. We currently intend to retain future earnings, if any, to fund the development and growth of our business
CAPITALIZATION
The following table sets forth our actual capitalization on December 31, 2003.
Stockholders' equity: Common Stock, $.01 par value, 75,000,000 shares authorized; 2,287,755 outstanding at December 31, 2003 $ 2,000 Additional paid-in capital $573,000 Accumulated deficit ($879,000) Stockholders' deficit ($304,000) Total Capitalization ($304,000) |
DILUTION
Dilution per share to new investors represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of common stock immediately after completion of this offering. After giving effect to the sale of the shares of common stock by us at the initial public offering price of $2.00 per share, less our estimated offering expenses, our pro forma net tangible book value at December
31, 2003, would be $7,651,000, or $1.22 per share. This represents an immediate increase in the pro forma net tangible book value of $1.35 per share to existing stockholders and an immediate dilution of $0.78 per share to new investors purchasing shares at the initial public offering price of $2.00 per share. The following table illustrates this per share dilution:
Maximum
-------
Assumed initial public offering price per share $ 2.00
Pro forma net tangible book value per share at December 31, 2003 (0.13)
Increase per share attributable to new investors 1.35
Dilution per share to new investors in this offering $ 0.78
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SELECTED FINANCIAL DATA
The following selected statement of operations data for the period from September 25, 1996, the date of our inception and for the years ended December 31, 2002 (audited) and December 31, 2003 (audited), and selected balance sheet data as of December 31, 2003 (audited), were derived from our financial statements and notes thereto included later in this prospectus. In our opinion, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the financial position and results of operations for each of the periods presented. Historical results are not necessarily indicative of results that may be expected for any future period. The following data should be read in conjunction with "Plan of Operation" and our audited financial statements, including the related footnotes.
For the year For the year
ended ended For the period from
December December September 25, 1996
31, 31, (inception) through
2003 2002 December 31, 2003
(audited) (audited) (audited)
----------- ------------ -------------------
STATEMENT OF OPERATIONS DATA
Net sales $ 0 $ 0 $ 0
Operating expenses: $478,000 $392,000 $879,000
Operating loss ($478,000) ($392,000) (879,000)
Net Loss ($478,000) ($392,000) ($879,000)
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Total assets $ 0 Current liabilities $304,000 Total stockholders' deficit ($304,000) |
PLAN OF OPERATION
You should read the following plan of operation together with our financial statements and related notes appearing elsewhere in this prospectus. This plan of operation contains forward-looking statements that involve risks, uncertainties, and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under "Risk Factors" on page 4 and elsewhere in this prospectus.
On September 10, 2002, we entered into a License Agreement with Two Dog Net, Inc. for an exclusive worldwide license to market and sell The Children's Internet(R) service. However, because this agreement did not reflect the intent of the parties, we replaced the royalty and license agreement with a wholesale sales & marketing agreement with the same effective date of September 10, 2002. The new agreement provides for us to be the exclusive marketers of Two Dog Net's proprietary and patent pending secured Internet service for pre-school to junior high school aged children called The Children's Internet(R). We plan to introduce an Internet service designed specifically for children that allows them to have completely safe, unrestricted live access to the Internet. The cornerstone of our consumer marketing plan is a national television advertising campaign which includes a 30-minute infomercial that was produced over a two-year period of time by Two Dog Net and is ready to air. We intend to utilize the infomercial to introduce The Children's Internet(R) service to the public, as well as build brand recognition and generate customer subscriptions. We plan to first conduct a media test in the fourth quarter of 2003. We believe the results from the media test will give us the platform to launch the advertising campaign on a national basis thereafter and be the basis for the ongoing infomercial media schedule 2003.
In a Stock Purchase Agreement dated October 11, 2002, our original shareholders sold 1,118,500 of their shares of our common stock to various purchasers, two of whom are related parties to our management, Nasser Hamedani, Sholeh Hamedani's father, and Soraiya Hamedani, Sholeh Hamedani's sister. Some of these purchasers were introduced to the original shareholders by Sholeh Hamedani, our President, Chief Financial Officer, and a Director. Some of these purchasers resold their shares to unrelated third parties. A portion of the proceeds received from the stock sales by the purchasers was in turn loaned to Shadrack Films, Inc., our parent company, to finance our initial operations thus far. These amounts are reflected on the financial statements as "Due to Parent Company." Our President, Chief Executive Officer, and one of our Directors, Sholeh Hamedani, is the sole shareholder of our parent company, Shadrack Films, Inc.
As of December 31, 2003, we had an accumulated total net loss of approximately $879,000. Of this amount, approximately $415,000 represents the estimated fair market value for the cost of wages, if paid, for the services rendered by our President, Chief Executive Officer and an outside consultant (we have recorded these amounts for the cost of wages, since they did not charge the Company, as contributed capital), $308,000 represents professional fees such as legal and accounting expenses and the balance of $153,000 consists primarily of occupancy and telecommunications costs including internet costs. To date, our parent company, Shadrack Films, has funded all of our expended costs.
Currently, we do not have any cash on hand and are dependent on funding from Shadrack Films for our current operations and for providing office space and utilities that, for the year ended
December 31, 2003 averaged $8,000 per month in operating costs exclusive of professional fees and time donated by employees. The accrued account payable due to Shadrack Films is an open account payable. Currently, the accrued balance of this account is approximately $205,000. . Our parent company is under no obligation to continue to fund our operations and could stop at any time without notice. We estimate that we need a minimum of $180,000 in cash to continue our operations for the next twelve months. If we raise the maximum offering, our working capital needs, including expansion of marketing and technical operations, will be met for approximately 24 months without regard to any subscription revenue. We do not currently have any arrangements for alternative financing in the event that we raise less then the maximum offering.
Where practicable we plan to contract with third party companies to market The Children's Internet Service as well as to provide administrative support services such as billing, level one technical support, and the like. We have already entered into two agreements with Infolink Communications, Ltd, a third party company, for the marketing of our service. (See "Business of the Company."). However, there is no assurance that we will be able to enter into additional arrangements for marketing and administrative support services.
As is indicated in "Use of Proceeds", we plan to scale our expenditures depending upon the amount of funds raised, with initial funds being used primarily to market the services in an effort to develop a revenue base sufficient to support our operations. Following is a discussion of how we to plan to proceed at different levels of funding.
FUNDING AT THE 10% LEVEL:
If we receive net proceeds of $755,000, which is the approximate net proceeds we will receive if we raise ten percent of the funds, we are hoping to raise in this offering, we anticipate using the funding to cover occupancy, telecommunication and other office costs for a twelve month period. We plan to spend the majority of the funds raised on marketing and sales initiatives in an effort to achieve sufficient revenues to help support the company on an ongoing basis. The infomercial television campaign would be the primary marketing vehicle to generate sales.
At this level of funding we anticipate that our employees will continue to donate the necessary time as they have in the past for approximately six months. However, they are under no obligation to continue to do so and they could stop at any time without notice.
At this level of funding we plan to expend approximately $90,000 in marketing funds in the initial ninety days as follows:
- Approximately $10,000 for creating, printing and duplicating collateral marketing materials including sales brochures and The hildren's Internet(R) installation CD's with packaging.
- Approximately $10,000 to re-edit and update the infomercial with new testimonials and create additional versions of the infomercial with different price points and special free trial offers based on consumer feedback from the media test
- Approximately $70,000 to conduct a television media test to assess consumer response,
test various price points and to fine-tune the media plan prior to "rolling-out" or launching the media schedule.
We expect the $70,000 media test conducted in the first ninety days to secure approximately 140 thirty-minute infomercial time slots, in approximately 40 markets, airing on both family oriented national television networks, such as Pax TV (Paxson Communications Corporation) and on various local affiliate broadcast stations. This approach should allow us to test a broad range of time periods, various markets and multiple national and local stations.
In the fourth through twelfth month upon completion of the initial three-month media test phase we will enter the roll-out phase. During this roll-out phase we plan to re-book all airings that achieved or exceeded the pre-determined target goal as well as expand the media mix to include additional time periods on proven stations and include other stations in proven markets. In the roll-out phase it is estimated that on average approximately $44,000 would be spent each month on media time.
Technical operations' costs at the 10% level of funding include our data center co-location facility and contingent technical reserve costs of approximately $41,000 plus license fees paid to Two Dog Net and for technical support based upon subscribers. Working capital and general corporate purposes at this level of funding are for occupancy costs, telecommunications costs and other office costs, which approximate $5,000 per month. Although we owe our parent company, Shadrack Films, approximately $205,000 in accrued costs for expenses incurred in the past, we do not plan to repay this amount in the first twelve months at the 10% level of funding.
FUNDING AT THE 25% LEVEL
If we receive net proceeds of $1,955,000, which is the approximate net proceeds we will receive if we raise twenty-five percent of the funds, we are hoping to raise in this offering, we anticipate using the funding to cover occupancy, telecommunication and other office costs for a twelve-month period. We plan to spend the majority of the funds raised on marketing and sales initiatives in an effort to achieve sufficient revenues to help support the company on an ongoing basis. The infomercial television campaign will be our primary marketing vehicle to generate sales.
At this level of funding we anticipate that our employees will continue to donate the necessary time as they have in the past for approximately six months. However, they are under no obligation to continue to do so and they could stop at any time without notice.
At this level of funding we plan to expend approximately $90,000 in marketing funds in the initial ninety days as follows:
- Approximately $10,000 for creating, printing and duplicating collateral marketing materials including sales brochures and The Children's Internet(R) installation CD's with packaging.
- Approximately $10,000 to re-edit and update the infomercial with new testimonials and create additional versions of the infomercial with different price points and special free trial offers based on consumer feedback from the media test.
- Approximately $70,000 to conduct a media test to assess consumer response, test various price points and to fine tune the media plan prior to "rolling-out" or launching the media schedule.
We expect the $70,000 media test conducted in the first ninety days will secure approximately 140 thirty-minute infomercial time slots, in approximately 40 markets, airing on both family oriented national television networks, such as Pax TV (Paxson Communications Corporation) and on various local affiliate broadcast stations. This approach should allow us to test a broad range of time periods, various markets and multiple national and local stations.
In the fourth through twelfth month upon completion of the initial three-month media test phase we will enter the roll-out phase. During this roll-out phase we plan to re-book all airings that achieved or exceeded the pre-determined target goal as well as expand the media mix to include additional time periods on proven stations and include other stations in proven markets. In the roll-out phase it is estimated that on average approximately $125,000 would be spent each month on media time.
In addition to infomercial marketing we would spend approximately $240,000 in the same time period on other support advertising and promotional activities including, public relations, direct mail campaigns, newspaper and magazine ads, and online marketing all focused on publications, events and regions that reach our target market of parents.
Technical operations' costs at the 25% level of funding include our data center co-location facility and contingent technical reserve costs of approximately $83,000 plus license fees paid to Two Dog Net and for technical support based upon subscribers. We further anticipate spending at this level an additional $160,000 for the development of new web pages of The Children's Internet daily features like the Fun Facts of the Day, Surveys, Grab Bag and new home room environments to give the child more choices and keep them engaged. Working capital and general corporate purposes at this level of funding are for occupancy costs, telecommunications costs and other office costs, which approximate $5,000 per month. In addition, we would incur personnel costs of approximately $7,000 per month and other contingent costs of $900 per month. Although we owe our parent company, Shadrack Films, approximately $205,000 in accrued costs for expenses incurred in the past, we do not plan to repay this amount in the first twelve months at the 25% level of funding.
FUNDING AT THE 50% LEVEL
If we receive net proceeds of $3,955,000, which is the approximate net proceeds we will receive if we raise fifty percent of the funds, we are hoping to raise in this offering, we anticipate using the funding to cover occupancy, telecommunication and other office costs for a twelve-month period. We plan to spend the majority of the funds raised on marketing and sales initiatives in an effort to achieve sufficient revenues to help support the company on an ongoing basis. The infomercial television campaign will be our primary marketing vehicle to generate sales.
At this level of funding, we anticipate that our employees will continue to donate the necessary time as they have in the past for approximately three months. However, they are under no obligation to continue to do so and they could stop at any time without notice.
At this level of funding we plan to expend approximately $90,000 in marketing funds in the initial ninety days as follows:
- Approximately $10,000 for creating, printing and duplicating collateral marketing materials including sales brochures and The Children's Internet(R) installation CD's with packaging.
- Approximately $10,000 to re-edit and update the infomercial with new testimonials and create additional versions of the infomercial with different price points and special free trial offers based on consumer feedback from the media test.
- Approximately $70,000 to conduct a media test to assess consumer response, test various price points and to fine tune the media plan prior to "rolling-out" or launching the media schedule.
We expect the $70,000 media test conducted in the first ninety days will secure approximately 140 thirty-minute infomercial time slots, in approximately 40 markets, airing on both family oriented national television networks, such as Pax TV (Paxson Communications Corporation) and on various local affiliate broadcast stations. This approach should allow us to test a broad range of time periods, various markets and multiple national and local stations.
In the fourth through twelfth month upon completion of the initial three-month media test phase we will enter the roll-out phase. During this roll-out phase we plan to re-book all airings that achieved or exceeded the pre-determined target goal as well as expand the media mix to include additional time periods on proven stations and include other stations in proven markets. In the roll-out phase it is estimated that on average approximately $258,000 would be spent each month on media time.
An additional $20,000 would be spent in producing 30, 60 and 90 second commercial spots to support the infomercial as well as broadcast the commercial spots in new markets as a stand alone advertising campaign. In addition we would spend approximately $240,000 in the same time period on other support advertising and promotional activities including, public relations, direct mail campaigns, newspaper and magazine ads, and online marketing all focused on publications, events and regions that reach our target market of parents.
Technical operations' costs at the 50% level of funding include our data center co-location facility and contingent technical reserve costs of approximately $103,000 plus license fees paid to Two Dog Net and for technical support based upon subscribers. We further anticipate spending at this level an additional $510,000 for the development of new web pages of The Children's Internet daily features like the Fun Facts of the Day, Surveys, Grab Bag and new home room environments to give the child more choices and keep them engaged. Working capital and general corporate purposes at this level of funding are for occupancy costs, telecommunications costs and other office costs, which approximate $5,000 per month. In addition, we would incur personnel costs of approximately $26,000 per month and other contingent costs of $3,000 per month. We owe our parent company, Shadrack Films, approximately $205,000 in accrued costs for expenses incurred in the past. At the 50% level of funding, we plan to repay this amount in the first twelve months.
At this level of funding, we believe would have sufficient operating capital to currently pay management employees, at close to market rates, and all other employees at market rates for their time.
FUNDING AT THE 75% LEVEL
If we receive net proceeds of $5,955,000, which is the approximate net proceeds we will receive if we raise fifty percent of the funds, we are hoping to raise in this offering, we anticipate using the funding to cover occupancy, telecommunication and other office costs for a twelve month period. We plan to spend the majority of the funds raised on marketing and sales initiatives in an effort to achieve sufficient revenues to help support the company on an ongoing basis. The infomercial television campaign will be our primary marketing vehicle to generate sales.
At this level of funding, we anticipate that our employees will continue to donate the necessary time as they have in the past for approximately three months. However, they are under no obligation to continue to do so and they could stop at any time without notice.
At this level of funding we plan to expend approximately $90,000 in marketing funds in the initial ninety days as follows:
- Approximately $10,000 for creating, printing and duplicating collateral marketing materials including sales brochures and The Children's Internet(R) installation CD's with packaging.
- Approximately $10,000 to update and re-edit the infomercial with new testimonials and create additional versions of the infomercial with different price points and special free trial offers based on consumer feedback from the media test.
- Approximately $70,000 to conduct a media test to assess consumer response, test various price points and to fine tune the media plan prior to "rolling-out" or launching the media schedule.
We expect the $70,000 media test conducted in the first ninety days will secure approximately 140 thirty-minute infomercial time slots, in approximately 40 markets, airing on both family oriented national television networks, such as Pax TV (Paxson Communications Corporation) and on various local affiliate broadcast stations. This approach should allow us to test a broad range of time periods, various markets and multiple national and local stations.
In the fourth through twelfth month upon completion of the initial three-month media test phase we will enter the roll-out phase. During this roll-out phase we plan to re-book all airings that achieved or exceeded the pre-determined target goal as well as expand the media mix to include additional time periods on proven stations and include other stations in proven markets. In the roll-out phase it is estimated that on average approximately $258,000 would be spent each month on media time.
An additional $20,000 would be spent in producing 30, 60 and 90 second commercial spots to
support the infomercial as well as broadcast the commercial spots in new markets as a stand alone advertising campaign. In addition we would spend approximately $440,000 in the same time period on other support advertising and promotional activities including, public relations, direct mail campaigns, newspaper and magazine ads, and online marketing all focused on publications, events and regions that reach our target market of parents.
Technical operations' costs at the 75% level of funding include our data center co-location facility and contingent technical reserve costs of approximately $118,000 plus license fees paid to Two Dog Net for technical support based upon subscribers. We further anticipate spending at this level an additional $800,000 for the development of new web pages of The Children's Internet daily features like the Fun Facts of the Day, Surveys, Grab Bag and new home room environments to give the child more choices and keep them engaged. Working capital and general corporate purposes at this level of funding are for occupancy costs, telecommunications costs and other office costs, which approximate $5,000 per month. In addition, we would incur personnel costs of approximately $42,000 per month and other contingent costs of $3,000 per month. We owe our parent, Shadrack Films, company approximately $205,000 in accrued costs for expenses incurred in the past. At the 75% level of funding, we plan to repay this amount.
At this level of funding, we believe would have sufficient operating capital to currently pay management employees, who previously donated a portion of their time, at close to market rates, and all other employees at market rates for their time.
FUNDING AT THE 100% LEVEL
If we receive net proceeds of $7,955,000, which is the approximate net proceeds we will receive if we raise one hundred percent of the funds, we are hoping to raise in this offering, we anticipate using the funding to cover occupancy, telecommunication and other office costs for a twelve month period. We plan to spend the majority of the funds raised on marketing and sales initiatives in an effort to achieve sufficient revenues to help support the company on an ongoing basis. The infomercial television campaign will be our primary marketing vehicle to generate sales.
At this level of funding we believe we would have sufficient operating capital to currently pay all of our employees at market rates for their time. However, they are under no obligation to continue to do so and they could stop at any time without notice.
At this level of funding we plan to expend approximately $90,000 in marketing funds in the initial ninety days as follows:
- Approximately $10,000 for creating, printing and duplicating collateral marketing materials including sales brochures and The Children's Internet(R) installation CD's with packaging.
- Approximately $10,000 to update and re-edit the infomercial with new testimonials and create additional versions of the infomercial with different price points and special free trial offers based on consumer feedback from the media test.
- Approximately $70,000 to conduct a media test to assess consumer response, test various price points and to fine tune the media plan prior to "rolling-out" or launching the media
schedule.
We expect the $70,000 media test conducted in the first ninety days will secure approximately 140 thirty-minute infomercial time slots, in approximately 40 markets, airing on both family oriented national television networks, such as Pax TV (Paxson Communications Corporation) and on various local affiliate broadcast stations. This approach should allow us to test a broad range of time periods, various markets and multiple national and local stations.
In the fourth through twelfth month upon completion of the initial three-month media test phase we will enter the roll-out phase. During this roll-out phase we plan to re-book all airings that achieved or exceeded the pre-determined target goal as well as expand the media mix to include additional time periods on proven stations and include other stations in proven markets. In the roll-out phase it is estimated that on average approximately $515,000 would be spent each month on media time.
An additional $20,000 would be spent in producing 30, 60 and 90 second commercial spots to support the infomercial as well as broadcast the commercial spots in new markets as a stand alone advertising campaign. In addition we would spend approximately $580,000 in the same time period on other support advertising and promotional activities including, public relations, direct mail campaigns, newspaper and magazine ads, and online marketing all focused on publications, events and regions that reach our target market of parents.
Technical operations' costs at the 100% level of funding include our data center co-location facility and contingent technical reserve costs of approximately $146,000 plus license fees paid to Two Dog Net for technical support based upon subscribers. We further anticipate spending at this level an additional $1,200,000 for the development of new web pages of The Children's Internet daily features like the Fun Facts of the Day, Surveys, Grab Bag and new home room environments to give the child more choices and keep them engaged. Working capital and general corporate purposes at this level of funding are for occupancy costs, telecommunications costs and other office costs, which approximate $5,000 per month. In addition, we would incur personnel costs of approximately $48,000 per month and other contingent costs of $14,000 per month. We owe our parent company, Shadrack Films, approximately $205,000 in accrued costs for expenses incurred in the past. At the 100% level of funding, we plan to repay this amount in the first twelve months.
At this level of funding, we believe would have sufficient operating capital to currently pay all employees at market rates for their time.
POSSIBLE NEED FOR ADDITIONAL FUNDS
We may be wrong in our estimates of revenue generated from marketing costs and additional funds may also be required in order to proceed with our marketing plan and our business plan described in "Business of the Company" below. Additionally, we will likely need additional funds in the event Shadrack Films discontinues funding our operations. Should we need additional funds, we would attempt to raise these funds through additional private placements or by borrowing money. We do not have any arrangements with potential investors or lenders to provide such funds and there is no assurance that such additional financing will be available
when required in order to proceed with the business plan or that our ability to respond to competition or changes in the market place or to exploit opportunities will not be limited by lack of available capital financing. If we are unsuccessful in securing the additional capital needed to continue operations within the time required, we will not be in a position to continue operations.
Although this Plan of Operation describes our planned use of the net proceeds of this offering at different funding levels, we can offer no assurance that we will raise any funds in this offering. If we are unsuccessful in securing the capital needed to continue operations or if initial sales of subscriptions do not fund continued operations, we will continue to look to our parent company to fund operations and to employees to donate their time. If our parent company, Shadrack Films, a company controlled by Sholeh Hamedani, discontinues the funding of our operations and/or if our key employees discontinue donating their time, we will not be in a position to continue operations. In this event, we would attempt to sell the company or file for bankruptcy.
BUSINESS OF THE COMPANY
COMPANY OVERVIEW
We were incorporated in the State of Nevada on September 25, 1996 as D.W.C. Installations. On July 3, 2002, Shadrack Films, Inc., a company controlled by Sholeh Hamedani, purchased 1,166,755 newly issued shares of our common stock for $150,000, thereby obtaining a majority ownership interest and becoming our parent company.
We were dormant and had no operations since inception until September 10, 2002 when we entered into a royalty and license agreement with Two Dog Net, Inc. to be the exclusive distributors of The Children's Internet(R) software.
We changed our name to The Children's Internet, Inc. on December 27, 2002. We are a development stage company and currently have no revenues, only minimal assets, and have incurred losses since our inception.
On September 10, 2002, we entered into a License Agreement with Two Dog Net, Inc. for an exclusive worldwide license to market and sell The Children's Internet(R) service. However, because the September 10, 2002 royalty and license agreement did not reflect the true intent of the parties on March 3, 2003, we replaced the royalty and license agreement with a wholesale sales & marketing agreement with the same effective date of September 10, 2002. The new agreement was for an exclusive and renewable five year wholesale sales and marketing agreement with Two Dog Net, Inc. to be the exclusive worldwide marketers of their proprietary and patent pending secured internet service for children pre-school to junior high called The Children's Internet (R) and an internet dial-up service. We are moving ahead with marketing The Children's Internet(R) but have no plans to offer dial-up services, as allowed by our agreement with Two Dog Net.
Our President, Chief Executive Officer, and one of our Directors, Sholeh Hamedani, was President of Two Dog Net, Inc. until August 1, 2002. Ms. Hamedani also owns approximately 10% of the total outstanding shares of Common Stock of Two Dog Net, Inc. Ms. Hamedani is also the sole shareholder of our parent company, Shadrack Films, Inc. Ms. Hamedani's father,
Nasser Hamedani, is the current President, Chairman and majority shareholder of Two Dog Net, Inc.
The Children's Internet(R) offers access to pre-selected and pre-approved educational and entertaining age appropriate web pages as well as secure e-mail, homework help, games, news, super portals to learning activities and educational resources all within, protected online environment. We believe that the proprietary, patent-pending security software, Safe Zone Technology(R), offers security against Internet predators and Internet content that is inappropriate for children. The target market for The Children's Internet(R) is the 48 million children on-line in 2002 (Report from Internet Commerce & Communications Division, Information Technology Association of America, February, 2002), as well as America's schools, which are connected to the Internet. The rate of general Internet use in the United States is expected to grow by 2 million new users per month. (Report from Internet Commerce & Communications Division, Information Technology Association of America, February, 2002.) Nearly two-thirds (62%) of US families have computers at home, but roughly 1 out of 5 (17%) of those with computers do not have Internet access due to safety concerns. (Report from Internet Commerce & Communications Division, Information Technology Association of America, February, 2002) Surveys tell us that 85% of all parents with children under 11 years of age have expressed concern for their child's safety on the Internet by overseeing each and every click and 45% of all parents feel the Internet is critical for educational purposes. (Greenfield Online, Inc. April 1999)
INDUSTRY BACKGROUND
THE INTERNET
The Internet is a worldwide series of inter-connected computer networks, which enables commercial organizations, educational institutions, government agencies and individuals to communicate freely, access and share information, and conduct business remotely.
The very openness of the Internet means that transmitted information and data stored in connected hosts are exposed to other users who are able, in the absence of effective security measures, to gain access to inappropriate data. This fundamental weakness mandates that organizations and individuals weigh security, productivity and censorship concerns against the perceived commercial opportunities presented by millions of Internet users. Today with more than 48 million children on line each day, the Internet, by its very nature of open access to the world, is becoming increasingly dangerous place for children to roam freely and in some extreme cases even deadly. (Report from Internet Commerce & Communications Division, Information Technology Association of America, February, 2002)
THE CHILDREN'S INTERNET(R)
The Children's Internet(R) offers educational and entertainment value of the Internet in a child's quest for academic achievement, social enrichment, and communication, while locking out the dangers. We believe that The Children's Internet(R) will help to reconcile parents' fear that the Internet could harm their children with the feeling that their children need the Internet for all of its benefits.
The Children's Internet(R) is a dedicated Internet Service Provider entirely and exclusively for children grades pre-school through junior high. It provides Internet access to a broad base of
pre-approved entertaining and educational content. Additionally, by simply utilizing the Family Favorites feature, parents can easily customize their children's access based on their family's beliefs, individual needs and interests by adding other websites from outside of The Children's Internet(R).
The Children's Internet(R) uses the proprietary Safe Zone Technology(R) to provide a:
- Controlled and secure environment that is safe for children
- An security product that is easy to install and to use
- Internet communications for children including secure e-mail
- Fun, entertaining, age appropriate children's content
- A user-friendly customized browser that is easy to navigate
- An educationally based Internet search engine
The Children's Internet(R) has age-appropriate content for each of four different age groups:
- 3 to 5 year olds;
- 6 to 8 year olds;
- 9 to 11 year olds; and,
- 12 to 14 year olds.
OUR WEBSITE
Our corporate website is www.thechildrensinternet.com. Our website functions as a promotional and sales tool where we provide product information, post press releases, provide an online inquiry form where the public can request a "free 30-Day trial" of The Children's Internet, and see a fully animated, interactive demonstration of the product.
KIDSAFENET.COM
Our product was previously promoted by www.kidssafenet.com, a web site owned and operated by Tim Nash who was an independent authorized distributor of The Children's Internet(R). However, on July 15, 2003, Mr. Nash terminated his distributorship with us and has taken down his web site, www.kidssafenet.com. Mr. Nash is also one of our shareholders. We do not have any authorized distributors of our product at this time.
CHILDREN ONLINE
Nearly three-quarters of adults (71%) are extremely concerned about children's Internet habits and believe that careful adults' supervision is needed. (Pathfinder Study by Arbitron NewMedia. July 1999.) Fifty-six percent of adult non-users agree that the Internet is a dangerous thing. (Pew Internet & American Life Project "The Ever-Shifting Internet Population" April 16, 2003.)
A Grunwald Associates survey found ("Children, Families, and the Internet 2000," June 2000 Grunwald Associates):
- Children spend between 6 and 10.5 hours per week on the Web.
- Only 41% of parents set up computers to limit where their children
travel on the Internet.
- 89% of sites collect personal information from children.
- Only 23% of websites tell children to ask their parents before giving
out family information.
- 64% of US families have computers at home
- 3/4 of all US teenagers are currently online
One in 5 children who use the Internet to socialize reported being approached for "cybersex" and 1 in 4 children have received unwanted exposure to sexual pictures online. ("Report Statistical Highlight," National Center for Missing and Exploited Children, Crimes Against Children, Research Center and Office of Juvenile Justice and Delinquency Prevention, June, 2000.) The increasing amount of content devoted to harmful and unwholesome subjects can keep children from learning and using this necessary, exciting and resourceful technology.
In addition to these statistics, the online pornography industry continues to thrive with some calculations estimating that there are more than 12 million web pages devoted to pornography. ("Accessibility of Information on the Web," Lawrence and Giles, NATURE, July 1999, p. 107.) Websites promoting hate, child pornography, illegal activity and violence are increasingly abundant as well. Between the months of February 2001 to July 2001 there was a 345% increase in child pornography websites. (N2H2, Inc. press release, August, 2001.) In spite of law enforcement agencies across the country stepping up their efforts to stop predators from using the Internet to communicate and attempt to lure children from their homes, there are hundreds of cases of cyber-crimes against minors. Another alarming statistic which proves that children need to be protected while online is that children spent 64.9% more time on pornography sites than they did on game sites in September 2000. (Source: "The NetValue Report on Minors Online." BUSINESS WIRE. (taken from study by NetValue, Internet activity measurement service) December 19,2000.) It is clear that children need protection and guidance when using the Internet.
AT SCHOOLS
In addition to the inherent need for safe Internet access for consumers' use at home, schools are mandated by law to implement Internet security measures for their students. On January 8, 2002, President Bush signed into law the "No Child Left Behind Act of 2001," re-defining the federal role in K-12 education based on some basic principles: safe Internet access, stronger accountability for results, enhanced collaboration between teachers and parents, and improved academic achievement. These main points are backed by $26.5 billion in federal funding through 2006. School districts will have to submit annual "report cards" showing a school's achievement through standardized test scores and validate teachers' technological qualifications. The law stipulates that the "staff will be replaced" - if the achievement results are not improved by 2006.
INTERNET SECURITY FOR CHILDREN
The Internet provides easy access to a vast array of information resources and services in addition to enabling communication between people and organizations around the world. Unfortunately, this feature of the Internet can pose serious problems for children and their parents. Left unprotected, children can access sites that are not appropriate for them. Many parents have serious concerns about their children accessing sites that contain pornography,
profanity, violence, extreme political views, racism and information on subjects such as manufacturing explosives or drugs. Statistics confirm that nearly 2/3 of U.S. families with children under the age of 18 are more likely to access the Internet (62%) (Internet COMMERCE & COMMUNICATIONS DIVISION; Information Technology Association of America, February 2002) Of parents with computers, roughly one out of five (17%) report they do not have Internet access due to safety concerns for their families. (Jupiter Communication survey, June 1999) Parents are also concerned that their children may enter unsupervised chat rooms where children can be exposed to objectionable language or ideas. These unsafe chat rooms can be havens for sinister individuals who prey on children by disguising themselves as another child.
Parents have relatively few good options available to them for protecting their children from harmful materials on the Internet. Parents have attempted to address their concerns over Internet security for their children in a number of ways:
- Constant parental monitoring;
- Prohibiting Internet access;
- Commercially available filtering and blocking software; and
- Limiting access to only children's sites.
While there are currently a number of Internet products on the market for children, none of these approaches give a realistic or total solution. All of these approaches have serious drawbacks for both children and their parents.
The constant vigilance required of parents to monitor all of their children's Internet activities poses tremendous challenges to parents. Parents cannot always available to monitor children's Internet access at those times when children want or need to be on-line. This creates frustration for both parents and children and can have the unintentional effect of limiting children's access to the Internet.
Total denial of Internet access is an effective means of keeping children safe from harmful materials on the Internet. Unfortunately, it also denies children access to the many benefits that the Internet has to offer. Therefore, the tactic of denying Internet access can prove to be crippling to the enrichment of children's knowledge by eliminating this increasingly valuable resource. It also inhibits the development of their skills essential in a technologically based society.
We believe that most parents would allow their children to have access to this unique resource if their security concerns were adequately addressed.
Filtering and blocking software attempts to prevent the user from accessing websites that have pre-defined objectionable words or phrases. These programs can be purchased by consumers and loaded onto a personal computer. Depending on the vendor, filtering and blocking software varies greatly in its ability to block undesirable material. Some of the problems with these software programs are:
1. The security interfaces are generally fairly simple to bypass, allowing the child to exit the program at will. For example, some filtering programs can be bypassed simply by typing in the URL address of any site on the Internet.
2. Filtering and blocking programs do not have the capability of successfully evaluating sites for appropriate content. Educational sites are sometimes blocked because of a misinterpretation of content by the software's logic program. For example, a search for information on breast cancer would routinely be filtered out since the word "breast" is within the text and hence blocked by the filtering software.
3. The company creating the software arbitrarily establishes keywords and topics. The values of the software maker may not reflect the values of the purchaser. Depending on the religious/political/social leanings of the company, the child may be prohibited from accessing relevant/appropriate information.
4. Filtering programs are incapable of matching the dynamics of the Internet. Each of these software packages relies on a static database of key search terms that are stored on the user's system. As websites are added to the Internet or are changed, these databases must be updated. The present rate of update is only once per month for many programs, which limits their ability to block new websites. Also, these products are incapable of evaluating photographic content.
5. Another security flaw is that most files are stored on the user's computer, which allows the possibility for tampering or removal of files in an effort to bypass the security program. Such tampering can cause the system to malfunction. Computer savvy children can also modify activity logs, thus eliminating evidence of sites visited.
6. Some ISPs or on-line services such as AOL offer security software. Most of these features can be easily by-passed by simply turning off the child security feature.
There are several Internet services that are focused on children. These sites generally have significant limitations with respect to child security:
1. Content Sites. These sites contain content directed toward children but do not necessarily provide security. Some of the major sites, such as Disney and Nickelodeon's Noggin, utilize proprietary characters and products and stress co-marketing between their Internet sites and their television and movie offerings but lack security features. Other minor sites offer original children's content but also lack security features or search engines.
2. Children's Search Engines. Children's search engines enable children to search for Internet resources from a pre-selected database of children's sites. These search engines do not offer a security feature. As a result, children have access to the Internet at large and can access sites that contain objectionable material. Other search engines have a large selection of prescreened sites, but offer no categorization of content by age.
3. Closed Sites. These sites offer original content and access to a limited number of partners' Internet sites. However, these sites have no Internet access and, therefore, children cannot take advantage of the relevant, timely information offered in a real-time Internet
environment.
4. E-Commerce Sites. These sites are designed to sell products or services to children. They contain neither security features or search engines.
Another option available to parents is to access the Internet through a secure ISP. A secure ISP uses filtering software, which prevents the user from accessing offensive materials. The software resides on the ISP server rather than on the user's computer, which prevents the user from disabling the software. This approach restricts not only children but their parents' use of the Internet as well. We believe that the inability of parents to customize the filtering software to allow them to have greater Internet access than their children is a significant drawback to the secure ISP. The secure ISP also suffers from many of the same weaknesses inherent in filtering and blocking software.
LACK OF COMPREHENSIVE INTERNET PRODUCTS FOR CHILDREN
Current Internet product offerings for children are either single faceted or lack one or more of the major features which children and parents want in an Internet service. We believe that an effective security feature is the cornerstone of a successful Internet product offering for children. Most parents view security as their primary concern when evaluating Internet usage for their young children.
On the other hand, we believe children have a different set of needs and interests when they access the Internet. Children want an Internet environment that is fun, entertaining, easy to use and contains specific Internet functionality. We believe children want Internet content to be as entertaining as the content they get from television and personal computer software programs. We believe they want to be able to communicate with their friends on-line via e-mail and chat rooms. We believe they also want to be able to search the Internet to help them with their schoolwork or just for fun. As anyone who has used an Internet search engine is aware, the search process can be difficult and time consuming. We believe the frustration level for children when they are faced with the prospect of reviewing hundreds of irrelevant or non-age appropriate sites can be overwhelming.
While there are currently a number of Internet products on the market for children, none of them provides the comprehensive solution that parents and children are seeking. To our knowledge, all currently available products lack one or more of the following essential features that parents demand and that children want:
- An effective security feature that requires little technology skill to
use or install
- Internet communications for children including e-mail and chat
- Fun, entertaining children's content
- Content that is appropriate for a child's age level
- An Internet search engine that is easy for children to use
We believe that the absence of a comprehensive Internet product for children has provided an opportunity for a company, like ours that can deliver a product, which meets the unfulfilled needs of this very large and rapidly growing market of children Internet users. We believe the
proprietary Safe Zone Technology(R) does provide the most comprehensive and effective solution available today that parents and children are seeking.
TWO DOG NET, INC.
Since 1996, Two Dog Net, Inc. a Utah corporation, has been developing The Children's Internet(R) service and Safe Zone Technology(R) to provide site content, navigation tools, and security designed especially for children and their families. The Children's Internet(R) service is designed to allow children to access the Internet in a safe environment that emphasizes educating children and developing their Internet navigation skills. Two Dog Net has developed and tested the user interface for the two primary aspects of the system: the Internet service's content areas that allows users to search a wide range of topics while teaching Internet navigation skills and the search engine that allows users to perform direct searches only to pre-approved sites on the Internet. The Children's Internet(R) service also provides users with tools for customizing the scope of Internet access for each family member.
OUR STRATEGY
A RICH AND DYNAMIC ENVIRONMENT
Our strategy for attracting new subscribers and retaining existing ones is to provide a dynamic environment that continually enhances the users' experience. A key aspect of this strategy is to deliver rich content and search capabilities coupled with fast download times. We believe that all users, and children in particular, will stay interested in the content matter and search results and therefore spend more time in the Internet environment if download times are fast and responsive. The time users spend on the system will directly impact the value of the areas of the website where sponsors and advertisers are presented.
Rich and entertaining content often involves incorporating multi-media files within web pages. However, these features typically increase download times as compared to text pages or simple graphics. To obtain fast download times, we provide this graphical content to our subscribers via the installation CD-ROM. The CD-Rom will interface with the Two Dog Net website to create a multimedia and interactive Internet environment, enabling users to enjoy an enriched multi-media experience that includes new original content such as games and instructional content with audio, video, and animation.
PROVIDE A SAFE INTERNET EXPERIENCE
In addition to the content provided by The Children's Internet (R) environment, the user can use the Children's Internet search engine to visit pre-approved sites. However, the system is not limited to these pre-approved sites. It is also designed to allow authorized users, e.g. parents, to customize the portal by utilizing the Family Favorites feature to add sites from the Internet-at-large to the sites available to his or her family. Such modifications will be user-specific, i.e. no other subscriber will be affected by any other subscriber's customized changes. Customers cannot remove pre-approved sites from the search engine at this time and we do not intend to add this feature in the near future. We believe that it is not necessary for customers to remove pre-approved sites because the pre-approved sites in the search engine are based on standards set by
a recognized educational curriculum and are not offensive or harmful in nature.
PROMOTE PRODUCT AWARENESS
We plan to invest heavily in mass media and public relations to create product awareness in order to build a large user base. In addition to the subscription revenue generated, the number of users and the growth rate of the user base, along with the user time spent on the system, are the key elements in determining the value of the advertising space on our system's web pages. Accordingly, we plan to pursue an aggressive marketing strategy to continuously promote awareness of The Children's Internet (R).
SAFE ZONE TECHNOLOGY(R)-SECURITY SOFTWARE
The Children's Internet(R) uses proprietary patent pending Safe Zone Technology(R). This technology, proprietary to Two Dog Net, offers a number of distinct benefits:
- Provides online security by controlling all online access to only The
Children's Internet(R) environment (until unlocked by an adult with a
password).
- Allows access only to pre-approved Internet sites, protecting the child
from the hazards of the Internet.
- Provides parents with the ability to customize the system for their
children.
- Allows secure e-mail, secure private chat and a proprietary,
child-friendly search engine to function within the security of the
system.
- Denies children access to the home PC operating system so those children
cannot disable security. Even with its multiple set of features and
security, it remains simple for an authorized adult with a password to
unlock the security in seconds to access their own Internet application
and operating system.
SAFE ZONE TECHNOLOGY(R) IS MADE UP OF THREE COMPONENTS:
SAFESOCK - This interface is used to connect the customer to The Children's Internet(R). It is the core piece of security between the three major components of our product: 1) the customer's personal computer 2) the Internet and 3) The Children's Internet(R). When the user requests a communication connection to the Internet it starts the authentication process to gain access to the Internet. This user must enter his/her password to validate their level of access. This level of security is part of the initial login process that the security controls before there is a valid network connection. This prevents any user from logging on to the network and gaining any access without proper security. The Browser module controls Web sites that can be accessed. Access is granted via positive authorization, which is determined by querying lists of pre-approved Web sites. If an individual site is not pre-approved, it is not accessible. The SafeSock "inclusive" approach collects, aggregates, and reviews the "good" sites that are then put on the WHITE LIST of pre-approved sites which is the principle difference on how Safe Zone Technology (R) differs from most competing systems that uses an exclusive authorization system or blocking and filtering systems. Under the "exclusive" system any sites that have not been deemed inappropriate and are not on the unacceptable list or BLACK LIST are assumed to be child-appropriate and accessible. Relying solely on the black list approach is not reliable simply because it does not account for new inappropriate sites that are added to the Internet on a daily basis. In addition this approach is not effective
against the trickery of pornographers who create pornographic sites with domain names of innocuous terms commonly searched for by kids such as "toys" or "games". The painstaking process of filtering and blocking out sites and maintaining such a product has proven to deplete resources of such competing companies.
SOCKWATCH - This module runs unobserved on a client computer, monitors the sites that are being browsed as well as other general Internet activity, and creates a log of visited files on the parent's computer. Parents and educators can view the logged information at a later time. Logged information will be able to provide authorized persons the ability to recreate Web-browsing sessions that occurred. The SockWatch Plug-in (a software package that is installed or "plugged-in" into a computer) will initially allow users to maintain activity logs on their home computer.
SOCKSURF - This module is a low-level TCP/IP (Transmission Control Protocol /
Internet Protocol) socket interface to programs that have been written to run on
the SafeSock Internet server. It mainly involves the user interface programs on
the browser Client-side (Remote Computer for the User) and the Server-side
(Company's Internal Server that is running the Safe Zone Technology(R)
application) and the related Internet communications protocol that will convey
user-entered information to the SafeSock server. It also involves the
communications between the Client and Server that allows the Family Favorites
feature of the browser to verify Web sites that are appropriate for an
individual user of the SafeSock service. Safe Zone Technology(R) is the default
security software for The Children's Internet(R). Safe Zone Technology(R) loads
below the Windows(R) operating system to protect the home PC with the secure Web
browser, 128-bit cryptography and security system. Until the application is
"unlocked" by an adult with an authorized password, the user cannot access the
Internet through any other browser (i.e.: Internet Explorer or AOL), children
can only access the Internet through The Children's Internet(R). Because The
Children's Internet(R) controls the desktop, the child cannot bypass the
security in order to surf the general Internet because the desktop is locked
down by SafeZone Technology (R) and it also restricts access to the control
panel (except by password), which is where most other security products are
easily disabled.
Safe Zone Technology(R) protects the home PC and networked environments. It is built at the control level of network communications and it's the interface between the operating environment of the PC and the servers that control this access at The Children's Internet(R). Safe Zone Technology(R) was designed to improve efficiency, security, and the speed of existing communication by locking this control at the radius interface to the network and behind the Window's environment to eliminate security holes and redundancies, while still allowing its user flexibility and control to customize the content according to their desires.
Safe Zone Technology(R) does not use static filtering or blocking techniques. Instead, Safe Zone Technolgy(R) literally "locks down" a computer so that it will only access pre-approved material. This pre-approved content is stored and accessed from one of our servers, so even if a website is changed to include inappropriate content, our users will only be able to access the approved content. Once a site has been reviewed and approved, its content is made part of the pre-approved database and stays locked into the search engine until the automated monitoring program detects a change to the site, at which time that site is re-reviewed before it is either deleted from our search engine if those changes are not approved or the changed content is made accessible to our users if it is approved. Parents can easily exit The Children's Internet(R) to enter the Internet at large through the use of a password. However, the Safe Zone
Technology(R) functions as the default security, so each time someone starts up the computer, it automatically guides users to the Internet through The Children's Internet(R) and the computer is in safe mode.
The materials the customers access in Safe Zone are content aggregated from third party websites. The Children's Internet functions as an Internet search engine that was specifically designed to be focused on children's content and as such is "locked" and secured to only link to pre-approved "child safe" age appropriate content. As a search engine, The Children's Internet can include websites on the Internet appropriate for children in its indexed directory without entering into contractual relationships with the owners of these websites.
ENTERTAINING, FUN AND EDUCATIONAL CONTENT AND FEATURES
In addition to its live aggregated Web content and security, The Children's Internet(R) is personalized and age specific. We have clustered our content and graphical interfaces into four different age groups, 3 to 5 year olds, 6 to 8 year olds, 9 to 11 year olds and 12 to 14 year olds. Each age group has fun and innovative themes from which to choose. The personalization features allow children to design The Children's Internet(R) to fit their individual personalities.
The Children's Internet delivers age-appropriate content for each of our four age groups and is aggregating the highest quality live websites for children within these groups. Each child can customize his or her Internet environment by choosing from a selection of age specific homerooms. A large selection of homerooms has been developed to match the varied interests and likes of children from themes such as a tree house or a space age homeroom. From the homeroom, a child can access all the proprietary features of The Children's Internet(R), including:
- POPULAR CHILDREN'S WEBSITES. Two Dog Net is continuously aggregating the top quality websites for children to include in The Children's Internet(R). Children can surf freely within the service and get access to the best learning resources and popular websites designed just for them.
- E-BUDDS(TM). This is our secure e-mail where children can send and receive e-mail messages from their friends and family. Although secure, E-budds(TM) is not restricted only to users of The Children's Internet(R). Parents must add desired e-mail addresses to their secure database profile before their child can send e-mail to or receive e-mail from those addresses, but those addresses can be from any email system (hotmail, mindspring, aol, etc.).
- AFTER SCHOOL LOUNGE. Children can link to some of the best resources and homework help sites on the web.
- NEWS STAND. This feature provides children with topics of interest to choose from with links to pre-approved news sites. Topics, which are chosen uniquely for each age group, include subjects such as cartoons, sports, fashion, book club, entertainment, music and what's hot - what's not.
- CUSTOMIZABLE GRAPHICAL CALENDAR. This feature offers the children their own
personal daily planner that keeps track of their school schedule, vacations, birthdays, special events and other activities. There is also a feature that explains the meaning of the holidays of each month.
- DAILY GRAB BAG. A host of our colorful characters deliver humorous or
esteem building messages, jokes, riddles or interesting trivia each day
- customized for each age group.
- FUN FACTS OF THE DAY. Daily changing educational facts that are delivered by animated characters in short cartoon segments developed specifically for each age group.
- GAME PORTAL. A portal for children to select from a variety of Internet games appropriate for their age group that are entertaining and educational.
- SURVEYS. Children can answer survey questions, such as, "What is your favorite food? - a) pizza, b) hamburgers, c) burritos or d) spaghetti" and receive instant feedback on how other children in their age group have responded.
- INCENTIVE SYSTEM. We reward children for partaking in the activities we offer such as answering surveys, learning from the fun facts or surfing the Web. Children collect our cyber coins that we call Diggers and can use them to purchase selected gifts. The more coins they collect and save the better the gift selection.
- STORYTIME. This feature is one of our portals that provides our younger children, ages 3 to 8, access to books on-line at unaffiliated third-party websites. Some of the book selections on these websites that we link to will read to the children while others are fun for parents or older siblings to read along with the younger child.
- FAMILY FAVORITES. By simply utilizing the Family Favorites feature, parents can easily customize their children's access based on their family's beliefs, individual needs and interests by adding other websites from outside The Children's Internet(R) while still maintaining total security.
- TOPIC BASED LINKS. We have organized children's web pages and sites into a major children's portal with topic-based links to general children's sites, topics of interest such as entertainment, music, sports, movies, health, fashion and educational topics including government, history, literature, etc. We will continually add new content and features to The Children's Internet(R) to ensure that our service is fresh and inviting for our users and to constantly stay ahead of potential competitors.
- MULTI-CULTURAL INFORMATION. We intend for The Children's Internet(R) to be a multi-cultural place where children can learn other languages and experience different cultures all within a safe, age specific, Internet community.
- DISTINCT CHARACTERS. Appearing throughout The Children's Internet(R) are our mascots, Bango and Baxter, our protector and companion dogs. Each age level also features its own unique characters to enhance the child's experience. These proprietary cartoon characters provide a familiar companion to the child throughout
the environment as the child explores areas of interest. In addition, our characters are designed to "grow" with the user as he or she progresses to the next age group within The Children's Internet(R).
- SEARCH ENGINE. The Children's Internet(R) search engine is designed to provide children with a fun, safe, easy to use and educational means to access thousands of age-appropriate sites on the Internet.
The search engine utilizes graphical interfaces, which are specifically designed for each of our four age categories. Each child can choose from a number of search themes, designed for their age group, from which to explore the Internet. Theme pages offer children three ways to perform an Internet search.
The first is the GRAPHICAL SEARCH, which uses animated graphical topics. These topics are nestled in a richly animated environment that is alive with sound and color specifically designed around the topics and age groups. We choose topics that we believe will encourage children to investigate the good things the Internet has to offer. For example, in the three to five year old category we offer subjects like bugs, telling time, cartoons, ABC's, and music. For the 12 to 14 year old age group topics include space, hobbies, body systems, famous speeches and people.
The second means of performing a search is through a DIRECT SEARCH. A child types in a word, such as CAR, and the search engine returns all sites in our secure database relating to cars.
The third method of searching is a category search called BAXTER'S SMART SEARCH. The foundation for the category search is based on the educational standards and curriculum guidelines as set by the Mid-continent regional Educational Labs (McREL). Baxter's Smart Search lets a child select from a familiar broad range of subjects generally studied in school, then select from another subset of categories to help a child further define their search until the desired information is found. The category search is an essential part of instilling time management skills by enabling children to locate sites quickly and easily on specific topics without the frustration of wading through thousands of irrelevant Internet pages. Baxter's Smart Search helps to build a child's confidence and sense of being "smart" through their achievement of locating their desired information. Our focused search capability is a direct result of our proprietary search engine architecture.
SEARCH ENGINE ARCHITECTURE AND SITE SELECTION
Two Dog Net, Inc. uses it's proprietary Safe Zone Technology(R) to allow children to benefit from and enjoy the Internet without compromising their safety or online activities. Consumer Reports in October of 2001 tested six popular blocking and filtering software products as well as parental controls on a popular ISP. Consumer Reports found that the security generally failed to block one out of every five sites deemed objectionable. Unlike these blocking and filtering products, The Children's Internet(R) service relies on the "screening and locking" technology of it's proprietary Safe Zone Technology(R). This technology provides a secure and "locked down" environment while allowing unrestricted access to thousands of pre-selected Web sites and pages that have been "screened" and reviewed by Two Dog Net, Inc.'s content staff and then "locked" into The Children's Internet search engine database.
The Children's Internet(R) aggregates content from the Internet and allows access to cached copies of approved sites. In addition, the software allows parents to customize the service by bringing in live sites and pages from outside of The Children's Internet as they see fit for their individual child. The comprehensive search engine has thousands web pages in the secure database, and it is anticipated that it will continue to grow.
The Children's Internet(R) search engine was built on the premise that a search engine for younger children should be one of quality not quantity and consequently not be burdened with millions of irrelevant and unsuitable sites that make searching very time consuming and frustrating for children Our belief is that the most important features of a child's search engine is safety, value, age appropriateness and ease of use.
Two Dog Net's team of educational consultants designed the architecture of the search engine to generally correspond to the school curriculum for children of each of the four age groups 3-5, 6-8, 9-11 and 12-14. The search engine is structured differently for each of the four age groups. As a result, the categories appearing on the search area for younger children will be different from those for the older age groups to reflect their different educational levels and interests.
Although here is currently only one staff content member, Two Dog Net, Inc. back in 1999 initially had a team of twenty "content watchdogs" made up of teachers, educators and other qualified reviewers who personally screened each Internet web page accessible through The Children's Internet. These content watchdogs first ensured that the web site was safe, wholesome and free of objectionable material. Then they screened for learning and entertainment value and indexed each site according to its age-appropriateness and relevance to curriculum standards. For guidance and direction Two Dog Net, Inc. follows the curriculum guidelines set by Mid-continent Regional Educational Laboratory (McREL). McREL is one of 10 regional educational laboratories (REL's) sponsored by the Office of Educational Research and Improvement (OERI) of the U.S. Department of Education and has received international recognition for its comprehensive compendium on the identification and articulation of content standards and benchmarks. McREL identifies standards and gives benchmarks of what grade-level a child is at in the core subject areas of math, science, civics, dance, theater, music, art, English language arts, history, and social studies, to name a few. The compilation of content standards for K-12 curriculum is too extensive to list within this disclosure, but the public at large may view the compendium of K-12 standards and guidelines by visiting their web site at: www.mcrel.org.
In order to efficiently and effectively begin the systematic collection, review and analysis of appropriate content for The Children's Internet(R) search engine, the content staff would go to organizations that they trusted to provide appropriate sites for children, such as the American Library Association (ALA) as a resource to aggregate a large number of sites. For example, by visiting http://www.ala.org/ala/alsc/greatwebsites/greatwebsiteskids.htm the content staff had access to hundreds of the ALA's picks of "Great Web Sites for Kids". The content staff also utilized other well-established resources and search engines, which are focused on children's content such as Yahooligans (Yahooligans.com) or Ask Jeeves for Kids (AJKids.com).
In reviewing web sites, the content staff reviewed each page of every web site so that not just the "primary root" address (e.g. http://www.disney.go.com) was put into the white list of
accepted sites, but each page which is identified with a URL extension for example from Disney's home page the child would then link to Disney's "Kids Island" games (http://www.disney.go.com/disneychannel/games/index.html). Notice how the URL address changes and lengthens to include each web page.
For example an entire site may consist of twenty pages and fifteen of those pages are accepted and five pages are not accepted. The pages that would be unacceptable for example would be pages like message boards that the webmaster does not control and where people can freely post profanity or inappropriate content and guest book pages where the child may be asked to record personal information.
The Children's Internet treats every hyperlink, including banner ads, pop-up windows, and text links as a separate web page and for each such hyperlink to be approved it is subjected to the same human review process. If a hyperlink is approved then it is added to the white list database. Therefore, many of the links on approved pages will not work because they have either not been reviewed by our content staff member or they have been reviewed and have not met our criteria. Clicking on a an unapproved hyperlink leads only to a green box that conforms to the space where the page linked to would normally appear with our warning message saying, "CAUTION, CURIOUS CANINES! THIS PAGE IS NOT PART OF THE CHILDREN'S INTERNET". The content of banner advertisements and pop-up windows is also blocked and results in this same warning message.
SEARCH ENGINE MAINTENANCE
After the difficult and labor-intensive task of building the integral foundation of the search engine was completed in 2001, Two Dog Net, Inc. downsized its content staff to one member and has since focused its efforts on maintaining the database. Maintenance of the search engine is accomplished through a process of automated programs and human review. The labor of the content staff member is needed for only approximately 10% of the process as the automated systems are responsible for 90% of the maintenance and updating of the search engine , which are supervised by our Chief Software Architect, Tyler Wheeler. Additionally, Two Dog Net's Chief Technical Officer oversees the automated update cycles. Although we take great precautions both through automated technology and human review there can be no assurance that we will be completely successful in addressing all such risks posed by the Internet.
AUTOMATED SEARCH ENGINE SERVERS
There are three servers involved in operating the search engine and its maintenance: the public server, the private server and the proxy server. The public server uses a customized and modified version of the Alta Vista Search Engine licensed software package and is the search engine and interface accessed by users. The private server is the home to the private interface used by our content staff reviewer to maintain and update the system. The proxy server acts as an intermediary between the Internet and our public server and it is instrumental to security by employing firewall services that separates and protects our internal computer network from outside intrusion, administrative control, and caching services.
AUTOMATED SEARCH ENGINE UPDATES
We maintain the integrity of our "white list" of pre-approved web pages and update sites by employing a program called Scooter. Scooter is a registered trademark of the Alta Vista search engine developed by Digital Corporation (which Two Dog Net licensed and customized). Most Internet search engines have such a program, which is also known as a "spider" or a "bot." Scooter is a program designed that visits web sites and reads their pages and other information in order to create entries for a search engine index. In our case Scooter goes out to the Internet and systematically visits every pre-approved web page on our white list and reads the entire page on each web site. When Scooter finds a pre-approved web page that has changed its URL and or has changed any text or page contents on the web page then that site is removed from the white list, returned to the private server, indexed accordingly as a URL change and or as a text/content change and put in cue to be reviewed by our content staff member. Due to the large file size of our white list and the amount of hardware and memory resources it takes to run Scooter, rather than have Scooter visit the entire white list in one day, we take the white list and break it down into smaller file sizes and cover the entire list once a week. Basically we take 20% of our white list each day, Monday through Friday and run Scooter on the smaller files. After the changed sites are reviewed by our content staff member and either approved or disapproved, those updates are made to create a new updated master white list of pre-approved we pages and are posted to the public server (search engine) and to the proxy server every Saturday between 10:00 p.m. PST and 2:00 a.m. PST.
AUTOMATED SEARCH ENGINE MAINTENANCE
A significant part of the automated search engine maintenance and security mechanisms run through the proxy server. The proxy server works directly with our public server (search engine) and is an integral part or our security interface for users. All of the web pages that have been screened and pre-approved by our content reviewers and teachers are cached (stored) on the proxy server and all of the web pages that are accessible by users through the search engine (public server) are in the exact image and "state" they were in when they were screened by the content reviewer. Therefore the only pages accessed by users are the cached pages and if the page has been updated, changed or hacked the child is protected because they only see the pre-approved cached web page and will not have access to that modified page until it is reviewed by the content staff and posted back to the white list of approved web pages. The proxy server is updated every seven days (see "Automated Search Engine Updates")
Our proxy server receives a request for a Web page from a user accessing the Public server. If the request passes screening requirements (if the requested web page is exactly the same URL and the same text on the web page) the proxy server, looks in its local cache of previously downloaded Web pages and returns it to the user without needing to forward the request to the Internet. If the page does not match the exact page that is in the cache, this site is immediately logged to the proxy server and the URL for the site is forwarded to the private server for our content staff member to review the changed content. Regardless of whether a site has changes or not, the pre-approved cached page on the proxy server is what is returned to the user. To the user, the proxy and cache servers are "invisible" and this process happens in milliseconds.
Additional advantages of using the proxy server are that the cache can speed response time to users and the identity of users can not be tracked or logged by the web sites because their only contact is with our servers.
Because the cache is currently updated only once a week, the web content that our users get will not always be up to date, but we believe this will not be a serious detriment to potential customers as we believe they prefer the protection the cache gives against inappropriate content
over having the most up-to-date sites. Additionally, over the past four years, Two Dog Net's actual experience in this industry has shown that many web pages for children are rarely updated especially homework help reference web pages (for example encyclopedia, dictionary, thesaurus entries) as well as games and entertainment and the seven day lag time for posting updates is sufficient. News and magazine web pages are generally not part of the search engine but we give parents the option to customize the product for their children by using our "Family Favorites" tool to add news and magazine sites as approved links for their child to access.
CONTENT REVIEWERS SEARCH ENGINE UPDATES
Currently because the primary focus has changed from building or expanding the database to simply maintaining the existing database, as discussed earlier we have found that one content staff member is sufficient to review the changed sites. The content staff member is responsible for reviewing the web pages which have been removed from the white list because Scooter detected changes to the content or to the URL. This staff member either updates such a site's URL address and/or reviews the new and updated content on the page and re-submits the page as an approved web page or permanently remove the site from The Children's Internet database if the content is no longer appropriate. In addition to maintaining the integrity of the original database and keeping URL's and content current and safe the content reviewer also spends some time searching for new children's sites to add to the white list.
A QUICK, RICH MULTIMEDIA ENVIRONMENT
We make heavy use of animation and sound throughout The Children's Internet(R) to make the environment entertaining for children and to maintain their interest. Our focus groups have confirmed our belief that children are generally visually oriented and that sound and movement are major factors in keeping children interested in the content and search results. We also learned that fast response times are important in maintaining a child's interest. Animation and sound are not extensively used over the Internet because sending large multimedia files can significantly slow down response times.
To obtain faster response times, we will periodically provide new content to our subscribers via CD-ROM. This includes the background screens for the homerooms and the search engine screens, all of which contain vivid content, animation and sound. These files are downloaded from the CD to the hard drive of the user's personal computer and upload from the hard drive almost instantly. The user's personal computer interacts over the Internet with our host server. The server is able to deliver to the user content that is customized for each child and changes daily. This combined method provides users with a rich, interactive experience with fast response times.
HARDWARE AND INFRASTRUCTURE
We have the rights to The Children's Internet(R) technology from an agreement with Two Dog Net the developer of the technology. The agreement covers the use of the technology and the use of hardware and software currently owned by Two Dog Net on which The Children's Internet(R) operates. Future upgrades to the equipment for expansion and modernization will be our responsibility.
Our Internet bandwidth provider is EmeryTech Data Center. EmeryTech Data Center, our co-location facility provides us with10 Mbps (Mega bytes per second) with expandability of up to 100 Mbps (Mega bytes per second) from two separate carriers, Qwest Communications and AT &T, for redundancy and back-up precautions.
MARKETING AND SALES
We plan to have two sources of revenue:
1. Retail Sales- selling monthly subscriptions to the Children's Internet(R) service directly to consumers; and
2. Wholesale Distribution- selling The Children's Internet at the wholesale prices to ISPs to re-sell to their current ISP customers.
Customers will pay for the service each month electronically via credit card or debit card. When the ISP is an authorized wholesale distributor of our service, the ISP will pay us monthly in one bulk payment for all of their customers subscribing to the service and then they will bill and collect the monthly subscription fee from each of their individual subscribers. If an individual acquires the service directly from us, we will automatically bill for the service each month. Initially we intend to use an Internet billing service to provide that service. To reach the approximately 55 million US households with children, we will invest in television supported by radio and print advertising as well as public relations activities to generate a high level of product awareness.
Although we originally planned to offer dial-up services to our customers, on June 11, 2003, Two Dog Net's third-party dial-up services provider, changed its pricing to a cost prohibitive structure that made it impossible for us to continue with our sales plan. Because of this, we are no longer offering wholesale dial-up services to ISPs. Therefore, our customers will be ISPs or customers who already have existing Internet access.
Our management believes that adding multiple forms of media to an advertising campaign raises total response. A combination of different media increases results because different people respond to different stimuli and reinforces the advertisers' messages.
All of our marketing efforts, regardless of the medium, will integrate references to The Children's Internet(R) website. Integration of the website in all marketing will encourage prospective users to test the product, and eventually to order the product online.
Selling and marketing are core competencies at The Children's Internet(R). We will focus our sales and marketing programs on two distinct yet related areas.
Using the ISPs' current customers as a base, we will market The Children's Internet(R) to those users as well as seek new users. Our sales effort with ISPs encompasses the utilization of third-party marketing companies.
On August 14, 2002, we entered into a License Agreement and a Independent Sales Agreement
with Infolink Communications, Ltd. Both agreements are for a term of three years, after which they automatically renew for three additional one year terms unless a party gives the other party 30 days notice prior to any such renewal.
Under the License Agreement, Infolink is authorized to sell The Children's Internet(R) service at prices to be determined by Infolink to the U.S. government and to corporate sponsors. In return, we would be entitled to $4.05 per month for each computer on which the service is being used by Infolink's customers under the agreement..
The Independent Sales Agreement allows Infolink to sell The Children's Internet(R) service to Infolink's customers at prices determined by Infolink. In return, we would be entitled to $.95 per computer on which the service is used by Infolink's customers under this agreement.
In addition to establishing relationships with third-party marketing companies, we also plan to focus on establishing long term, value-driven relationships with:
- Parents and Children
- The School Market: School Administrators and Teachers
Children are the single fastest growing segment of Internet users today. Despite this fact, there is an ever-increasing amount of content devoted to harmful and unwholesome subjects that can damage children and inhibit them from learning while utilizing this exciting, resourceful technology. Of the 174 million Internet users in America, 90% of that amount are children and teenagers (ages 5 to 17). (U.S. Internet Population Continues to Grow" Cyber Atlas, Jupiter Media Corporation, February 6, 2002) In 2000, children 12 years and under influenced the household spending of over $600 billion. (McNeal, James (2001). Quoted in McDonald M, Lavelle M. Call it 'kid-fluence'. U.S. NEWS & WORLD REPORT, July 30, 2001, p.32.)
Careful development of the right message is of critical importance to the success of our marketing efforts and to the accomplishment of our financial objectives short and long term. Our commitment is to the ongoing testing and refinement of our message and our media mix. Initially we envision both local and regional rollouts prior to a full-scale national program. In most cases, test programs are most successful when staged over 3 to 4-month timeframes. Our methodology will develop a program, launch the program, evaluate, refine and continue forward based only upon having received quality customer feedback.
Our overall business and marketing strategy consists of the following key elements:
- GENERATE PRODUCT AWARENESS. We will implement an integrated marketing communications and sales strategy that continuously promotes awareness of The Children's Internet(R).
- BUILD BRAND EQUITY. We are dedicated to establishing and building our brand names, and our future plans include marketing and The Children's Internet(R) branded products based on our proprietary animated characters.
- ESTABLISH MARKETING RELATIONSHIPS. We believe that entering into marketing agreements, similar to those we have entered into with Infolink and described above, will be important in retaining customers for The Children's Internet(R).
CONSUMER MARKETING AND SALES
We are authorized to use a 30 minute infomercial produced by Two Dog Net describing The Children's Internet(R) service. The infomercial will be the cornerstone of our consumer-marketing program. This direct response-marketing vehicle provides a number of advantages including: a direct sale opportunity, brand development, cost effectiveness, and rapid market response (feedback).
The infomercial will serve three benefits in our marketing mix: as a primary source to generate qualified leads, a sponsorship tie-in vehicle and a significant brand recognition tool. We will utilize the infomercial to support our dial-up small ISPs, (building new users for them) as well as attracting new small ISPs. We believe a multi-tiered approach with the infomercial supported by varied marketing campaigns will be highly effective for us.
We will reach parents through an integrated marketing plan that leads with the infomercial and supported by traditional marketing venues such as radio and print. The infomercial includes powerful testimonials from non-biased "experts" like the FBI, the FCC Chairman Bill Kennard, and IBM's Director of Educational Services. The infomercial validates the dangers on the Internet, while simultaneously reinforcing the educational value and need of The Children's Internet(R).
SPONSORSHIP SALES, ADVERTISING BANNER SALES AND E-COMMERCE
SPONSORSHIP SALES: We intend to present sponsorship opportunities to large consumer driven companies that focus on the specific demographic markets of children and/or their families. We intend to incorporate sponsor specific content into users' primary age-specific Web pages or on other high traffic areas of The Children's Internet(R). Our goals are to provide each sponsor with a targeted audience, and to provide value-added marketing tools to increase both sales and brand equity.
We intend to create a premier sponsorship program for our corporate sponsors. Premier sponsors on The Children's Internet(R) will have unique benefits over traditional sponsorships. Utilizing our infomercial expertise, sponsors will be able to create multi-media, TV-like commercial spots specifically formatted to "air" on the Internet, otherwise known as Intermercials(C), which will appear in different areas of The Children's Internet(R).
The Children's Internet(R) has opportunities for events, cross promotions, tie-ins and long term relationships. The Children's Internet(R) will seek to attract market leaders in key categories.
ADVERTISING BANNER SALES: Our primary sales effort will be to develop sponsorship relationships. A secondary effort will be traditional Internet banner advertising. Because of the nature of The Children's Internet(R), in which children are automatically directed to and locked into the service,
advertisers are more likely to receive a higher traffic volume of their target audience than most other potential advertising sites.
E-COMMERCE PARTNERSHIPS: In the past year, the Internet has become a generally accepted medium for the sale of products and services ranging from books and CD's to airline and event tickets.
This widespread acceptance of the Internet as a shopping venue for the public at large opens great opportunities for The Children's Internet(R). We are searching for companies that wish to establish a presence on the Internet for the sale of their products to our target audience or our user base. The Children's Internet(R) has the advantage of being able to design content sites targeted at the specific user for specific categories of product sales. For example, we may design a music store in which children can listen to new CDs and purchase the CD online. We may create a toy store in which children view new toys, try them out and drag icons of specific toys they want to their own holiday wish list. Parents will be able to view this list and purchase online the exact toys their child has requested.
We have not yet made any sponsorship sales or advertising banner sales nor have we entered into any e-commerce partnerships, and we can offer no assurance that we will ever successfully do so. However, we hope to derive revenues from these activities if we are successful.
PUBLIC RELATIONS
Public relations activities will combine events, special promotions, and other integrated marketing strategies with traditional media relations with the objective of remaining top-of-mind with consumers and media.
We intend to:
- Promote a Children's Internet Safety Week.
- Build relationships with school districts on a countywide basis.
- Establish educator relations program designed to update educators on the
latest in Internet technology, including a comprehensive Educator's Kit
and media relations initiatives.
- Encourage use of The Children's Internet(R) in classroom
settings day in and day out.
- Partner with targeted organizations consistent with The Children's
Internet(R) overall business direction.
- Position wherever possible, The Children's Internet(R) to be the
"market leader" in safety on the Internet for children; continually
pursue opportunities to place our management as speakers in
appropriate safety and educational forums.
- Provide news bureau services and announcements of developments within
our company (partners, content, features, etc.).
ONLINE PROMOTION
With the use of permission marketing, we will allow our best prospects and customers to tell us what kind of information they want and will allow from us and we will provide it. Building this type of relationship is fundamental in running successful online and traditional direct selling
programs. We are after long term relationships with our customer base. It is our hope that children who become users at age four or five stay with us for another five to seven years -- not unlike the loyalty enjoyed by Sesame Street in the 1960s-1990s.
Along with permission marketing, other on-line promotion will include newly developed Intermercials(C). We will create commercials specifically designed for Internet viewing and run them throughout the Internet where there is high visibility of our target audience.
FREE CD DISTRIBUTION
Following the successful software model of free distribution, The Children's Internet(R) may distribute CD's to appropriate and selected non-profit organizations and clubs. This will allow large numbers of prospects the opportunity to become familiar with our product and services.
SCHOOL ADMINISTRATORS AND TEACHERS
To accomplish our objectives, we intend to employ the following marketing communications programs and elements:
TEACHER SURVEYS- These surveys will be used to determine technology needs and assess the teachers' understanding of using the Internet as a primary teaching tool. This will also deepen our relationships and visibility opportunities with teachers.
EDUCATOR'S PACKAGE- This package will contain a comprehensive assembly of key printed informational materials to explain the full array of The Children's Internet(R) services and products--generic brochure, case studies/testimonials, site screen shots, key facts and fundraising oriented promotional materials.
EDUCATIONAL CONFERENCES- Typically these events attract 3,000 to 6,000 attendees and represent an outstanding direct marketing opportunity to build prospects for our sales and marketing database. Our efforts would include product demonstrations, handouts, and offers to try The Children's Internet(R).
DIRECT PRESENTATIONS- This method will involve direct selling to school administrators, technologists, teachers, etc. We will attempt to be represented at key conferences of the PTA nationally and regionally.
ACTIVE PARTICIPATION IN SELECTED ADVOCACY GROUPS- This action will be designed to enable The Children's Internet(R)'s high visibility among groups concerned and focused on Internet safety for children and the expansion of more useful content for schools. This would involve The PTA, National School Board Association and The National Association of Elementary School Principals.
EDUCATOR PARTNERSHIPS- This action involves designing long-term relationships with respected educational authorities that are highly visible throughout the country.
EDUCATION MARKET MEDIA RELATIONS- A series of targeted media relations activities has
been developed to engage school personnel, parents and children--all around Internet Safety and the uniqueness of The Children's Internet(R). Media relations will be the foundation used to generate awareness, trial and involvement with our products and services.
The school market is an important vehicle for obtaining product trial by children and awareness of the product by parents. We intend to implement an aggressive marketing program aimed at school districts and a school fund raising program aimed at local schools, parents' groups and PTA's. This would provide not only increased exposure among our target market, but also product trial by the children.
A NEW REVENUE STREAM FOR SCHOOLS - FUNDRAISING
The Children's Internet(R) has developed a fundraising program for schools with The Children's Internet(R) as the centerpiece for local community fundraising efforts. The Children's Internet(R) will pay schools or related organizations (PTA or Parents Group) a percentage of the subscription revenue generated from sales of The Children's Internet(R) service by the school or related organization. Initial interest in this program at focus groups of PTA and Parent Group members has been extremely high. Parents were drawn by the opportunity of selling a product that they perceive to have real value rather than the typical fund raising vehicle of magazines, candy or wrapping paper.
The typical parent group has 5 to 10 members who are dedicated to making their school better for their children. These parents have almost a missionary zeal and can be one of our most effective assets. We will test this method initially with private schools and then expand to the public school sector later on.
PRICING CONSIDERATIONS
The Children's Internet(R) anticipates retail pricing at $9.95 per month. Presently, there appear to be no specific competitive price barriers or market forces at work. The Children's Internet(R) brand is capable of exceeding customer expectations the more the possibility of premium pricing exists.
RESEARCH AND DEVELOPMENT
Based on our agreement with Two Dog Net, we will look to Two Dog Net as our research and development partner and will continue to rely on Two Dog Net to keep The Children's Internet(R) technology current. To date, all of the research and development efforts have been performed by Two Dog Net.
Over the course of the past six years, Two Dog Net has been focused on the development of Safe Zone Technology(R), The Children's Internet(R), and the creation of unique user interfaces and feature functionality for The Children's Internet(R). In the future, in association with Two Dog Net, we will explore ways to leverage our current knowledge on compatible product enhancements. For example, some of the development may focus on interactive learning systems, a parent's portal, multiple participant interactive games for children, a companion product to The Children's Internet(R) aimed at the teen market, and on-line books.
We will only begin development of new products after we have successfully launched The Children's Internet(R) and feel comfortable that the research and development effort will not dilute our focus and resources from the success of The Children's Internet(R).
WHOLESALE SALES & MARKETING AGREEMENT
On September 10, 2002, we entered into a License Agreement with Two Dog Net, Inc. for an exclusive worldwide license to market and sell The Children's Internet(R) service. We were required to pay Two Dog Net a monthly royalty payment of 7% of net sales of The Children's Internet(R) product. We acquired the license for $2,000,000 required to be paid no later than September 10, 2004. We paid $15,500 of this amount during the quarter ended September 30, 2002.
On November 5, 2002, we amended the License Agreement with Two Dog Net to agree to issue two million shares of our Series A Convertible Preferred Stock in exchange for the long term debt owed to Two Dog Net of $1,984,500 to reduce our long-term debt. However these two million shares were never issued and on March 3, 2003, we replaced the License Agreement with a Wholesale Sales & Marketing Agreement which gives us the exclusive worldwide right to market, sell, and distribute The Children's Internet(R) service and wholesale dial-up Internet service of Two Dog Net. We will pay Two Dog Net a per user charge of $3.00 per month for each user accessing The Children's Internet(R) service. The Wholesale Sales & Marketing Agreement has a term of five years and renews for additional five year terms automatically unless either we or Two Dog Net give written notice of termination of the agreement not less than one year before the end of any five year term.
We have related parties with Two Dog Net as follows:
- Our President, Chief Executive Officer, and one of our Directors, Sholeh
Hamedani, is the sole shareholder of our parent company, Shadrack Films,
Inc. Ms. Hamedani was also President of Two Dog Net, Inc., the licensor
of The Children's Internet(R) technology until August 1, 2002. Ms.
Hamedani also owns approximately 10% of the total outstanding shares of
common stock of Two Dog Net
- Ms Hamedani's father, Nasser Hamedani, is the current President,
Chairman and majority shareholder of Two Dog Net
TWO DOG NET, INC.
We currently rely upon Two Dog Net, Inc. to maintain the product, The Children's Internet(R), in its current form. Two Dog Net, Inc. invested approximately seven years in the development of
the product and its supporting technologies. Today, because all the research and product development is complete, they have changed their business model accordingly and have downsized considerably. They no longer need to employ technologists, artists, animators, writers, educators, and the respective management to run the business. Currently they operate their business with their Founder and Chairman, Nasser Hamedani, their Chief Technical Officer, Larry Wheeler, an accountant and creative/content director. When it becomes necessary to subsidize their own efforts they retain, on an as needed basis, independent contractors. In the unlikely event that Two Dog Net, Inc. ceases their operations due to circumstances beyond their control we have in place the necessary mechanisms to seamlessly assume their current responsibilities of maintaining the product. We feel confident in our management team's ability and experience to be able to continue supporting the sales of the product.
Aside from their licensing of The Children's Internet(R) service to us, they do not currently license any of their other products and or technologies. Additionally, they do not generate any revenues, or net income besides the revenues derived from the sales of The Children's Internet(R). Two Dog Net, Inc.'s current overhead costs, which continue to be funded through private sources, are minimal and they do not foresee their operating costs significantly increasing.
COMPETITION
In the past three years, competition has significantly declined as many providers have gone out of business.
However, the market for Internet products and services is still highly competitive and competition is expected to increase. There are no substantial barriers to entry in these markets. Although we currently believe that the diverse segments of the Internet market provide opportunities for more than one supplier of products and services similar to ours, it is possible that a single supplier may dominate one or more market segments.
Our management believes that the principal competitive factors in our market are brand recognition, ease of use, comprehensiveness of available content, customization by the consumer, quality and responsiveness of search results, the availability of high-quality, focused value added services, and required technology to offer access to end users with few interruptions. Competition among current and future suppliers of Internet navigational and informational services, high-traffic websites and ISPs could result in significant price competition and reductions in revenues. There can be no assurance that we will be able to compete successfully.
We compete with other providers of security software, information and community
services. Many companies offer competitive products or services addressing
filtering of Internet content, including, among others, Net Nanny (Net Nanny
Software, Inc.), Cyber Patrol (The Learning Company), Cyber Snoop (Pearl
Software, Inc.), Cyber Sentinel (Security Software Systems, Inc.), Cybersitter
97 (Solid Oak Software, Inc.), SurfWatch (SurfWatch Software, Inc.),
WebChaperone (WebCo International, Inc.), EdView Channel Lock and EdViewsmart
Zone (EdView, Inc.) and X-Stop (Log-On Data, Inc.). In addition, we compete with
online services such as Yahooligans! (Yahoo!), an Internet navigator designed
for children in grades K-12; America Online (America Online, Inc.), which offers
parental control options for Internet access; and Disney's Blast Online, which
also offers child-oriented Internet navigation. These
companies already have an established market presence, and are far ahead of us in gaining market share. Also, entities that sponsor or maintain high-traffic websites or that provide an initial point of entry for Internet users, such as the Regional Bell Operating Companies or commercial online services such as the Microsoft Network ("MSN") and America Online ("AOL"), currently offer and could further develop, acquire or license Internet search and navigation functions that could compete with our product.
Many of our existing competitors, as well as a number of potential new competitors, have significantly greater financial, technical, marketing and distribution resources. In addition, providers of Internet tools and services may be acquired by, receive investments from, or enter into other commercial relationships with larger, well-established and well-financed companies, such as Microsoft or AOL. Greater competition resulting from such relationships could have a material adverse effect on our business, operating results and financial condition.
EMPLOYEES AND CONSULTANTS
We currently employ five employees: Sholeh Hamedani, Soraiya Hamedani, Roaya Hamedani, Jamshid Ghosseiri and Tyler Wheeler. Four of these are full-time employees: Sholeh Hamedani, Soraiya Hamedani, Roaya Hamedani, and Tyler Wheeler. Additionally, we have retained Jim Lambert as a full time financial consultant. We do not anticipate hiring any additional employees during calendar year 2003. We hire independent contractors on an "as needed" basis only. We have no collective bargaining agreements with our employees. We believe that our employee relationships are satisfactory.
PROPERTIES
Our parent company, Shadrack Films, Inc. has agreed to allow us to operate from its offices located at 5000 Hopyard Rd., Suite 320, Pleasanton, CA 94588 under a verbal license revocable at any time without prior notice. These offices are 2,059 square feet and are leased by Shadrack Films from Principal Life Insurance Company, an Iowa corporation. From March 22, 2004 until April 30, 2004, we will occupy the office space on a rent-free basis. From month two (May 1, 2004) through thirteen the basic rent per month is $3,603; for months fourteen through twenty five, the basic rent per month is $3,706; and for months twenty-six through thirty-seven, the basic rent per month is $3,809 under a lease agreement that expires on May 1, 2007.
PATENTS AND TRADEMARKS
Our success is dependent on the proprietary technology from Two Dog Net, Inc. that we market and sell. The proprietary technology underlying The Children's Internet(R) service is owned by Two Dog Net, Inc.. We do not have any patents, pending or otherwise. Following is a list of the intellectual property we have the rights to use from Two Dog Net, Inc.:
- "The Children's Internet(R)" registered trademark;
- Safe Zone Technology(R) registered trademark;
- The Safe Zone Technology(R) software patent application pending; and
- "Two Dog Net(TM)" trademark.
"Children's Internet" is a service mark of Two Dog Net, Inc. and was registered with the U.S. Patent and Trademark Office on October 9, 2001 as Registration Number Serial Number 75378450. We do not hold any registered service marks or trademarks.
Two Dog Net, Inc. filed U.S. Patent Application No. 08/971,447 for the Safe Zone Technology(R) software on or about December 1, 1997 and on or about November 20, 2000 they filed a continuation application. They have advised us that there is no assurance that the patent will ever be issued and that the patent application process may continue through the year 2004.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we cannot determine the extent to which piracy of our software products exists, such piracy can be expected to be a persistent problem, particularly in international markets and as a result of the growing use of the Internet. Some courts have held that shrink-wrap licenses, because they are not signed by the licensee, are not enforceable. In addition, there can be no assurance that patent applications filed by Two Dog Net, Inc. will result in patents being issued, and any patents that may be issued to it in the future, will afford protection against competitors with similar technology; nor can there be any assurance that patents issued to Two Dog Net, Inc. will not be infringed upon or designed around by others or that others will not obtain patents that we would need to license or design around. Impairment of our intellectual property rights could negatively affect our business or could allow competitors to minimize any advantage that our proprietary technology may give us.
LITIGATION
On February 13, 2004, we received notice that our prior landlord, Hill Physicians Medical Group, Inc. had filed an unlawful detainer action against us on February 6, 2004 in the Contra Costa County Superior Court as case number WS04-0238. Our prior landlord alleged that the lease for our office space expired January 31, 2004 and requested the court to award it possession of the premises and pay the sum of $8,746.52 for rent and other charges due pursuant to the lease. On February 19, 2004 we signed a Mutual Settlement Agreement and Release allowing us to continue to occupy our office space on a rent-free basis through March 22, 2004 and providing for a Stipulation for Entry of Judgment in the amount of $8,746.52 against us in the event we failed to vacate this office space on March 22, 2004, removing all of our belongings and leaving it in good condition. We consider this matter resolved because we vacated this office space on March 22, 2004 as required by the settlement agreement. We received written confirmation from the landlord that we indeed moved out on March 22, 2004, we removed all of our belongings and we left the office space in good condition. Additionally, we have received a Request for Dismissal of this action signed by counsel for Hill Physicians Medical Group, Inc. who has informed us that the Request for Dismissal will be filed with the court. Therefore at this time we are not engaged in any legal proceedings and are not aware of any pending or threatened litigation that could have a material adverse effect on our business.
MANAGEMENT
Our directors and executive officers are as follows:
Name Age Position
---- --- --------
Sholeh Hamedani 36 President, Chief Executive
Officer, Chief Financial
Officer, Chairman of the Board
of Directors
Jamshid Ghosseiri 64 Secretary, Director
Tyler Wheeler 33 Chief Software Architect, Director
Roger Campos, Esq. 57 Director
Dale Boehm 35 Director
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MS. SHOLEH HAMEDANI, has been our President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board since August 23, 2002. From May 2002 through the present, she has served as the President, CEO and founder of Shadrack Films, Inc., our parent company. From July 1995 to August 2002, she was President and co-founder of Two Dog Net, Inc., a security solutions provider and software developer. She was responsible for managing product development of new technologies, as well as creating and implementing their marketing strategies. Ms. Hamedani's experience includes local and national advertising campaigns on television, radio, and print as well as producing, scripting and directing educational video programs and television infomercials. Prior to Two Dog Net, Inc., Ms. Hamedani was part of the founding team at SyberVision Systems in the Production and TV Media Department from 1985 to 1989. Ms. Hamedani attended California State University, Hayward majoring in Business Administration from 1985 to1988.
MR. JAMSHID GHOSSEIRI has been a director since August 23, 2002 and Secretary since January 2, 2003. From January 9, 1989 through the present, he has served as Chief of the Microbiology Department at Mt. Diablo Medical Center. Mr. Ghosseiri has over 35 years of experience in the field of clinical microbiology and research in infectious diseases. He received a B.S. from San Jose State University in 1966 and completed his Post Graduate Studies in Infectious Diseases at Stanford University in 1969.
MR. TYLER WHEELER has been our Chief Software Architect and a director since August 23, 2002. He co-founded Micro Tech Systems in 1989. In 1993, he and his father founded Integrative Systems, Inc., a hardware and software computer consulting firm. From January 1996 to August 2002 , Mr. Wheeler served as Vice President of Technology at Two Dog Net, Inc. a security solutions provider and software developer. Mr. Wheeler completed a BA in Finance and Business Law at California State University, Fresno in May of 1996.
MR. ROGER CAMPOS, ESQ. has been a director since August 23, 2002. Mr. Campos received his J.D. (law) degree in June 1972 from the United States International University (San Diego, CA) and received his BA in June of 1969 from the University of California at Santa Barbara. From February 2002 through the present, he serves as President and CEO of the Minority Business Roundtable, a national membership organization, based in Washington DC, for CEOs of the nation's largest minority-owned companies. From January 2000 to February 2002, Mr. Campos was Executive Director of the Minority Business Roundtable. From January 1997 to January
2000, he served as Vice President of government relations for the Hispanic Association of Colleges and Universities. Mr. Campos provides consulting services in the areas of contracting, marketing, and business transactions.
MR. DALE BOEHM has been a director since August 23, 2002. Since March 17, 2003 continuing to the present Mr. Boehm is the President of MasterLink Corporation. MasterLink Corporation is a project management based professional services organization with a focus on network and system integration, carrier services brokering and network management services. From September 2002 continuing through today Mr. Boehm is the Founder and President of Caspian Technology Concepts, a consulting firm specializing in network management services. Previous to this, Mr. Boehm served as Director of Sales at Qwest Telecommunications, Inc from July 2001 continuing until August 2002where he was responsible for 90+ direct reports and all of the revenue in the National Accounts division in Illinois and Wisconsin. From December 2000 to July 2001, Mr. Boehm was the Regional Vice President of Central Region Sales at OneSecure Inc., a managed security services provider enabling clients to co-manage firewalls. Mr. Boehm was Regional Vice President Enterprise Solutions of GlobalCenter from November 1999 through December 2000 prior to its sale to Exodus. He was also the Manager of IP Network Solutions at AT&T from February 1997 through November 1999. From January 2000 through the present, Mr. Boehm has been an instructor of TCP/IP, Business-to-Business e-Commerce, and IP Technology programs at the University of Wisconsin-Milwaukee where he is the Chairman on the Executive Steering Committee for the University Outreach Program. He is also a member of the Information Systems Security Association (ISSA)(R). Mr. Boehm received his Certificate of Telecommunications Analysis from the University of Wisconsin-Milwaukee in 1994 and is currently enrolled at Concordia University, Mequon, Wisconsin for a Bachelor of Arts, Management & Communication degree.
Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of stockholders and until their successors have been elected and qualified.
MEETINGS OF THE BOARD OF DIRECTORS AND INFORMATION REGARDING COMMITTEES
There currently are no committees of the Board of Directors. The Board of Directors held no meetings in the year ended December 31, 2003.
EXECUTIVE COMPENSATION
GENERAL COMPENSATION DISCUSSION
All decisions regarding compensation for our executive officers and executive compensation programs are reviewed, discussed, and approved by the Board of Directors. All compensation decisions are determined following a detailed review and assessment of external competitive data, the individual's contributions to our success, any significant changes in role or responsibility, and internal equity of pay relationships.
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation earned by or paid to the executive officers for the last three fiscal years. None of our officers earned more than $100,000 in the last three fiscal years.
============================================================================================================
ANNUAL LONG TERM COMPENSATION
COMPENSATION
============================================================================================================
Awards Payouts
============================================================================================================
Other Securities
Annual Restricted Underlying
Compen- Stock Options/ LTIP All Other
Salary Bonus sation Awards SARs Payouts Compensation
Year ($) ($) ($) ($) (#) ($) ($)
============================================================================================================
Sholeh 2002 $ 75,000[1] $0 $0 $0 -0- $0 $0
Hamedani, 2003 $180,000[2] $0 $0 -0- $0 $0
President,
CEO, CFO
============================================================================================================
Alan Schram, 2002 $142,848[4] $0 $0 $0 -0- $0 $0
President,
Secretary and
Treasurer[3]
------------------------------------------------------------------------------------------------------------
2001 $ 0 $0 $0 $0 -0- $0 $0
------------------------------------------------------------------------------------------------------------
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[2] The officer did not charge the Company for her services - this amount was the estimated fair market value for comparable services and was recorded as contributed to capital as of December 31, 2003..
[3] Resigned August 12, 2002.
[4] In July 2002, the Company (which was then named DWC Installations) sold 1,166,755 newly issued shares of its common stock to Shadrack Films, Inc. (then named The Children's Internet, Inc.) for $150,000. This was the transaction in which the current management assumed control of the Company. Out of this $150,000 received by the Company, Alan Schram received $142,848 for his services to the Company.
PRINCIPAL STOCKHOLDERS
The following table sets forth the shareholdings of those persons who: (i) own more than 5% of our common stock as of April 2, 2004 with the number of outstanding shares at 2,287,755; (ii) are our officers or directors; and (iii) all officers and directors as a group:
----------------------------------------- ----------------- -------------- ---------------
PERCENTAGE
PERCENTAGE BENEFICIALLY
BENEFICIALLY OWNED FOLLOWING
OWNED PRIOR TO MAXIMUM
NAME NUMBER OF SHARES OFFERING[1] OFFERING[5]
----------------------------------------- ----------------- -------------- ---------------
Sholeh Hamedani, President, CEO, CFO, 1,166,755[3] 51.0% 18.6%
Director[2]
----------------------------------------- ----------------- -------------- ---------------
Jamshid Ghosseiri, Ph.D., Secretary, -0- -0- -0-
Director[2]
----------------------------------------- ----------------- -------------- ---------------
Tyler Wheeler, CTO, Director[2] -0- -0- -0-
----------------------------------------- ----------------- -------------- ---------------
Roger Campos, Esq., CTO, Director[2] -0- -0- -0-
----------------------------------------- ----------------- -------------- ---------------
Dale Boehm, Director[2] -0- -0- -0-
----------------------------------------- ----------------- -------------- ---------------
All Officers and Directors as a group
(5 people) 1,166,755 51.0% 18.6%
----------------------------------------- ----------------- -------------- ---------------
Shadrack Films, Inc. 1,166,755[3] 51.0% 18.6%
----------------------------------------- ----------------- -------------- ---------------
Steve Sowieja[2] 210,000[4] 9.2% 3.3%[6]
----------------------------------------- ----------------- -------------- ---------------
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[1] Except as otherwise indicated, we believe that the beneficial owners of Common Stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.
[2] c/o 5000 Hopyard Rd., Suite 320, Pleasanton, California 94588.
SELLING STOCKHOLDERS
1,118,500 shares of common stock offered under this prospectus may be sold by the holders. We will not receive any of the proceeds from sales of shares offered under this prospectus by stockholders.
All costs, expenses and fees in connection with the registration of the selling stockholders' shares will be borne by us. All brokerage commissions, if any attributable to the sale of shares by selling stockholders will be borne by the stockholders.
The selling stockholders are offering a total of 1,118,500 shares of our stock common stock. The selling stockholders are not affiliated with broker-dealers. The following table sets forth:
a. the name of each person who is a selling stockholder;
b. the number of securities owned by each such person at the time of this offering; and
c. the number of shares of common stock such person will own after the completion of this offering.
The column "Shares Owned After the Offering" gives effect to the sale of all the shares of common stock being offered by this prospectus, including the 4,000,000 shares being offered for sale in this offering by The Children's Internet.
NO. OF
SHARES SHARES OWNED PRIOR SHARES OWNED AFTER
SELLING STOCKHOLDER OFFERING TO THE OFFERED THE OFFERING
------------------- -------- -------------- ------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
------ ---------- ------ ----------
Steve Sowieja 110,000 110,000 4.81% 0 0%
Cities Electric[1] 100,000 100,000 4.37% 0 0%
Reza Mizban 71,934 71,934 3.14% 0 0%
Ronald Jones 70,221 70,221 3.07% 0 0%
Larry Wheeler 68,542 68,542 3.00% 0 0%
Farzin Cigarchi 68,508 68,508 2.99% 0 0%
Phoenix Fund Partners, LP[2] 60,000 60,000 2.62% 0 0%
Leona Holdings, LLC[3] 58,335 58,335 2.55% 0 0%
Five Star Financial[4] 50,000 50,000 2.19% 0 0%
Onyx Holdings[5] 50,000 50,000 2.19% 0 0%
Alan G. Schill 32,160 32,160 1.41% 0 0%
Fouad Batah 23,000 23,000 1.01% 0 0%
Norman Shumate 20,000 20,000 * 0 0%
William Gonte 20,000 20,000 * 0 0%
Jeffrey Parker 15,000 15,000 * 0 0%
Marc Williams 15,000 15,000 * 0 0%
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Richard Kwiecinski 15,000 15,000 * 0 0% J. Scott Phillips 12,500 12,500 * 0 0% Jet 1 Profit Sharing[6] 12,500 12,500 * 0 0% Charnie Stein 10,000 10,000 * 0 0% J.H. & Eva Leta Colbert 10,000 10,000 * 0 0% Joan O'Brien 10,000 10,000 * 0 0% Mark Peltier 10,000 10,000 * 0 0% Paul Michael Perez 10,000 10,000 * 0 0% Timothy M. Nash 10,000 10,000 * 0 0% Jill Morton 8,000 8,000 * 0 0% Robert Hannabery 6,500 6,500 * 0 0% Fred & Ardith Frederickson 6,000 6,000 * 0 0% Margaret Altman 6,000 6,000 * 0 0% A Nose for Sound[7] 5,000 5,000 * 0 0% Aldo Cataldo 5,000 5,000 * 0 0% Bonnie Elzinga 5,000 5,000 * 0 0% Burt Duer 5,000 5,000 * 0 0% Diane Lupo 5,000 5,000 * 0 0% Edward & Sarah Kochevar 5,000 5,000 * 0 0% Gina Gubbins-Mather 5,000 5,000 * 0 0% Gregory & Susan Schwem 5,000 5,000 * 0 0% James & Juanita Allen 5,000 5,000 * 0 0% John E. and Margaret L. DeBates 5,000 5,000 * 0 0% Judtih Geyer 5,000 5,000 * 0 0% Lloyd & Wilma Jensen 5,000 5,000 * 0 0% Luis Eduardo Ortiz 5,000 5,000 * 0 0% Merrill & Ruth Schmieding 5,000 5,000 * 0 0% Michael L. Eastop 5,000 5,000 * 0 0% Raymond A Schmitz, Jr. 5,000 5,000 * 0 0% Raymond A Schmitz,, III 5,000 5,000 * 0 0% Ronald Lee 5,000 5,000 * 0 0% William Scotts 5,000 5,000 * 0 0% Phil W. and Joan F. Ensor 4,500 4,500 * 0 0% Attilio Caliendo 4,000 4,000 * 0 0% Ellen S. Frank 4,000 4,000 * 0 0% Valeria Howard 4,000 4,000 * 0 0% Milena Arantes 3,500 3,500 * 0 0% Dharmendra I. Patel 3,000 3,000 * 0 0% |
Ed Hidrogo 2,750 2,750 * 0 0% Bernice Fay Tugman 2,500 2,500 * 0 0% Francesca Caliendo 2,500 2,500 * 0 0% Gary & Merial Henson 2,500 2,500 * 0 0% Joseph Ceglio 2,500 2,500 * 0 0% Michael Cutro 2,500 2,500 * 0 0% Ronald Summers 2,500 2,500 * 0 0% Thomas P. Ksiezopolski 2,500 2,500 * 0 0% Todd Denenberg 2,500 2,500 * 0 0% Paul G. and Kathie L. Haertling 2,000 2,000 * 0 0% Rafael Caliendo 2,000 2,000 * 0 0% Robert Skaggs 1,300 1,300 * 0 0% Edward P. and Patricia E. 1,250 1,250 * 0 0% Morrissey Robert and Elizabeth Graham 1,250 1,250 * 0 0% A. Q. Joffe 1,000 1,000 * 0 0% Dan Sidenberg 1,000 1,000 * 0 0% Donald & Tamra Miller 1,000 1,000 * 0 0% Kevin Hannabery 1,000 1,000 * 0 0% Kimberly A. Petilli 1,000 1,000 * 0 0% Linda J. Morra 1,000 1,000 * 0 0% Lori Geller Warshaw 1,000 1,000 * 0 0% Michael Perlmutter 1,000 1,000 * 0 0% Russell Summers 1,000 1,000 * 0 0% Marc Launey 750 750 * 0 0% J. Tim Gonzales 500 500 * 0 0% Melissa W. Wilson 500 500 * 0 0% |
* Less than 1%.
1. The principal of Cities Electric is Steve Sowieja.
2. The principals of Phoenix Fund Partners, LP are John Czeck, Beth Turk and
Mary Butler
3. The principal of Leona Holdings, LLC is Jayne Carper.
4. The principal of Five Star Financial is Peter Perez.
5. The principal of Onyx Holdings is Cort Poyner.
6. The principal of Jet 1 Profit Sharing is J. Scott Phillips.
7. The principal of A Nose for Sound is Bruce Gerstein.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our President, Chief Executive Officer, and one of our Directors, Sholeh Hamedani, is the sole shareholder of our parent company, Shadrack Films, Inc. Ms. Hamedani was also President of Two Dog Net, Inc., the owner of The Children's Internet(R) technology until August 1, 2002. Ms. Hamedani also owns approximately 10% of the total outstanding shares of Common Stock of Two Dog Net, Inc.
Ms Hamedani's father, Nasser Hamedani, is the current President, Chairman and majority shareholder of Two Dog Net, Inc.
On June 28, 2002, we entered into a Consulting Agreement with Alan Schram. This agreement provided for Alan Schram to provide consulting services to us. In return for his services, the agreement entitled Alan Schram to receive 25,000 shares of our common stock at the completion of the agreement's four month term. We are currently in negotiations with Mr. Schram to settle our obligations under the terms of this agreement. As of the date hereof, these shares have not been issued. Alan Schram is our former President, Secretary, Chief Financial Officer and Director.
On July 3, 2002, we entered into an agreement with Shadrack Films, Inc. Pursuant to the agreement, we sold 1,166,755 newly issued shares of our common stock to Shadrack Films, Inc. in exchange for an aggregate purchase price of $150,000. Sholeh Hamedani is the sole shareholder of Shadrack Films, Inc.
On September 10, 2002, we entered into a License Agreement with Two Dog Net, Inc. to license The Children's Internet(R) technology and intellectual property. We paid $15,500 in cash to Two Dog Net in consideration for the License Agreement. This agreement was subsequently cancelled and on March 3, 2003, we entered into a new Wholesale Sales & Marketing Agreement with Two Dog Net. Under the terms of this agreement, we will pay Two Dog Net$3.00 per month for each user accessing The Children's Internet(R) service.
The Agreement also provides that we will pay Two Dog Net $3.79 per month for each user accessing Internet dial-up service, but we have no plans to offer dial-up service.
In a Stock Purchase Agreement dated October 11, 2002 and in reliance on an exemption from registration pursuant to Section 4(1) of the Securities Act of 1933,our original shareholders sold 1,118,500 of their shares of our common stock to various purchasers, two of who are related to our management, Nasser Hamedani, Sholeh Hamedani's father, and Soraiya Hamedani, Sholeh Hamedani's sister. Some of these purchasers were introduced to the original shareholders by Sholeh Hamedani, our President, Chief Financial Officer, and a Director. Some of these purchasers resold their shares to unrelated third parties, relying on an exemption from registration pursuant to Section 4(1) of the Securities Act of 1933. A portion of the proceeds received from the stock sale by the purchasers was in turn loaned to Shadrack Films, Inc., our parent company. Shadrack Films used these funds to finance our initial operations thus far. These amounts are reflected on the financial statements as "Due to Parent Company." The original shareholders received their shares from us in reliance on the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933.
One of our shareholders, Tim Nash was an independent authorized distributor of The Children's Internet(R) and promoted our product on his web site, www.kidssafenet.com. Mr. Nash is no longer an independent authorized distributor for us since July 15, 2003 and he has since taken down his web site. Mr. Nash owns 10,000 shares of our common stock.
Our offices are furnished to us by our parent company, Shadrack Films, Inc. of which Sholeh Hamedani, our President, Chief Financial Officer, and a Director, is the sole shareholder.
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of 75,000,000 shares of common stock, par value $.001 and 10,000,000 shares of preferred stock, par value $.001, of which respectively 2,287,755 and zero are issued and outstanding as of April 2, 2004. We have approximately 90 holders of our common stock prior to this offering. There are no outstanding options or warrants to purchase, or securities convertible into our common shares.
COMMON STOCK
Each holder of our common stock is entitled to a pro rata share of cash distributions made to shareholders, including dividend payments. The holders of our common stock are entitled to one vote for each share of record on all matters to be voted on by shareholders. The holders of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors from funds legally available for that purpose. Cash dividends are at the sole discretion of our Board of Directors. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of our liabilities and after provision has been made for each class of stock, if any, having any preference in relation to our common stock. Holders of shares of our common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock. Holders of shares of our common stock do not have any cumulative voting rights.
PREFERRED STOCK
Our Board of Directors has the authority, without action by our stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to designate the rights, preferences and privileges of each series, any or all of which may be greater than the rights of the common stock. The effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock might include, among other things, restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock and delaying or preventing a change in our control without further action by the stockholders. As of the date hereof, no shares of preferred stock are issued and outstanding. The preferred stock does not have any cumulative voting rights.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our shares of common stock is Transfer Online, 317 SW Alder Street, 2nd Floor, Portland, OR 97204
MARKET FOR COMMON EQUITY
Immediately prior to this offering, there was no public market for our common stock. We intend to attempt to have our shares of common stock quoted on the Over the Counter Bulletin Board (OTCBB). However, there is no assurance that we will find a broker willing to file the Form 211
necessary for our shares to be considered for quotation on the OTCBB or that our shares will qualify to be listed on the OTCBB if a Form 211 is filed.
All of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act. If shares are purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act, their sales of shares would be subject to the limitations and restrictions that are described below.
All of the remaining shares of common stock outstanding were issued and sold by us in reliance on an exemption from the registration requirements of the Securities Act and will become eligible for sale in the public market pursuant to Rule 144 as described below.
Approximate Shares Eligible
Relevant Dates for Future Sale Comment
------------------------------- --------------------------- --------------------------------------
On the date of this prospectus 5,118,500 Freely tradable shares sold in
this offering if maximum
offering is sold
Pursuant to Rule 144 upon 2,287,755 Shares salable under Rule 144
expiration of the applicable or Rule 144(k)
holding period
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RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will equal approximately 60,800 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Bulletin Board during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to other requirements regarding the manner of sale, notice filing, and the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell such shares without complying with the manner of sale, notice filing, volume limitation or notice provisions of Rule 144.
PLAN OF DISTRIBUTION
DIRECT PUBLIC OFFERING
We are offering for sale a maximum of 4,000,000 shares of our common stock in a self-underwritten offering directly to the public at the price of $2.00 per share. This offering will terminate 12 months after this registration statement is declared effective by the Securities and Exchange Commission, provided we may extend the offering for up to one year following the twelve-month offering period. We have not conducted any discussions or negotiations for the sale of all or any portion of those 4,000,000 shares of our common stock. There is no minimum number of shares that must be purchased by each prospective purchaser.
We anticipate that Sholeh Hamedani, our President, Chief Executive Officer, Chief Financial Officer, and Director, will participate in the offer and sale of our common stock, and rely on the safe harbor from broker-dealer registration set out in Rule 3a4-1 under the Securities Exchange Act of 1934. Although Ms. Hamedani is an associated person to us as that term is defined in Rule 3a4-l under the Exchange Act, she is deemed not to be a broker for the following reasons:
- Ms. Hamedani is not subject to a statutory disqualification as that term is defined in Section (a)(39) of the Exchange Act at the time of her participation in the sale of our securities.
- Ms. Hamedani will not be compensated for her participation in the sale of our securities by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities.
- Ms. Hamedani is not an associated person of a broker or dealer at the time of participation in the sale of our securities.
- Ms. Hamedani is not associated with a broker or dealer and does not have an arrangement with a broker or dealer to effect transactions in securities.
- Ms. Hamedani does not participate in selling an offering of securities for any issuer more than once every 12 months other than in reliance on paragraph (a)4(i) or (a)4(iii) of Section 3a4-1 of the Securities Exchange Act of 1934, except that for securities issued pursuant to Rule 415 under the Securities Act of 1933, the 12 months shall begin with the last sale of any security included within one rule 415 registration.
Ms. Hamedani will restrict her participation to the following activities:
- Preparing any written communication or delivering any communication through the mails or other means that does not involve oral solicitation by the President of a potential purchaser;
- Responding to inquiries of potential purchasers in communications initiated by the potential purchasers, provided, however, that the content of responses are limited to information contained in this registration statement and any amendments filed hereto
filed under the Securities Act or other offering document; and
- Performing ministerial and clerical work involved in effecting any transaction.
We have not retained a broker or dealer for the sale of securities being offered. In the event we retain a broker or dealer who may be deemed an underwriter, we will file an amendment to the registration statement.
Our officers and directors are entitled to purchase offered shares. However, none of our officers or directors has indicated that they will purchase any of the offered shares and, therefore, we do not believe that any of our officers or directors will purchase any of the offered shares. If any of our officers or directors decides to purchase offered shares, we do not intend to loan such officer or director the funds necessary to purchase offered shares.
The shares of common stock we are offering have not been registered for sale under the securities laws of any state as of the date of this prospectus. We intend to register or qualify the offered shares in California.
Under the Securities Exchange Act of 1934 and the regulations thereunder, any person engaged in a distribution of the shares of our common stock offered by this prospectus may not simultaneously engage in market making activities with respect to our common stock during the applicable "cooling off" periods prior to the beginning of such distribution.
SELLING STOCKHOLDERS
The selling stockholders will sell their shares from time to time in negotiated transactions at a price of $2.00 per share, provided that in the event that our shares become quoted on the OTC Bulletin Board, selling stockholders may sell their shares at then-prevailing prices or in privately negotiated transactions. Such transactions may or may not involve NASD licensed broker-dealers. There is no minimum investment amount.
The selling stockholders may effect such transactions by selling common stock directly to purchasers or to or through broker-dealers, which may act as agents. Such broker-dealers may receive compensation in the form of discounts, concessions, or commissions from the selling stockholders. They may also receive compensation from the purchasers of common shares for whom such broker-dealers may act as agents. Such compensation as to a particular broker-dealer might be in excess of customary commissions.
Each selling stockholder and any broker-dealer that acts in connection with the sale of shares of common stock may be deemed to be, an "underwriter" within the meaning of Section 2(11) of the Securities Act of 1933.
The shares are being offered as part of a continuous offering under Rule 415 of Regulation C under the Securities Act of 1933. Our management expects that the shares will be sold within one year of the commencement of the offering and expects to update this Prospectus for any material changes as needed.
We have notified the selling stockholders of the prospectus delivery requirements for sales made pursuant to this prospectus and that, if there are material changes to the stated plan of distribution, a post-effective amendment with current information would need to be filed before offers are made and no sales could occur until such amendment is declared effective.
Selling stockholders also may resell all or a portion of the common shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided they meet the criteria and conform to the requirements of such rule.
APPLICABILITY OF "PENNY STOCK RULES"
We anticipate that, if our common stock is accepted for quotation on the Bulletin Board system, it will trade at less than $5.00 per share for an indeterminate amount of time. Therefore, the SEC "penny stock" rules will govern the trading in our common stock. These rules require, among other things, that any broker engaging in a transaction in our securities provide its customers with the following:
- a risk disclosure document,
- disclosure of market quotations, if any,
- disclosure of the compensation of the broker and its salespersons
in the transaction, and
- monthly account statements showing the market values of our
securities held in the customer's accounts.
The broker must provide the bid and offer quotations and compensation information before effecting the transaction. This information must be contained on the customer's confirmation. Generally, brokers subject to the "penny stock" rules when effecting transactions in our securities may be less willing to do so. This may make it more difficult for investors to dispose of our common stock. In addition, the broker prepares the information provided to the broker's customer. Because we do not prepare the information, we cannot assure you that such information is accurate, complete or current.
INDEMNIFICATION
Our certificate of incorporation and by-laws provide that our officers and
directors will not be personally liable to us or our stockholders for monetary
damages for breach of the fiduciary duty of care as a director, including
breaches which constitute gross negligence. By its terms and in accordance with
the Nevada Revised Statutes, however, this provision does not eliminate or limit
the liability of a director (i) for breach of the director's duty of loyalty to
us or our stockholders, (ii) for acts or omissions not in good faith or which
involve international misconduct or a knowing violation of law, (iii) for
unlawful payments or dividends or unlawful stock repurchases or redemptions,
(iv) for any improper benefit or (v) for breaches of a director's
responsibilities under the federal securities laws.
Our certificate of incorporation also provides for indemnification to the fullest extent provided by the Nevada Revised Statutes.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, the company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the common stock offered by this prospectus was passed upon for us by Oswald & Yap, a professional corporation, Irvine, California.
EXPERTS
The financial statements of The Children's Internet, Inc. included in this prospectus to the extent and for the periods indicated in their report, have been audited by Stonefield Josephson, Inc., Santa Monica, California, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until 90 days after the commencement of the offering, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
WHERE YOU CAN FIND MORE INFORMATION
We are presently subject to the reporting requirements of the Securities Exchange Act of 1934 and file quarterly and annual reports and other documents with the Securities and Exchange Commission. We will annually send an annual report to shareholders included audited financial statements. We have filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act for the shares of common stock in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to our common stock and us, we refer you to the registration statement and the exhibits that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits that were filed with the registration statement may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the SEC upon payment of the prescribed fee. Information regarding the operation of the Public Reference Room may be obtained by calling the Commission at 1(800) SEC-0330. The Securities and Exchange Commission maintains a website that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the site is http://www.sec.gov.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors............................................... 1 Balance Sheet -- December 31, 2003........................................... 2 Statements of Operations -- December 31, 2003 and 2002....................... 3 Statements of Stockholders' Deficit -- December 31, 2003..................... 4 Statements of Cash Flows -- December 31, 2003 and 2002....................... 5 Notes to Financial Statements -- December 31, 2003......................... 6-9 |
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF THE CHILDREN'S INTERNET, INC.:
We have audited the accompanying balance sheet of The Children's Internet, Inc (A Development Stage Company) as of December 31, 2003 and the related statements of operations, stockholders' deficit and cash flows for each of the two years in the period ended December 31, 2003 and for the period from September 25, 1996 (inception) to December 31, 2003. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Children's Internet, Inc. as of December 31, 2003 and the results of its operations and its cash flows for each the two years in the period ended December 31, 2003 and for the period from September 25, 1996 (inception) to December 31, 2003 in conformity with generally accepted accounting principles in the United States.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 of the accompanying financial statements, the Company has no established source of revenue and has no funds to pay its current liabilities. These issues raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to this matter is discussed in Note 1. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Stonefield Josephson, Inc. STONEFIELD JOSEPHSON, INC. Certified Public Accountants Santa Monica, California February 26, 2004 |
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
BALANCE SHEET
DECEMBER 31,
2003
ASSETS
TOTAL ASSETS $ -
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts Payable and Accrued Expenses $ 99,000
Due to Parent Company 205,000
------------
Total Current Liabilities 304,000
------------
STOCKHOLDERS' DEFICIT
Preferred Stock, $0.001 par value; 10,000,000 shares authorized; zero shares
issued and outstanding.
Common stock, $0.001 par value; 75,000,000 shares authorized; 2,287,755 shares
issued and outstanding 2,000
573,000
Deficit accumulated during the development stage (879,000)
------------
TOTAL STOCKHOLDERS' DEFICIT (304,000)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ -
============
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The accompanying notes are an integral part of the financial statements.
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
FOR THE PERIOD
SEPTEMBER 25, 1996
(INCEPTION) TO
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
-------------------------------- ------------------
2003 2002 2003
---------- ---------- ----------
REVENUE $ - $ - $ -
General Selling and Administrative Expenses 478,000 392,000 (879,000)
---------- ---------- ----------
Operating Loss before provision for income taxes (478,000) (392,000) (879,000)
Provision for Income taxes - - -
---------- ---------- ----------
NET LOSS $ (478,000) $ (392,000) $ (879,000)
========== ========== ==========
Net Loss per Common Share
- basic and diluted $ (0.21) $ (0.23) $ (0.64)
========== ========== ==========
Weighted Average Number of Common
Shares Outstanding
- basic and diluted 2,287,755 1,715,267 1,367,379
========== ========== ==========
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The accompanying notes are an integral part of the financial statements.
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIT
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT STOCKHOLDERS'
COMMON STOCK CAPITAL STAGE DEFICIT
----------------------- ---------- ---------- ------------
SHARES AMOUNT
--------- -------
Balance, September 25, 1996 - $ - $ - $ - $ -
Issuance of common stock
for cash on September 24, 1996
at $0.005 per share 1,121,000 1,000 4,000 - 6,000
Net Loss (6,000) (6,000)
--------- ------- --------- ---------- -----------
Balance, December 31, 1996 1,121,000 1,000 4,000 (6,000) -
Net Loss - - - - -
--------- ------- --------- ---------- -----------
Balance, December 31, 1997 1,121,000 1,000 4,000 (6,000) -
Net Loss - - - - -
--------- ------- --------- ---------- -----------
Balance, December 31, 1998 1,121,000 1,000 4,000 (6,000) -
Net Loss - - - - -
--------- ------- --------- ---------- -----------
Balance, December 31, 1999 1,121,000 1,000 4,000 (6,000) -
Net Loss - - - (3,000) (3,000)
Expenses paid by former office on behalf of company 3,000 3,000
--------- ------- --------- ---------- -----------
Balance, December 31, 2000 1,121,000 1,000 7,000 (9,000) -
Net Loss - - - - -
--------- ------- --------- ---------- -----------
Balance, December 31, 2001 1,121,000 1,000 7,000 (9,000) -
Issuance of common stock
for cash on July 3, 2002
at $0.1286 per share 1,166,755 1,000 149,000 150,000
Expenses paid by former officer on behalf of company 2,000 2,000
Services performed as capital contribution 125,000 125,000
Net Loss - - - (392,000) (392,000)
--------- ------- --------- ---------- -----------
Balance, December 31, 2002 2,287,755 2,000 283,000 (401,000) (116,000)
Services performed as capital contribution 290,000 290,000
Net Loss - - - (478,000) (478,000)
--------- ------- --------- ---------- -----------
Balance, December 31, 2003 2,287,755 $ 2,000 $ 573,000 $ (879,000) $ (304,000)
========= ======= ========= ========== ===========
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The accompanying notes are an integral part of the financial statements.
THE CHILDREN'S INTERNET, INC.
(Formerly D.W.C. Installations)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD
SEPTEMBER 25,
1996
(INCEPTION) TO
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------- --------------
2003 2002 2003
---------- ---------- --------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $ (478,000) $ (392,000) $ (879,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Services performed as capital contribution 290,000 125,000 414,000
Expenses paid by former officer on behalf of company 2,000 5,000
Increase in liabilities
Accounts payable and accrued expenses 36,000 62,000 99,000
Due to Parent Company 152,000 53,000 205,000
---------- ---------- ----------
Net cash used in operating activities - (150,000) (156,000)
---------- ---------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Issuance of common stock 150,000 156,000
---------- ---------- ----------
Net cash provided by financing activities - 150,000 156,000
---------- ---------- ----------
Net change in cash and cash equivalents - - -
Cash and cash equivalents - beginning of period - - -
---------- ---------- ----------
Cash and cash equivalents - end of period $ - $ - $ -
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year -
Interest paid $ - $ - $ -
========== ========== ==========
Income taxes paid $ - $ - $ -
========== ========== ==========
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The accompanying notes are an integral part of the financial statements.
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Children's Internet, Inc. (formerly D.W.C. Installations ("Company") is currently a development stage company under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 7. The Company was incorporated under the laws of the State of Nevada on September 25, 1996.
On July 3, 2002, Shadrack Films, Inc. purchased 1,166,755 newly issued shares of our common stock for $150,000, thereby obtaining a majority ownership interest and becoming our parent company. Total issued and outstanding shares were increased to 2,287,755 as a result of this sale.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern. At present, although the Company has signed contracts establishing revenue sources, the Company has not generated any revenues from these established sources of revenue. This factor raises substantial doubt about the Company's ability to continue as a going concern. Without realization of additional capital or established revenue sources, it would be unlikely for the Company to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amount, or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. It is management's objective to seek additional capital through a SB-2 Registration Statement which the Company has filed with the SEC and they hope will raise additional capital (see Note 4 - SB-2 Registration Statement).
USE OF ESTIMATES
The preparation of financial statement in conformity with accounting principals generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts 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. The Company has estimated the fair market value of the cost of wages, if paid, for the services rendered by its officer and an outside consultant.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are provided for based on the liability method of accounting pursuant to SFAS No. 109, "Accounting for Income Taxes". Deferred income taxes, if any, are recorded to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end.
LOSS PER SHARE
SFAS No. 128, "Earnings (Loss) Per Share", requires the presentation of basic loss per share and diluted loss per share. The computation of basic loss per share is computed by dividing loss available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. As of December 31, 2003, the Company has no potentially dilutive common shares outstanding.
COMPREHENSIVE INCOME
As of December 31, 2003, the Company has no items that represent comprehensive income and therefore, has not included a Statement of Comprehensive Income in the accompanying financial statements.
SEGMENT REPORTING
The Company identifies its operating segments based on how management internally evaluates separate financial information (if available), business activities and management responsibility. The Company believes it operates in a single business segment. Through December 31, 2003 there have been no foreign operations.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (an interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements). Interpretation 46 addresses consolidation by business enterprises of entities to which the usual condition of consolidation described in ARB-51 does not apply. The Interpretation changes the criteria by which one company includes another entity in its consolidated financial statements. The general requirement to consolidate under ARB-51 is based on the presumption that an enterprise's financial statements should include all of the entities in which it has a controlling financial interest (i.e., majority voting interest). Interpretation 46 requires a variable interest entity to be consolidated by a company that does not have a majority voting interest, but nevertheless, is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A company that consolidates a variable interest entity is called the primary beneficiary of that entity.
In December 2003 the FASB concluded to revise certain elements of FIN 46, primarily to clarify the required accounting for interests in variable interest entities. FIN-46R replaces FIN-46, that was issued in January 2003. FIN-46R exempts certain entities from its requirements and provides for special effective dates for entities that have fully or partially applied FIN-46 as of December 24, 2003. In certain situations, entities have the option of applying or continuing to apply FIN-46 for a short period of time before applying FIN-46R. In general, for all entities that were previously considered special purpose entities, FIN 46 should be applied in periods ending after December 15, 2003. Otherwise, FIN 46 is to be applied for registrants who file under Regulation SX in periods ending after March 15, 2004, and for registrants who file under Regulation SB, in periods ending after December 15, 2004. The Company does not expect the adoption to have a material impact on the Company's financial position or results of operations.
During April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of this Statement should be applied prospectively. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases or sales of when issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The Company does not participate in such transactions, however, is evaluating the effect of this new pronouncement, if any, and will adopt FASB 149 within the prescribed time.
During May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for public entities at the beginning of the first interim period beginning after June 15, 2003. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a freestanding financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements. The Company is evaluating the effect of this new pronouncement and will adopt FASB 150 within the prescribed time.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" which replaces the previously issued Statement. The revised Statement increases the existing disclosures for defined benefit pension plans and other defined benefit postretirement plans. However, it does not change the measurement or recognition of those plans as required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Specifically, the revised Statement requires companies to provide additional disclosures about pension plan assets, benefit obligations, cash flows, and benefit costs of defined benefit pension plans and other defined benefit postretirement plans. Also, companies are required to provide a breakdown of plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and target allocation percentages for these asset categories. The Company has implemented this pronouncement and has concluded that the adoption has no material impact to the financial statements.
NOTE 2 - SALES AND MARKETING AGREEMENT
On September 10, 2002, the Company entered into a renewable five year royalty and licensing agreement with Two Dog Net, Inc. ("TDN"). Under the terms of that license agreement with TDN, in addition to the monthly royalty payment due, the Company was required to pay an additional $2,000,000 no later than September 10, 2004. The Company capitalized this amount for the technology license and established an amortization period of three years, the expected useful life of the license. On November 5, 2002, the Company exchanged two million shares of its Series A Convertible Preferred Stock for the long-term debt owed.
This original agreement did not reflect the true intent of the parties and on March 3, 2003, the parities replaced the royalty and license agreement with a wholesale sales & marketing agreement with the same effective date of September 10, 2002. The new agreement was for an exclusive and renewable five year wholesale sales and marketing agreement with TDN to be the exclusive marketers of their proprietary and patent pending secured internet service for children pre-school to junior high called The Children's Internet(R) and an internet dial-up service. Under the terms of the agreement, the Company can continue the agreement for an additional five years on the same terms unless either party terminates by written notice to the other party no less than one year before the end of the term. Under the terms of the sales and marketing agreement with TDN, the Company will pay TDN a fee per month per subscriber for the services subscribed. The effect of the change was to remove long term debt and an intangible asset net of accumulated amortization from the balance sheet and to reduce the net loss for the three months ended September 30, 2002 by the amount of the amortization ($53,118) and to reduce stockholders' deficit at September 30, 2002 by a like amount. All financial statements for the period ended September 30, 2002 were restated.
NOTE 3 - RELATED PARTY TRANSACTIONS
In the first half of the year, the Parent Company provided for the office space
utilized by the Company and paid for the Companies utility costs. The Company
has accrued a payable, included in Due to Parent Company, for reimbursement of
such costs. In the second half of the year when the Parent Company's lease
expired, the Company entered into a lease agreement with Hill Physicians Medical
Group, Inc., a California corporation to continue to occupy the same office
space consisting of 2,759 square feet. The initial term of this sublease
commenced on July 1, 2003 and expired on January 31, 2004. On February 19, 2004,
the Company entered into a settlement agreement with their landlord to continue
to occupy the office space on a rent-free basis until March 22, 2004 (see Note 7
- Subsequent Events).
The Company's President, Chief Executive Officer, Chief Financial Officer, and Director, Sholeh Hamedani and an
outside financial consultant have provided services to the Company at a fair market value of $290,000 and $125,000 during the twelve months ended December 31, 2003 and 2002 respectively, and will not seek payment for the services provided.
The Company, Shadrack and TDN are related parties, in that, the Company's President, Chief Executive Officer, Chief Financial Officer, and Director, Sholeh Hamedani, is the sole shareholder of Shadrack which owns 51% of the Company's common stock. Ms. Hamedani was President of TDN until August 1, 2002. In addition, the current President, Chairman and Founder of TDN, Nasser Hamedani, is the father of the Company's President, Chief Executive Officer, Chief Financial Officer, and Director, Sholeh Hamedani.
On June 28, 2002, the Company entered into a Consulting Agreement with Alan Schram. This agreement provides for Alan Schram to provide consulting services to the Company. In return for his services, the agreement entitles Alan Schram to receive 25,000 shares of the Company's common stock at the completion of the agreement's four month term. The consulting services have been accrued in other expenses. The Company is currently in negotiations with Mr. Schram to settle its obligations under the terms of this agreement. As of the date hereof, these shares have not been issued. Alan Schram is the Company's former President, Secretary, Chief Financial Officer and Director.
NOTE 4 - SB-2 REGISTRATION STATEMENT
On February 10, 2003, the Company filed a Form SB-2 registration statement offering for sale of up to a maximum of 4,000,000 shares of the Company's common stock directly to the public. There is no underwriter involved in this offering. The shares are being offered without any underwriting discounts or commissions. The purchase price is $2.00 per share. If all of the shares offered by the Company are sold, the proceeds will be $8,000,000. The Company has received comments from the SEC on their filing and has responded to those comments and filed amendments to the registration statement in July, September and December 2003 and February 2004.
NOTE 6 - COMMITMENT
On September 30, 2003, the Company signed a 13-month colocation to house the Company's search engine, servers and related equipment. For the year ended December 31, 2003 the total amount paid was $5,800.
NOTE 7 - SUBSEQUENT EVENTS
On February 13, 2004 the Company received notice that their landlord, Hill Physicians Medical Group, Inc. had filed an unlawful detainer action against them on February 6, 2004 in the Contra Costa County Superior Court as case number WS04-0238. The landlord alleges that the lease for the office space expired January 31, 2004 and was requesting the court to award it possession of the premises and pay the sum of $8,746.52 for rent and other charges due pursuant to the lease. On February 19, 2004 the Company signed a Mutual Settlement Agreement and Release allowing the Company to continue to occupy the office space on a rent-free basis through March 22, 2004 and providing for a Stipulation for Entry of Judgment in the amount of $8,746.52 against the Company in the event they fail to vacate this office space on March 22, 2004. Other then this dispute with the landlord, the Company is not aware of any other pending or threatened litigation that could have a material adverse effect on the financial statements.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation and by-laws provide that our officers and directors will not be personally liable to the company or our stockholders for monetary damages for breach of the fiduciary duty of care as a director, including breaches which constitute gross negligence. By its terms and in accordance with the Nevada Revised Statutes, however, this provision does not eliminate or limit the liability of a director (i) for breach of the director's duty of loyalty to the company or our stockholders, (ii) for acts or omissions not in good faith or which involve international misconduct or a knowing violation of law, (iii) for unlawful payments or dividends or unlawful stock repurchases or redemptions, (iv) for any improper benefit or (v) for breaches of a director's responsibilities under the federal securities laws.
Our certificate of incorporation also provides for indemnification to the fullest extent provided by the Nevada Revised Statutes.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the company pursuant to the foregoing provisions, or otherwise, the company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by us in connection with the registration of our shares is as follows:
SEC Filing Fee......................... $ 942
Accounting Fees and Expenses........... $ 15,000
Legal Fees and Expenses................ $ 25,000
Printing Costs......................... $ 2,500
Other Contingent Costs................. $ 1,558
Total............................. $ 45,000
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ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On or about July 3, 2002, we issued 1,166,755 shares of common stock to The Children's Internet, Inc. for a purchase price of $150,000. This transaction is described in our Information Statement Pursuant to Section 14(f) of the Securities Exchange Act of 1934 and Rule 14f-1 thereunder filed on August 9, 2002, and our Current Report on Form 8-K filed with the SEC on July 18, 2002. There was no underwriter involved in this issuance and no commissions were paid to any person in connection with this issuance. As this issuance was to a single, sophisticated party and did not involve a public offering, this issuance was exempt from the registration provisions of the Securities Act of 1933 pursuant to Section 4(2).
Pursuant to a Consulting Agreement, dated June 28, 2002, we agreed to issue 25,000 shares at the completion of the term of the Consulting Agreement to Alan Schram in return for services.
As of the date hereof, these shares have not been issued. In this transaction we relied on the exemption from the registration provisions of the Securities Act of 1933 pursuant to Section 4(2), as this was to be an issuance to a single sophisticated individual and no public solicitations were made.
ITEM 27. EXHIBITS
3.1 Articles of Incorporation, dated September 25, 1996[1]
3.2 Certificate of Amendment of Articles of Incorporation, dated February
10, 2000[1]
3.3 Certificate of Amendment of Articles of Incorporation, dated December
27, 2002[1]
3.4 Certificate of Designation of Series A Preferred Stock, dated November
8, 2002[1]
3.5 Bylaws[1]
5.1 Opinion of Oswald & Yap [4]
10.1 Plan of Reorganization and Acquisition, July 3, 2002[1]
10.2 Consulting Agreement with Alan Schram, dated June 28, 2002[1]
10.3 License Agreement dated September 10, 2002[1]
10.4 Amendment to License Agreement, dated November 5, 2002[1]
10.5 Wholesale Sales & Marketing Agreement, dated March 3, 2003[1]
10.6 Stock Purchase Agreement, dated October 11, 2002[2]
10.7 Co-Location Agreement, dated July 11, 2003[3]
10.8 Independent Sales Agreement with Infolink, dated August 14, 2003[1]
10.9 Licensing Agreement with Infolink, dated August 14, 2003[1]
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10.10 Co-Location Agreement, dated September 26, 2003[4]
10.11 Lease Agreement entered into by our parent company, Shadrack Films,
dated March 11, 2004
23.1 Consent of Oswald & Yap[5]
23.2 Consent of Stonefield Josephson, Inc.
--------------------------------------------------------------------------------
________________________
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[1] Previously filed.
[2] Corrects previously filed Exhibit 10.6
[3] Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2003 (File No. 000-29611) filed on EDGAR August
14, 2003.
[4] Previously filed.
[5] Included with opinion in Exhibit 5.1.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a)To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) (Section.230.424(b) of this chapter) if, in
the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(c) Include any additional or changed material information on the plan of
distribution.
2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3) To remove from registration by means of post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Ramon, State of California, on April 2, 2004.
The Children's Internet, Inc.
/S/ SHOLEH HAMEDANI --------------------------------------------- By: Sholeh Hamedani Its:President, Chief Executive Officer, Chief Financial Officer, Director |
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 5 to Registration Statement has been signed by the following persons in the capacities indicated on April 2, 2004.
SIGNATURE TITLE
/s/ Sholeh Hamedani
-------------------------------------
Sholeh Hamedani Chief Executive Officer
(Principal Executive Officer)
/s/ Sholeh Hamedani
-------------------------------------
Sholeh Hamedani Chief Financial Officer
(Principal Financial Officer, Controller)
/s/ Jamshid Ghosseiri
-------------------------------------
Jamshid Ghosseiri Secretary, Director
/s/ Tyler Wheeler
-------------------------------------
Tyler Wheeler Director
/s/ Roger Campos, Esq.
-------------------------------------
Roger Campos, Esq. Director
/s/ Dale Boehm
-------------------------------------
Dale Boehm Director
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Exhibit 10.11
SIGNATURE CENTER
OFFICE LEASE
BETWEEN
PRINCIPAL LIFE INSURANCE COMPANY
an Iowa corporation
("LANDLORD")
AND
SHADRACK FILMS, INC.,
A CALIFORNIA CORPORATION
("TENANT")
MARCH 11, 2004
TABLE OF CONTENTS
ARTICLE PAGE
------- ----
1.......TERM 1
2.......POSSESSION 2
3.......BASIC RENT 2
4.......RENTAL ADJUSTMENT 3
5.......SECURITY DEPOSIT 4
6.......USE 5
7.......NOTICES 6
8.......BROKERS 6
9.......HOLDING OVER 6
10......TAXES ON TENANT'S PROPERTY 7
11......CONDITION OF PREMISES 7
12......ALTERATIONS 8
13..... REPAIRS 9
14..... LIENS 9
15..... ENTRY BY LANDLORD 10
16..... UTILITIES AND SERVICES 10
17..... BANKRUPTCY 11
18..... INDEMNIFICATION 11
19..... DAMAGE TO TENANT'S PROPERTY 12
20..... TENANT'S INSURANCE 12
|
21......DAMAGE OR DESTRUCTION 13 22......EMINENT DOMAIN 14 23......DEFAULTS AND REMEDIES 15 24..... ASSIGNMENT AND SUBLETTING 17 25......SUBORDINATION 18 26......ESTOPPEL CERTIFICATE 19 27......SIGNAGE 20 28......RULES AND REGULATIONS 20 29......CONFLICT OF LAWS 20 30......SUCCESSORS AND ASSIGNS 20 31......SURRENDER OF PREMISES 21 32......ATTORNEY'S FEES 21 33......PERFORMANCE BY TENANT 21 34......MORTGAGEE PROTECTION 21 35......DEFINITION OF LANDLORD 22 36......WAIVER 22 37......IDENTIFICATION OF TENANT 22 38......PARKING 23 39......TERMS AND HEADINGS 23 40......EXAMINATION OF LEASE 23 41......TIME 23 42......PRIOR AGREEMENT: AMENDMENTS 23 43......SEPARABILITY 24 |
44......RECORDING 24 45......CONSENTS 24 46......LIMITATION ON LIABILITY 24 47......RIDERS 25 48......EXHIBITS 25 49......MODIFICATION FOR LENDER 25 50......PROJECT PLANNING 25 51......OPTION TO RENEW 25 |
LIST OF EXHIBITS
EXHIBIT A The Premises EXHIBIT A-1 The Building EXHIBIT B Tenant Improvements EXHIBIT C Standards for Utilities and Services EXHIBIT D Rules and Regulations EXHIBIT E Parking Rules and Regulations |
SIGNATURE CENTER
THIS LEASE is made as of the 11TH day of MARCH 2004, by and between PRINCIPAL LIFE INSURANCE COMPANY, AN IOWA CORPORATION ("Landlord"), and SHADRACK FILMS, INC., A CALIFORNIA CORPORATION ("Tenant").
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord SUITE NUMBER 320 (the "Premises") outlined on the floor plan attached hereto and marked EXHIBIT A, the Premises being agreed, for the purposes of this Lease, to have an area of approximately 2,059 RENTABLE SQUARE FEET and being situated on the THIRD FLOOR of that certain office building located at 5000 HOPYARD ROAD, PLEASANTON, CALIFORNIA (the "Building"), and part of a two building complex (the "Project") more particularly described in EXHIBIT A-1 attached hereto. The building contains approximately ONE HUNDRED FIFTY NINE THOUSAND AND SIXTY (159,060) rentable square feet of space. Tenant acknowledges that Landlord may elect to sell one or more of the buildings within the Project and that upon any such sale Tenant's pro-rata share of those Direct Expenses allocated to the outside areas of the Project may be adjusted accordingly.
The parties hereto agree that said letting and hiring is upon and subject to the terms, covenants and conditions herein set forth. Tenant covenants, as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions for which Tenant is liable and that this Lease is made upon the condition of such performance.
Prior to the commencing of the term of this Lease the Premises shall be improved by the Tenant Improvements described in the Work Letter marked EXHIBIT B attached hereto.
ARTICLE 1
TERM
The term of this Lease shall be for 37 MONTHS, unless sooner terminated as hereinafter provided, commencing upon the earlier of:
(i) Substantial completion of the Tenant Improvements described in the Work Letter (subject to the provisions of Paragraph 7 of the Work Letter) and the tender of possession of the Premises to Tenant or
(ii) The date that Tenant opened for business in the Premises, and ending on the last day of the last month in the term of this Lease, unless such term shall be sooner terminated as hereinafter provided. As soon as the commencement date is determined, the parties shall enter into an amendment of this Lease setting forth the precise commencement and termination dates of this Lease. Failure to enter into such an amendment, however, shall not affect Tenant's liability hereunder. Reference in this Lease to a "Lease Year" shall mean each successive twelve month period commencing with the commencement date.
Landlord and Tenant estimate that the commencement date shall be APRIL 1, 2004.
ARTICLE 2
POSSESSION
Tenant agrees that, if Landlord is unable to deliver possession of the Premises to Tenant on the scheduled commencement of the term of this Lease, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, but in such event the Term of this Lease shall not commence until Landlord tenders possession of the Premises to Tenant with the Tenant Improvements substantially completed. If Landlord completes construction of the Tenant Improvements prior to the date scheduled in the Work Letter, Landlord shall deliver possession of the Premises to Tenant upon such completion and the term of this Lease shall thereupon commence.
ARTICLE 3
BASIC RENT
(a) Tenant agrees to pay Landlord Basic Rent for the Premises (subject to adjustment as hereinafter provided) as follows:
MONTHS OF TERM BASIC RENT/PER MONTH
-------------- --------------------
01 $0.00
02 - 13 $3,603.25
14 - 25 $3,706.20
26 - 37 $3,809.15
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The Basic Rent shall be paid monthly, in advance on the first (1st) day of each calendar month during the term, commencing on the first (1st) month of the Lease term and continuing on the first day of each month thereafter, except that the first (1st) month's rent shall be paid on execution hereof. If Tenant's obligation to pay rent commences or ends on a day other than the first day of a calendar month, then the rental for such period shall be prorated in the proportion that the number of days this Lease is in effect during such period bears to thirty. In addition to the Basic Rent, Tenant agrees to pay as additional rental the amount of rental adjustments and other charges required by this Lease. All rental shall be paid to Landlord, without prior demand and without any deduction or offset, in lawful money of the United States of America, at the address of Landlord designated on the signature page of this Lease or to such other person or at such other place as Landlord may from time to time designate in writing. Tenant agrees that if Tenant's right to possession is terminated by Landlord because of Tenant's breach of the Lease, Landlord may, at its option, (1) void the initial _______________________ (__) month free rent period ("Free Rent Period"),: (2) recover from Tenant, in addition to any damages due Landlord under the terms and conditions of this Lease, rent for the term of this Lease at the rental rate provided above and rent for the Free Rent Period at a rental rate of ______________ Dollars ($___) per month.
(b) LATE CHARGES. In the event Tenant fails to pay any installment of rent when due or in the event Tenant fails to make any other payment for which Tenant is obligated under this Lease when due, then Tenant shall pay to Landlord a late charge equal to 5% of the amount due to compensate Landlord for the extra costs incurred as a result of such late payment.
ARTICLE 4
RENTAL ADJUSTMENT
(a) For the purpose of this Article 4, the following terms are defined as follows:
(i) TENANT'S PERCENTAGE. That portion of the Building occupied by Tenant divided by the total rentable square footage of the Building, which result is the following 1.294%.
(ii) DIRECT EXPENSES BASE. The amount of the annual Direct Expenses which Landlord has included in Basic Rent, which amount is $ per square foot, for a total of $ per year. THE AMOUNT OF ANNUAL DIRECT EXPENSES WHICH LANDLORD HAS INCLUDED IN ANNUAL BASIC RENT IS THE AMOUNT OF TENANT'S PERCENTAGE OF THE ACTUAL DIRECT EXPENSES FOR 2004. IF THE PROJECT IS LESS THAN NINETY-FIVE PERCENT (95%) OCCUPIED DURING ANY CALENDAR YEAR OF THE TERM, AN ADJUSTMENT SHALL BE MADE IN COMPUTING THE DIRECT EXPENSES FOR SUCH YEAR SO THAT DIRECT EXPENSES SHALL BE COMPUTED AS THOUGH THE PROJECT WERE NINETY-FIVE PERCENT (95%) OCCUPIED.
(iii) DIRECT EXPENSES. The term "Direct Expenses" shall include:
(A) All real and personal property taxes and assessments imposed by any governmental authority or agency on the Building and the land on which the Building is located (including a pro-rata portion of any taxes levied on any common areas); any assessments levied in lieu of taxes; any non-progressive tax on or measured by gross rentals received from the rental of space in the Building; and any other costs levied or assessed by, or at the direction of, any federal, state, or local government authority in connection with the use or occupancy of the Premises or the parking facilities serving the Premises; any tax on this transaction or any document to which Tenant is a party creating or transferring an interest in the Premises, and any expenses, including cost of attorneys or experts, reasonably incurred by Landlord in seeking reduction by the taxing authority of the above-referenced taxes, less tax refunds obtained as a result of an application for review thereof; but shall not include any net income, franchise, capital stock, estate or inheritance taxes.
(B) Operating costs consisting of costs incurred by Landlord in maintaining and operating the Building, exclusive of costs required to be capitalized for federal income tax purposes, and including (without limiting the generality of the foregoing) the following: costs of utilities, supplies and insurance, cost of services of independent contractors, managers and other suppliers, the fair rental value of the management office, cost of compensation (including employment taxes and fringe benefits) of all persons who perform regular and recurring duties connected with the management, operation, maintenance, and repair of the Building, its equipment, parking facilities and the common areas, including, without limitation, engineers, janitors, foremen, floor waxers, window washers, watchmen and gardeners, but excluding persons performing services not uniformly available to or performed for substantially all Building tenants; cost of maintaining, repairing and replacing landscaping, sprinkler systems, concrete walkways, paved parking areas, signs, and site lighting.
(C) Amortization of such capital improvements as Landlord may have installed: (a) for the purpose of reducing operating costs, (b) to comply with governmental rules and regulations promulgated after completion of the Building, (c) for the purpose of replacing existing capital items and improvements, and (d) any costs required by the CC&R's, as defined in Article 6, affecting the Premises or by any corporation, committee or association formed in connection therewith, provided that such cost together with interest at the maximum rate allowed by law shall be amortized over such reasonable period as Landlord shall determine, and only the monthly amortized cost shall be included in Direct Expenses.
(b) PAYMENT OF DIRECT EXPENSES.
(i) If Tenant's Percentage of the Direct Expenses paid or incurred by Landlord for any calendar year exceeds the Direct Expenses Base included in Tenant's rent, then Tenant shall pay such excess as additional rent.
(ii) In addition, for each year after the first calendar year, or portion thereof, Tenant shall pay Tenant's Percentage of Landlord's estimate of the amount by which Direct Expenses for that year shall exceed the Direct Expenses Base ("Landlord's Estimate"). This estimated amount shall be divided into twelve equal monthly installments. Tenant shall pay to Landlord, concurrently with the regular monthly rent payment next due following the receipt of such statement, an amount equal to one monthly installment multiplied by the number of months from January in the calendar year in which said statement is submitted to the month of such payment, both months inclusive. Subsequent installments shall be payable concurrently with the regular monthly rent payments for the balance of that calendar year and shall continue until the next calendar year's statement is rendered.
(iii) As soon as possible after the end of each calendar year, Landlord shall provide Tenant with a statement showing the amount of Tenant's Percentage of Direct Expenses, the amount of Landlord's Estimate actually paid by Tenant and the amount of the Direct Expenses Base. Thereafter, Landlord shall reconcile the above amounts and shall either bill Tenant for the balance due (payable on demand by Landlord) or credit any overpayment by Tenant towards the next monthly installment of Landlord's Estimate falling due, as the case may be. For purposes of making these calculations, in no event shall Tenant's Percentage of the Direct Expenses be deemed to be less than the Direct Expenses Base.
(c) Even though the term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Percentage of Direct Expenses for the year in which this Lease terminates, Tenant shall immediately pay any increase due over the estimated expenses paid and, conversely, any overpayment made in the event said expenses decrease shall be rebated by Landlord to Tenant.
ARTICLE 5
SECURITY DEPOSIT
Upon Tenant's execution of the Lease, Tenant shall deposit with Landlord the sum of $11,118.60. Said sum shall be held by Landlord as security for the faithful performance by
Tenant of all of Tenant's obligations hereunder. If Tenant defaults with respect to any provision of this Lease, including but not limited to the provisions relating to the payment of rent, Landlord may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the deposit is so used or applied, Tenant shall, upon demand, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this security deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit. If Tenant shall fully and faithfully perform all of its obligations under this Lease, the security deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interests hereunder) at the expiration of the Lease term, provided that Landlord may retain the security deposit until such time as any amount due from Tenant in accordance with Article 4 hereof has been determined and paid in full. PROVIDED THAT TENANT IS NOT IN DEFAULT UNDER THIS LEASE, THE SECURITY DEPOSIT SHALL BE REDUCED BY APPLYING AMOUNTS TO BASIC RENT DUE FOR THE 13TH AND 25TH MONTHS OF THE LEASE.
ARTICLE 6
USE
Tenant shall use the Premises for GENERAL OFFICE USE shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord. Nothing contained herein shall be deemed to give Tenant any exclusive right to such use in the Building. Tenant shall not use or occupy the Premises in violation of law or of the certificate of occupancy issued for the Building or Project, and shall, upon written notice from Landlord, discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or of said certificate of occupancy. Tenant shall comply with any direction of any governmental authority having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or with respect to the use or occupation thereof. Tenant's shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or any other insurance policy covering the Building and/or Project and/or property located therein and shall comply with all rules, orders, regulations and requirements of the Insurance Service Offices, formerly known as the Pacific Fire Rating Bureau or any other organization performing a similar function. Tenant shall promptly, upon demand, reimburse Landlord for any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of this Article. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant acknowledges that Landlord has recorded covenants, conditions and restrictions against the Premises on June 30, 1983 as Instrument Number 83/115477 in the Official Records of Alameda County (the "CC&Rs"), and further amended via Certification of Amendment dated April 18, 1985 Instrument Number 85/07539 and Second Certification of Amendment dated October 11, 1989 Instrument Number 89/277713. Tenant's use of the Premises shall be subject to and Tenant shall comply with the
CC&R's, as the same may be amended from time to time. Tenant acknowledges that there have been and may be from time to time recorded easements and/or declarations granting or declaring easements for parking, utilities, fire or emergency access, and other matters. Tenant's use of the Premises shall be subject to and Tenant shall comply with any and all such easements and declarations. Tenant's use of the Premises shall be subject to such guidelines as may from time to time be prepared by Landlord or the Meyer Center- Pleasanton Owner's Association in their sole discretion. Tenant acknowledges that governmental entities with jurisdiction over the Premises may, from time to time promulgate laws, rules, plans and regulations affecting the use of the Premises, including, but not limited to, traffic management plans and energy conservation plans. Tenant's use of the Premises shall be subject to and Tenant shall comply with any and all such laws, rules, plans, and regulations. Tenant, at its sole cost, shall comply with all laws relating to the storage, use and disposal of hazardous, toxic or radioactive matter, including those materials identified in Sections 66680 through 66685 of Title 33 of the California Administrative Code, Division 4, Chapter 30 ("Title 22") as they may be amended from time to time (collectively "Toxic Materials"). If Tenant does store, use or dispose of any Toxic Materials, Tenant shall notify Landlord in writing at least ten (10) days prior to their first appearance on the Premises.
ARTICLE 7
NOTICES
Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery or by mail, and if given by mail shall be deemed sufficiently given if sent by registered or certified mail addressed to Tenant at the Building, or to Landlord at its address set forth at the end of this Lease. Either party may specify a different address for notice purposes by written notice to the other except that the Landlord may in any event use the Premises as Tenant's address for notice purposes.
ARTICLE 8
BROKERS
Tenant warrants that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, except JON GRESHAM WITH LEE & ASSOCIATES, whose commission shall be payable by Landlord, and that it knows of no other real estate broker or agent who is or might be entitled to a commission in connection with the Lease. If Tenant has dealt with any other person or real estate broker with respect to leasing or renting space in the Building, Tenant shall be solely responsible for the payment of any fee due said person or firm and Tenant shall hold Landlord free and harmless against any liability in respect thereto, including attorneys' fees and costs.
ARTICLE 9
HOLDING OVER
If Tenant holds over after the expiration or earlier termination of the term hereof without the express written consent of Landlord, Tenant shall become a Tenant at sufferance only, at a rental rate equal to one hundred fifty percent (150%) of the rent in effect upon the date of such expiration (subject to adjustment as provided in Paragraph 4 hereof and prorated on a daily basis), and otherwise subject to the terms, covenants and conditions herein specified, so far as applicable.
Acceptance by Landlord of rent after such expiration or earlier termination shall not result in a renewal of this Lease. The foregoing provisions of this Article 9 are in addition to and do not affect Landlord's right of re-entry or any rights of Landlord hereunder or as otherwise provided by law. If Tenant fails to surrender the Premises upon the expiration of this Lease despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including without limitation, any claim made by any succeeding tenant founded on or resulting from such failure to surrender and any attorneys' fees and costs.
ARTICLE 10
TAXES ON TENANT'S PROPERTY
(a) Tenant shall be liable for and shall pay, at least ten days before delinquency, all taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based upon such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall, upon demand, repay to Landlord the taxes so levied against Landlord, or the portion of such taxes resulting from such increase in the assessment.
(b) If the Tenant Improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which Tenant Improvements conforming to Landlord's "Building Standard," in other space in the Building are assessed, then the real property taxes and assessment levied against the Building by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of Paragraph 10(a), above. If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant Improvements are assessed at a higher valuation than Landlord's Building Standard, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used.
ARTICLE 11
CONDITION OF PREMISES
Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises or the Building or with respect to the suitability of either for the conduct of Tenant's business. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Building were in satisfactory condition at such time.
ARTICLE 12
ALTERATIONS
(a) Tenant shall make no alterations, additions or improvements in or to the Premises without Landlord's prior written consent, and then only by contractors or mechanics approved by Landlord. Tenant agrees that there shall be no construction or partitions or other obstructions which might interfere with Landlord's free access to mechanical installations or service facilities of the Building or interfere with the moving of Landlord's equipment to or from the enclosures containing said installations or facilities. All such work shall be done at such times and in such manner as Landlord may from time to time designate. Tenant covenants and agrees that all work done by Tenant shall be performed in full compliance with all laws, rules, orders, ordinances, regulations and requirements of all governmental agencies, offices, and boards having jurisdiction, and in full compliance with the rules, regulations and requirements of the Insurance Service Offices formerly known as the Pacific Fire Rating Bureau, and of any similar body. Before commencing any work, Tenant shall give Landlord at least ten days written notice of the proposed commencement of such work and shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for said work. Tenant further covenants and agrees that any mechanic's lien filed against the Premises or against the Building for work claimed to have been done for, or materials claimed to have been furnished to, Tenant will be discharged by Tenant, by bond or otherwise, within ten days after the filing thereof, at the cost and expense of Tenant. All alterations, additions or improvements upon the Premises made by either party, including (without limiting the generality of the foregoing) all wallcovering, built-in cabinet work, paneling and the like, shall, unless Landlord elects otherwise, become the property of Landlord, and shall remain upon, and be surrendered with the Premises, as a part thereof, at the end of the term hereof, except that Landlord may, by written notice to Tenant, require Tenant to remove all partitions, counters, railings and the like installed by Tenant, and Tenant shall repair all damage resulting from such removal or, at Landlord's option, shall pay to Landlord all costs arising from such removal.
(b) All articles of personal property and all business and trade fixtures, machinery and equipment, furniture and movable partitions owned by Tenant or installed by Tenant at its expense in the Premises shall be and remain the property of Tenant and may be removed by Tenant at any time during the lease term when Tenant is not in default hereunder. If Tenant shall fail to remove all of its effects from the Premises upon termination of this Lease for any cause whatsoever, Landlord may, at its option, remove the same in any manner that Landlord shall choose, and store said effects without liability to Tenant for loss thereof. In such event, Tenant agrees to pay Landlord upon demand any and all expenses incurred in such removal, including court costs and attorneys' fees and storage charges on such effects for any length of time that the same shall be in Landlord's possession. Landlord may, at its option, without notice, sell said effects, or any of the same, at private sale and without legal process, for such price as Landlord may obtain and apply the proceeds of such sale upon any amounts due under this Lease from Tenant to Landlord and upon the expense incident to the removal and sale of said effects.
ARTICLE 13
REPAIRS
(a) By entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair. Tenant shall keep, maintain and preserve the Premises in first class condition and repair, and shall, when and if needed, at Tenant's sole cost and expense, make all repairs to the Premises and every part thereof. Tenant shall, upon the expiration or sooner termination of the term hereof, surrender the Premises to Landlord in the same condition as when received, usual and ordinary wear and tear excepted. Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof. The parties hereto affirm that Landlord has made no representations to Tenant respecting the condition of the Premises or the Building except as specifically herein set forth.
(b) Anything contained in Paragraph 13(a) above to the contrary notwithstanding, Landlord shall repair and maintain the structural portions of the Building, including the foundations, building shell, and roof structure, all at Landlord's expense. At Tenant's expense to be prorated through operating costs, Landlord shall repair and maintain the basic plumbing, elevators, life safety systems and other building systems, heating, ventilating, air conditioning and electrical systems installed or furnished by Landlord, and perform roof repair and maintenance to the Premises. Landlord shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. Except as provided in Article 21 hereof, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or in or to fixtures, appurtenances and equipment therein.
Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect.
ARTICLE 14
LIENS
Tenant shall not permit any mechanic's, materialmen's or other liens to be filed against the Building or Project, nor against Tenant's leasehold interest in the Premises. Landlord shall have the right at all reasonable times to post and keep posted on the Premises any notices which it deems necessary for protection from such liens. If any such liens are filed, Landlord may, without waiving its rights and remedies based on such breach of Tenant and without releasing Tenant from any of its obligations, cause such liens to be released by any means it shall deem proper, including payments in satisfaction of the claim giving rise to such lien. Tenant shall pay to Landlord at once, upon notice by Landlord, any sum paid by Landlord to remove such liens, together with interest at the maximum rate per annum permitted by law from the date of such payment by Landlord.
ARTICLE 15
ENTRY BY LANDLORD
Landlord reserves and shall at any and all times have the right to enter the Premises to inspect the same, to supply janitorial service and any service to be provided by Landlord to Tenant hereunder, to show the Premises to prospective purchasers or tenants, to post notices of nonresponsibility, to alter, improve or repair the Premises or any other portion of the Building or Project, all without being deemed guilty of any eviction of Tenant and without abatement of rent. Landlord may, in order to carry out such purposes, erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, provided that the business of Tenant shall be interfered with as little as is reasonably practicable. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss in, upon and about the Premises. Landlord shall at all times have and retain a key with which to unlock all doors in the Premises, excluding Tenant's vaults and safes. Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not be construed or deemed to be a forcible or unlawful entry into the Premises, or any eviction of Tenant from the Premises or any portion thereof, and any damages caused on account thereof shall be paid by Tenant. It is understood and agreed that no provision of this Lease shall be construed as obligating Landlord to perform any repairs, alterations or decorations except as otherwise expressly agreed herein by Landlord.
ARTICLE 16
UTILITIES AND SERVICES
Provided that Tenant is not in default under this Lease, Landlord agrees to furnish or cause to be furnished to the Premises the utilities and services described in the Standards for Utilities and Services, attached hereto as EXHIBIT C, subject to the conditions and in accordance with the standards set forth therein. Landlord's failure to furnish any of the foregoing items when such failure is caused by:
(i) Accident, breakage, or repairs,
(ii) Strikes, lockouts or other labor disturbance or labor dispute of any character,
(iii) Governmental regulation, moratorium or other governmental action,
(iv) Inability despite the exercise of reasonable diligence to obtain electricity, water or fuel, or by
(v) Any other cause beyond Landlord's reasonable control shall not result in any liability to Landlord. In addition, Tenant shall not be entitled to any abatement or reduction of rent by reason of such failure, no eviction of Tenant shall result from such failure and Tenant shall not be relieved from the performance of any covenant or agreement in this Lease because of such
failure. In the event of any failure, stoppage or interruption thereof, Landlord shall diligently attempt to resume service promptly.
ARTICLE 17
BANKRUPTCY
If Tenant shall file a petition in bankruptcy under any provision of the Bankruptcy Code as then in effect, or if Tenant shall be adjudicated a bankrupt in involuntary bankruptcy proceedings and such adjudication shall not have been vacated within thirty days from the date thereof, or if a receiver or trustee shall be appointed of Tenant's property and the order appointing such receiver or trustee shall not be set aside or vacated within thirty days after the entry thereof, or if Tenant shall assign Tenant's estate or effects for the benefit of creditors, or if this Lease shall, by operation of law or otherwise, pass to any person or persons other than Tenant, then in any such event Landlord may terminate this Lease, if Landlord so elects, with or without notice of such election and with or without entry or action by Landlord. In such case, notwithstanding any other provisions of this Lease, Landlord, in addition to any and all rights and remedies allowed by law or equity, shall, upon such termination, be entitled to recover damages in the amount provided in Paragraph 23(b) hereof. Neither Tenant nor any person claiming through or under Tenant or by virtue of any statute or order of any court shall be entitled to possession of the Premises but shall surrender the Premises to landlord. Nothing contained herein shall limit or prejudice the right of Landlord to recover damages by reason of any such termination equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved; whether or not such amount is greater, equal to, or less than the amount of damages recoverable under the provisions of this Article 17.
ARTICLE 18
INDEMNIFICATION
Tenant shall indemnify, defend and hold Landlord harmless from all claims arising from Tenant's use of the Premises or the conduct of its business or from any activity, work, or thing done, permitted or suffered by Tenant in or about the Premises. Tenant shall further indemnify, defend and hold Landlord harmless from all claims arising from any breach or default in the performance of any obligation to be performed by Tenant under the terms of this Lease, or arising from any act, neglect, fault or omission of Tenant or of its agents or employees, and from and against all costs, attorneys' fees, expenses and liabilities incurred in or about such claim or any action or proceeding brought thereon. In case any action or proceeding shall be brought against Landlord by reason of any such claim, Tenant upon notice from Landlord shall defend the same at Tenant's expense by counsel approved in writing by Landlord. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to person in, upon or about the Premises from any cause whatsoever except that which is caused by the failure of Landlord to observe any of the terms and conditions of this Lease where such failure has persisted for an unreasonable period of time after written notice of such failure. Tenant hereby waives all its claims in respect thereof against Landlord.
ARTICLE 19
DAMAGE TO TENANT'S PROPERTY
Notwithstanding the provisions of Article 18 to the contrary, Landlord or its agents shall not be liable for (i) any damage to any property entrusted to employees of the Building, (ii) loss or damage to any property by theft or otherwise, (iii) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing work therein or from the roof, street or sub-surface or from any other place or resulting from dampness or (iv) any other cause whatsoever. Landlord or its agents shall not be liable for interference with light or other incorporeal hereditaments, nor shall Landlord be liable for any latent defect in the Premises or in the Building. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the Building or of defects therein or in the fixtures or equipment.
ARTICLE 20
TENANT'S INSURANCE
(a) Tenant shall, during the term hereof and any other period of occupancy, at its sole cost and expense, keep in full force and effect the following insurance:
(i) Standard form property insurance insuring against the perils of fire, extended coverage, vandalism, malicious mischief, special extended coverage ("All-Risk") and sprinkler leakage. This insurance policy shall be upon all property owned by Tenant, for which Tenant is legally liable or that was installed at Tenant's expense, and which is located in the Project including, without limitation, furniture, fittings, installations, fixtures (other than Tenant improvements installed by Landlord), and any other personal property in an amount not less than ninety percent of the full replacement cost thereof. In the event that there shall be a dispute as to the amount which comprises full replacement cost, the decision of Landlord or any mortgagees of Landlord shall be conclusive. This insurance policy shall also be upon direct or indirect loss of Tenant's earnings attributable to Tenant's inability to use fully or obtain access to the Premises or Building in an amount as will properly reimburse Tenant. Such policy shall name Landlord and any mortgagees of Landlord as insured parties, as their respective interests may appear.
(ii) Comprehensive General Liability Insurance insuring Tenant against any liability arising out of the lease, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be in the amount of $2,000,000 Combined Single Limit for injury to, or death of one or more persons in an occurrence, and for damage to tangible property (including loss of use) in an occurrence, with such liability amount to be adjusted from year to year to reflect increases in the Consumer Price Index. The policy shall insure the hazards of premises and operation, independent contractors, contractual liability (covering the Indemnity contained in Paragraph 18 hereof) and shall (1) name Landlord as an additional insured, and (2) contain a cross liability provision, and (3) contain a provision that "the insurance provided the Landlord hereunder shall be primary and non-contributing with any other insurance available to the Landlord."
(iii) Workers' Compensation and Employer's Liability insurance (as required by state law).
(iv) Any other form or forms of insurance as Tenant or Landlord or any mortgagees of Landlord may reasonably require from time to time in form, in amounts and for insurance risks against which a prudent tenant would protect itself.
(b) All policies shall be written in a form satisfactory to Landlord and shall be taken out with insurance companies holding a General Policyholders Rating of "A" and a Financial Rating of "X" or better, as set forth in the most current issue of Bests Insurance Guide. Within ten days after the execution of this Lease, Tenant shall deliver to Landlord copies of policies or certificates evidencing the existence of the amounts and forms of coverage satisfactory to Landlord. No such policy shall be cancelable or reducible in coverage except after thirty days prior written notice to Landlord. Tenant shall, within ten days prior to the expiration of such policies, furnish Landlord with renewals or "binders" thereof, or Landlord may order such insurance and charge the cost thereof to Tenant as additional rent. If Landlord obtains any insurance that is the responsibility of Tenant under this section, Landlord shall deliver to Tenant a written statement setting forth the cost of any such insurance and showing in reasonable detail the manner in which it has been computed.
ARTICLE 21
DAMAGE OR DESTRUCTION
(a) In the event the Building and/or the Premises is damaged by fire or other perils covered by Landlord's insurance, Landlord shall have the following rights and obligations:
(i) In the event of total destruction, at Landlord's option, as soon as reasonably possible thereafter, commence repair, reconstruction and restoration of the Building and/or the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or within ninety days after such damage, elect not to so repair, reconstruct or restore the Building and/or the Premises, in which event this Lease shall terminate. In either event, Landlord shall give Tenant written notice of its intention within said ninety day period. In the event Landlord elects not to restore the Building and/or the Premises, this Lease shall be deemed to have terminated as of the date of such total destruction.
(ii) In the event of a partial destruction of the Building and/or the Premises, to an extent not exceeding twenty-five percent of the full insurable value thereof, and if the damage thereto is such that the Building and/or the Premises may be repaired, reconstructed or restored within a period of ninety days from the date of the happening of such casualty and if Landlord will receive insurance proceeds sufficient to cover the cost of such repairs, then Landlord shall commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease shall continue in full force and effect. If such work of repair, reconstruction and restoration shall require a period longer than ninety days or exceeds twenty-five percent of the full insurable value thereof, or if said insurance proceeds will not be sufficient to cover the cost of such repairs, then Landlord either may elect to so repair, reconstruct or restore and the Lease shall continue in full force and effect or Landlord may elect not to repair, reconstruct or restore and the Lease shall then terminate. Under any of the conditions of this Subparagraph 21(a)(ii), Landlord shall give written notice to Tenant of its intention within said ninety day period. In the event
Landlord elects not to restore the Building and/or the Premises, this Lease shall be deemed to have terminated as of the date of such partial destruction.
(b) Upon any termination of this Lease under any of the provisions of this Article 21, the parties shall be released without further obligation to the other from the date possession of the Premises is surrendered to Landlord except for items which have therefore accrued and are then unpaid.
(c) In the event of repair, reconstruction and restoration by Landlord as herein provided, the rental payable under this Lease shall be abated proportionately with the degree to which Tenant's use of the Premises is impaired during the period of such repair, reconstruction or restoration. Tenant shall not be entitled to any compensation or damages for loss in the use of the whole or any part of the Premises and/or any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration.
(d) Tenant shall not be released from any of its obligations under this Lease except to the extent and upon the conditions expressly stated in this Article 21. Notwithstanding anything to the contrary contained in this Article 21, if Landlord is delayed or prevented from repairing or restoring the damaged Premises within one year after the occurrence of such damage or destruction by reason of acts of God, war, governmental restrictions, inability to procure the necessary labor or materials, or other cause beyond the control of Landlord, Landlord shall be relieved of its obligation to make such repairs or restoration and Tenant shall be released from its obligation under this Lease as of the end of said one year period.
(e) If damage is due to any cause other than fire or other peril covered by extended coverage insurance, Landlord may elect to terminate this Lease.
(f) If Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall be obligated to make repair or restoration only of those portions of the Building and the Premises which were originally provided at Landlord's expense, and the repair and restoration of items not provided at Landlord's expense shall be the obligation of Tenant.
(g) Notwithstanding anything to the contrary contained in this Article 21, Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Article 21 occurs during the last twelve months of the term of this Lease or any extension hereof.
(h) The provisions of California Civil Code 1932, Subsection 2, and 1933, Subsection 4, which permit termination of a lease upon destruction of the Leased Premises, are hereby waived by Tenant; and the provisions of this Article shall govern in case of such destruction.
ARTICLE 22
EMINENT DOMAIN
In case all of the Premises, or such part thereof as shall substantially interfere with Tenant's use and occupancy thereof, shall be taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, either party shall have the right to terminate this Lease
effective as of the date possession is required to be surrendered to said authority. Tenant shall not assert any claim against Landlord or the taking authority for any compensation because of such taking, and Landlord shall be entitled to receive the entire amount of any award without deduction for any estate or interest of Tenant. In the event the amount of property or the type of estate taken shall not substantially interfere with the conduct of Tenant's business, Landlord shall be entitled to the entire amount of the award without deduction for any estate or interest of Tenant, Landlord shall restore the Premises to substantially their same condition prior to such partial taking, and a proportionate allowance shall be made to Tenant for the rent corresponding to the time during which, and to the part of the Premises of which, Tenant shall be so deprived on account of such taking and restoration. Nothing contained in this Paragraph shall be deemed to give Landlord any interest in any award made to Tenant for the taking of personal property and fixtures belonging to Tenant.
ARTICLE 23
DEFAULTS AND REMEDIES
(a) The occurrence of any one or more of the following events shall constitute a default hereunder by Tenant:
(i) The vacation or abandonment of the Premises by Tenant. Abandonment is herein defined to include, but is not limited to, any absence by Tenant from the Premises for five business days or longer while in default of any provision of this Lease.
(ii) The failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of three days after written notice thereof from Landlord to Tenant; provided however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 regarding unlawful detainer actions.
(iii) The failure by Tenant to observe or perform any of the
express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in Subparagraph 23(a)(i) or (ii)
above, where such failure shall continue for a period of ten days after written
notice thereof from Landlord to Tenant. Any such notice shall be in lieu of, and
not in addition to, any notice required under California Code of Civil Procedure
Section 1161 regarding unlawful detainer actions. If the nature of Tenant's
default is such that more than ten days are reasonably required for its cure,
then Tenant shall not be deemed to be in default if Tenant shall commence such
cure within said ten-day period and thereafter diligently prosecute such cure to
completion, which completion shall occur not later than sixty days from the date
of such notice from Landlord.
(iv) (1) The making by Tenant of any general assignment for the benefit of creditors; (2) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within thirty days); (3) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to
Tenant within thirty days; or (4) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within thirty days.
(b) In the event of any such default by Tenant, in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant:
(i) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus
(ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus
(iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus
(iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. As used in Subparagraph 23(b)(i) and (ii) above, the "worth at the time of award" is computed by allowing interest at the maximum rate permitted by law. As used in Subparagraph 23(b)(iii) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent.
(c) In the event of any such default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. No re-entry or taking possession of the Premises by Landlord pursuant to this Paragraph 23(c) shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction.
(d) All rights, options and remedies of Landlord contained in this Lease shall be constructed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. No waiver of any default of Tenant hereunder shall be implied from any acceptance by Landlord of any rent or other payments due hereunder or any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver. The consent or approval of Landlord to or of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar acts by Tenant.
(e) The chronic delinquency by Tenant in the payment of Basic Rent or
any other payments required to be paid by Tenant under this Lease shall
constitute a default hereunder by Tenant. "Chronic delinquency" shall mean
failure by Tenant to pay Basic Rent, or any other payments required to be paid
by Tenant under this Lease within three (3) days after written notice thereof
for any three (3) occasions (consecutive or non-consecutive) during any twelve
(12) month period. In the event of a chronic delinquency, Landlord shall have
the right, at Landlord's option, to require that Basic Rent be paid by Tenant
quarterly, in advance.
ARTICLE 24
ASSIGNMENT AND SUBLETTING
(a) Tenant shall not voluntarily assign or encumber its interest in this Lease or in the Premises, or sublease all or any part of the Premises, or allow any other person or entity to occupy or use all or any part of the Premises, without first obtaining Landlord's prior written consent. Any assignment, encumbrance or sublease without Landlord's prior written consent shall be voidable, at Landlord's election, and shall constitute a default and at the option of the Landlord shall result in a termination of this Lease. No consent to assignment, encumbrance, or sublease shall constitute a further waiver of the provisions of this paragraph. Tenant shall notify Landlord in writing of Tenant's intent to sublease, encumber or assign this Lease and Landlord shall, within thirty days of receipt of such written notice, elect one of the following:
(i) Consent to such proposed assignment, encumbrance or sublease;
(ii) Refuse such consent, which refusal shall be on reasonable grounds; or
(iii) Elect to terminate this Lease.
(b) As a condition for granting its consent to any assignment, encumbrance or sublease, sixty days prior to any anticipated assignment or sublease Tenant shall give Landlord written notice (the "Assignment Notice"), which shall set forth the name, address and business of the proposed assignee or sublessee, information (including references) concerning the character, ownership, and financial condition of the proposed assignee or sublessee, and the Assignment Date, any ownership or commercial relationship between Tenant and the proposed assignee or sublessee, and the consideration of all other material terms and conditions of the proposed assignment or sublease, all in such detail as Landlord shall reasonably require. If Landlord requests additional detail, the Assignment Notice shall not be deemed to have been received until Landlord receives such additional detail, and Landlord may withhold consent to any assignment or sublease until such additional detail is provided to it. Further, Landlord may require that the sublessee or assignee remit directly to Landlord on a monthly basis, all monies due to Tenant by said assignee or sublessee.
(c) The consent by Landlord to any assignment or subletting shall not be construed as relieving Tenant or any assignee of this Lease or sublessee of the Premises from obtaining the express written consent of Landlord to any further assignment or subletting or as releasing Tenant or any assignee or sublessee of Tenant from any liability or obligation hereunder
whether or not then accrued. In the event Landlord shall consent to an assignment or sublease, Tenant shall pay Landlord as Additional Rent a reasonable attorneys' and administrative fee not to exceed $500 for costs incurred in connection with evaluating the Assignment Notice. This section shall be fully applicable to all further sales, hypothecations, transfers, assignments and subleases of any portion of the Premises by any successor or assignee of Tenant, or any sublessee of the Premises.
(d) As used in this section, the subletting of substantially all of the Premises for substantially all of the remaining term of this Lease shall be deemed an assignment rather than a sublease. Notwithstanding the foregoing, Landlord shall consent to the assignment, sale or transfer if the Assignment Notice states that Tenant desires to assign the Lease to any entity into which Tenant is merged, with which Tenant is consolidated or which acquires all or substantially all of the assets of Tenant, provided that the assignee first executes, acknowledges and delivers to Landlord an agreement whereby the assignee agrees to be bound by all of the covenants and agreements in this Lease which Tenant has agreed to keep, observe or perform, that the assignee agrees that the provisions of this section shall be binding upon it as if it were the original Tenant hereunder and that the assignee shall have a net worth (determined in accordance with generally accepted accounting principles consistently applied) immediately after such assignment which is at least equal to the net worth (as so determined) of Tenant at the commencement of this Lease.
(e) Except as provided above, Landlord's consent to any sublease shall not be unreasonably withheld. A condition to such consent shall be delivery by Tenant to Landlord of a true copy of any such sublease. If for any proposed assignment or sublease Tenant receives rent or other consideration, either initially or over the term of the assignment or sublease, in excess of the rent called for hereunder, or, in case of the sublease of a portion of the Premises, in excess of such rent fairly allocable to such portion, after appropriate adjustments to assure that all other payments called for hereunder are taken into account, Tenant shall pay to Landlord as additional rent hereunder three-quarters (3/4) of the excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. Landlord's waiver or consent to any assignment or subletting shall not relieve Tenant from any obligation under this lease. The parties intend that the preceding sentence shall not apply to any sublease rentals respecting a portion of the Premises that during the entire term of this Lease was not occupied by Tenant for its own use, but was always subleased by Tenant and/or kept vacant. For the purpose of this section, the rent for each square foot of floor space in the Premises shall be deemed equal.
ARTICLE 25
SUBORDINATION
Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee with a lien on the Building or any ground lessor with respect to the Building, this Lease shall be subject and subordinate at all times to:
(i) All ground leases or underlying leases which may now exist or hereafter be executed affecting the Building or the land upon which the Building is situated or both,
(ii) The lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Building, land, ground leases or underlying leases, or Landlord's interest or estate in any of said items is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to the Lease. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord, at the option of such successor in interest. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents evidencing the priority or subordination of this Lease with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of Tenant to execute, deliver and record any such document in the name and on behalf of Tenant, and
(iii) The CC&R's as described in Article 6.
ARTICLE 26
ESTOPPEL CERTIFICATE
(a) Within ten days following any written request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord a statement certifying:
(i) The date of commencement of this Lease;
(ii) The fact that this Lease is unmodified and in full force and effect (or, if there have been modifications hereto, that this Lease is in full force and effect, and stating the date and nature of such modifications);
(iii) The date to which the rental and other sums payable under this Lease have been paid;
(iv) That there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement; and
(v) Such other matters requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Article 26 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or any interest therein.
(b) Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant:
(i) That this Lease is in full force and effect, without modification except as may be represented by Landlord,
(ii) That there are no uncured defaults in Landlord's performance, and
(iii) That not more than one month's rental has been paid in advance.
ARTICLE 27
SIGNAGE
Landlord shall provide for Tenant the opportunity to have Tenant's name placed upon the Building lobby directory sign, and at Tenant's entrance to the Premises. Tenant shall have no other right to maintain a Tenant identification sign in any other location in, on or about the Premises, the Building, or Signature Center and shall not display or erect any Tenant identification sign, display or other advertising material that is visible from the exterior of the Building. The size, design, color and other physical aspects of the Tenant identification sign shall be subject to Landlord's written reasonable approval prior to installation. The cost of the installation of the sign, and its maintenance and removal expense, shall be at Tenant's sole expense. If Tenant fails to maintain its sign or if Tenant fails to remove its sign upon termination of this Lease, Landlord may do so at Tenant's expense and Tenant's reimbursement to Landlord for such amounts shall be deemed additional rent. All signs shall comply with rules and regulations set for by Landlord as may be modified from time to time.
ARTICLE 28
RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the "Rules and Regulations," a copy of which is attached hereto and marked EXHIBIT D, and all reasonable and nondiscriminatory modifications thereof and additions thereto from time to time put into effect by Landlord. Landlord shall not be responsible to Tenant for the violation or non-performance by any other tenant or occupant of the Building of any of said Rules and Regulations.
ARTICLE 29
CONFLICT OF LAWS
This Lease shall be governed by and construed pursuant to the laws of the State of California.
ARTICLE 30
SUCCESSORS AND ASSIGNS
Except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns.
ARTICLE 31
SURRENDER OF PREMISES
The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, operate as an assignment to it of any or all subleases and subtenancies.
ARTICLE 32
ATTORNEYS' FEES
(a) If Landlord should bring suit for possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provisions of this Lease, or for any other relief against Tenant hereunder, or in the event of any other litigation between the parties with respect to this Lease, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment.
(b) If Landlord is named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including reasonable attorneys' fees.
ARTICLE 33
PERFORMANCE BY TENANT
All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money owed to any party other than Landlord, for which it is liable hereunder or if Tenant shall fail to perform any other act on its part to be performed hereunder and such failure shall continue for ten days after notice thereof by Landlord, Landlord may, without waiving or releasing Tenant from obligations of Tenant, but shall not be obligated to, make any such payment or perform any such other act to be made or performed by Tenant. All sums so paid by Landlord and all necessary incidental costs together with interest thereon at the maximum rate permissible by law, from the date of such payment by Landlord, shall be payable to Landlord on demand. Tenant covenants to pay any such sums and Landlord shall have (in addition to any other right or remedy of Landlord) all rights and remedies in the event of the non-payment thereof by Tenant as are set forth in Article 23 hereof.
ARTICLE 34
MORTGAGEE PROTECTION
In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Premises whose address shall have been furnished to Tenant, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure.
ARTICLE 35
DEFINITION OF LANDLORD
The term "Landlord", as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners, at the time in question, of the fee title of the Premises or the lessees under any ground lease, if any. In the event of any transfer, assignment or other conveyance or transfers of any such title, Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved from and after the date of such transfer, assignment or conveyance of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed. Without further agreement, the transferee of such title shall be deemed to have assumed and agreed to observe and perform any and all obligations of Landlord hereunder, during its ownership of the Premises. Landlord may transfer its interest in the Premises without the consent of Tenant and such transfer or subsequent transfer shall not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease.
ARTICLE 36
WAIVER
The waiver by Landlord of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained, nor shall any custom or practice which may grow up between the parties in the administration of the terms hereof be deemed a waiver of or in any way affect the right of Landlord to insist upon the performance by Tenant in strict accordance with said terms. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant or any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent.
ARTICLE 37
IDENTIFICATION OF TENANT
If more than one person executes this Lease as Tenant:
(i) Each of them is jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions, provisions and agreements of this Lease to be kept, observed and performed by Tenant, and
(ii) The term "Tenant" as used in this Lease shall mean and include each of them jointly and severally. The act of or notice from, or notice to refund to, or the signature of any one or more of them, with respect to the tenancy of this Lease, including, but not limited to any renewal, extension, expiration, termination or modification of this Lease, shall be binding upon each and all of the persons executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or so given or received such notice or refund or so signed.
ARTICLE 38
PARKING
The use by Tenant, its employees and invitees, of the parking facilities of the Building shall be on the terms and conditions set forth in EXHIBIT E attached hereto and by this reference incorporated herein and shall be subject to such other agreement between Landlord and Tenant as may hereinafter be established. Tenant, its employees and invitees shall use no more than four (4) non-exclusive parking spaces per one thousand (1,000) square feet of leased space. Tenant's use of the parking spaces shall be confined to the Building. If, in Landlord's reasonable business judgment, it becomes necessary, Landlord shall exercise due diligence to cause the creation of cross-parking easements and such other agreements as are necessary to permit Tenant, its employees and invitees to use parking spaces on the properties and buildings of Signature Center, which are separate legal parcels from the Building. Tenant acknowledges that other tenants of the Building and the tenants of the other buildings, their employees and invitees, may be given the right to park at the Building.
ARTICLE 39
TERMS AND HEADINGS
The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof.
ARTICLE 40
EXAMINATION OF LEASE
Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant.
ARTICLE 41
TIME
Time is of the essence with respect to the performance of every provision of this Lease in which time or performance is a factor.
ARTICLE 42
PRIOR AGREEMENT: AMENDMENTS
This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest.
ARTICLE 43
SEPARABILITY
Any provision of this Lease which shall prove to be invalid, void or illegal in no way affects, impairs or invalidates any other provision hereof, any such other provisions shall remain in full force and effect.
ARTICLE 44
RECORDING
Neither Landlord nor Tenant shall record this Lease nor a short form memorandum thereof without the consent of the other.
ARTICLE 45
CONSENTS
Whenever the consent of either party is required hereunder such consent shall not be unreasonably withheld.
ARTICLE 46
LIMITATION ON LIABILITY
In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord:
(a) The sole and exclusive remedy shall be against the Landlord's interest in the Building;
(b) No partner, officer, agent or employee of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of Landlord);
(c) No service or process shall be made against any partner, officer, agent or employee of Landlord (except as may be necessary to secure jurisdiction of Landlord);
(d) No partner, officer, agent or employee of Landlord shall be required to answer or otherwise plead to any service of process;
(e) No judgment will be taken against any partner, officer, agent or employee of Landlord;
(f) Any judgment taken against any partner, officer, agent or employee of Landlord may be vacated and set aside at any time nunc pro nunc;
(g) No writ of execution will ever be levied against the assets of any partner, officer, agent or employee of Landlord;
(h) These covenants and agreements are enforceable both by Landlord and also by any partner, officer, agent or employee of Landlord.
ARTICLE 47
RIDERS
Clauses, plats and riders, if any, signed by Landlord and Tenant and affixed to this Lease are a part hereof.
ARTICLE 48
EXHIBITS
All Exhibits attached hereto are incorporated into this Lease.
ARTICLE 49
MODIFICATION FOR LENDER
If, in connection with obtaining construction, interim or permanent financing for the Building the lender shall request reasonable modifications in this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder or materially adversely affect the leasehold interest hereby created or Tenant's rights hereunder.
ARTICLE 50
PROJECT PLANNING
If Landlord requires the Premises for use in conjunction with another suite or for other reasons connected with the Project planning program, upon notifying Tenant in writing, Landlord shall have the right to relocate Tenant to other space in the Project, at Landlord's sole cost and expense, and the terms and conditions of the original Lease shall remain in full force and effect, except that a revised EXHIBIT A reflecting the location of the new space shall be attached to and become a part of this Lease. However, if the new space does not meet with Tenant's approval, Tenant shall have the right to terminate this Lease effective thirty (30) days after written notice to Landlord, which notice shall be given within ten (10) days after receipt of Landlord's notification.
ARTICLE 51
OPTION TO RENEW
Provided that Tenant is not in default under the terms and conditions of
the Lease at the time of its exercise of their Option to Renew, or at the time
of renewal of the Lease, Tenant shall have the right to renew this Lease for one
(1) twelve (12) month term at the then prevailing fair market rent with a
minimum of one hundred eighty (180) days and a maximum two hundred seventy (270)
days written notice to Landlord. This option is personal to Shadrack Films
Incorporated and may not be assigned or transferred to any third party.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date first above written.
LANDLORD: ADDRESS:
PRINCIPAL LIFE INSURANCE COMPANY, c/o PARKWAY PROPERTIES, INC.
an Iowa corporation, for its Real Estate 4900 Hopyard Road
Separate Account Suite 270
Pleasanton, CA 94588
By: PRINCIPAL REAL ESTATE
INVESTORS, LLC, a Delaware limited
liability company, its authorized
signatory
By: /S/ MARTIN E FISHER, JR.
---------------------------------
By: Senior Asset Manager
---------------------------------
TENANT: ADDRESS:
SHADRACK FILMS, INC., 2401 CROW CANYON RD., SUITE 201
A CALIFORNIA CORPORATION SAN RAMON, CA 94583
By: /S/ SHOLEH HAMEDANI
---------------------------------
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EXHIBIT A-1
THE BUILDING
REAL PROPERTY in the City of Pleasanton, County of Alameda, State of California, described as follows:
PARCEL THREE:
Parcel A, Parcel Map 3972, filed June 27, 1983, in Map Book 138, at Page 65,
Alameda County Records.
Excepting from the above-described parcel of land all oil, gas, minerals and other hydrocarbon substances in and under or that may be produced from a depth below 500 feet from the surface of said land, without right of entry upon the surface of said land for the purpose of mining, drilling, exploring or extracting such oil, gas minerals and other hydrocarbon substances or other use of or rights in or to any portion of the surface of said land to a depth of 500 feet below the surface thereof, as reserved in the Deed from Volk-McLain Communities, Inc., to Qualified Investments, Inc., dated June 25, 1967, recorded June 27, 1967, Series No. AZ/60836, Alameda County Records.
A.P. No. 941-1301-059
PARCEL FOUR:
Parcel B, Parcel Map 3972, filed June 27, 1983, Map Book 138, Page 65, Alameda
County Records, and a portion of Parcel C of said Parcel Map as deeded to Robert
E. Meyer by Independence Savings and Loan Association for the purpose of Lot
Line Adjustment recorded September 19, 1984, Series No. 84-189967, Official
Records, the portion of Lot C described as follows:
Beginning on the East line of Johnson Drive on the boundary line between Parcel B and C, as shown on said Parcel Map 3972; thence from said point of beginning, South 88"21'09" East along said boundary line of 314.37 feet to the Northeast corner of Parcel B; thence North 01"38'51" East along the direct production North of the East line of said Parcel B, 31.50 feet; thence North 88" 21' 09", West, 321.55 feet to the East line of said Johnson Drive, along an acre of a curve to the left with a radius 426.50 feet, through a central angle of 4"20'29" an arc distance of 32.32 feet to the point of beginning.
Excepting therefrom
All oil, gas, minerals and other hydrocarbon substances in and under or that may
be produced from a depth below 500 feet from the surface of said land without
right of entry upon the surface of said land, for the purpose of mining,
drilling, exploring, or extraction such oil, gas, minerals, and other
hydrocarbon substances or other use of or rights in or to any portion of the
surface of said land to a depth of 500 feet below the surface thereof, as
reserved in the Deed from Volk-McLain Communities, Inc., to Qualified
Investments, Inc., recorded June 27, 1967, Reel 1988, Image 207, Series No.
AZ/60836, Official Records.
A.P. No. 941-1301-060-01
EXHIBIT A-1
EXHIBIT B
TENANT IMPROVEMENTS
TENANT WILL LEASE PREMISES IN "AS-IS" CONDITION.
IN WITNESS WHEREOF, this Tenant Improvement Agreement is executed as of the date first above written.
LANDLORD: ADDRESS:
PRINCIPAL LIFE INSURANCE COMPANY, c/o PARKWAY PROPERTIES, INC.
an Iowa corporation, for its Real Estate 4900 Hopyard Road
Separate Account Suite 270
Pleasanton, CA 94588
By: PRINCIPAL REAL ESTATE
INVESTORS, LLC, a Delaware limited
liability company, its authorized
signatory
By: /S/ MARTIN E FISHER, JR.
-----------------------------------------
By: Senior Asset Manager
-----------------------------------------
TENANT: ADDRESS:
SHADRACK FILMS, INC., 2401 CROW CANYON RD., SUITE 201
A CALIFORNIA CORPORATION SAN RAMON, CA 94583
By: /S/ SHOLEH HAMEDANI
-----------------------------------------
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EXHIBIT B
EXHIBIT C
STANDARDS FOR UTILITIES AND SERVICES
The following Standards for Utilities and Services are in effect. Landlord reserves the right to adopt nondiscriminatory modifications and additions hereto:
As long as Tenant is not in default under any of the terms, covenants, conditions, provisions, or agreements of this Lease, Landlord shall:
(a)i On Monday through Friday, except holidays, from 7
A.M. to 6 P.M. (and other times for a reasonable additional charge to be fixed
by Landlord), ventilate the Premises and furnish air conditioning or heating on
such days and hours, when in the judgment of Landlord it may be required for the
comfortable occupancy of the Premises. The air conditioning system achieves
maximum cooling when the window coverings are closed. Landlord shall not be
responsible for room temperatures if Tenant does not keep all window coverings
in the Premises closed whenever the system is in operation. Tenant agrees to
co-operate fully at all times with Landlord, and to abide by all regulations and
requirements which Landlord may prescribe for the proper function and protection
of said air conditioning system. Tenant agrees not to connect any apparatus,
device, conduit or pipe to the Building chilled and hot water air conditioning
supply lines. Tenant further agrees that neither Tenant nor its servants,
employees, agents, visitors, licensees or contractors shall at any time enter
mechanical installations or facilities of the Building or adjust, tamper with,
touch or otherwise in any manner affect said installations or facilities. The
cost of maintenance and service calls to adjust and regulate the air
conditioning system shall be charged to Tenant if the need for maintenance work
results from either Tenant's adjustment of room thermostats or Tenant's failure
to comply with its obligations under this section, including keeping window
coverings closed as needed. Such work shall be charged at hourly rates equal to
then current journeymen's wages for air conditioning mechanics.
(a)ii Landlord shall operate and maintain the heating, cooling and ventilation (HVAC) system for the Premises in a manner sufficient to maintain an indoor air quality within the limits required by the American Society of Heating, Air Conditioning and Refrigeration Engineers (ASHRAE) standard 62-1999.
Tenant shall notify Landlord and its Manager within two (2) days after Tenant first has knowledge of any of the following conditions at, in, on or within the Premises: standing water, water leaks, water stains, humidity, mold growth, or any unusual odors (including, but not limited, musty, moldy or mildewy odors).
EXHIBIT C
(b) Landlord shall furnish to Tenant after-hours heating and air conditioning at the rate of $25.00 per hour (two-hour minimum charge) for such after-hours use. If the actual cost to Landlord of providing such after-hours heating and air-conditioning increases at any time during the term of this Lease, Landlord shall have the right to increase the hourly rate charged by Landlord for such after-hours usage upon at least 10 days prior notice to Tenant. Landlord shall bill Tenant monthly for such after-hours usage and Tenant shall pay such charges to Landlord, as additional rent, within 20 days after receipt of Landlord's statement of such charges.
(c) Landlord shall furnish to the Premises, during the usual business hours on business days, electric current sufficient for normal office use. Tenant agrees, should its electrical installation or electrical consumption be in excess of the aforesaid quantity or extend beyond normal business hours, to reimburse Landlord monthly for the measured consumption at the average cost per kilowatt hour charged to the Building during the period. If a separate meter is not installed at Tenant's cost, such excess cost will be established by an estimate agreed upon by Landlord and Tenant, and if the parties fail to agree, as established by an independent licensed engineer. Said estimates to be reviewed and adjusted quarterly. Tenant agrees not to use any apparatus or device in, or upon, or about the premises which may in any way increase the amount of such services usually furnished or supplied to said Premises, and Tenant further agrees not to connect any apparatus or device with wires, conduits or pipes, or other means by which such services are supplied, for the purpose of using additional or unusual amounts of such services without written consent of Landlord. Should Tenant use the same to excess, the refusal on the part of Tenant to pay upon demand of Landlord the amount established by Landlord for such excess charge shall constitute a breach of the obligation to pay rent under this Lease and shall entitle Landlord to the rights therein granted for such breach. At all times Tenant's use of electric current shall never exceed the capacity of the feeders to the Building or the risers or wiring installation and Tenants shall not install or use or permit the installation or use of any computer, larger than personal computer, or electronic data processing equipment in the Premises, without the prior written consent of Landlord.
(d) Water will be available in public areas for drinking and lavatory purposes only, but if Tenant requires, uses or consumes water for any purposes in addition to ordinary drinking and lavatory purposes of which fact Tenant constitutes Landlord to be the sole judge, Landlord may install a water meter and thereby measure Tenant's water consumption for all purposes. Tenant shall pay Landlord for the cost of the meter and the cost of the installation thereof and throughout the duration of Tenant's occupancy, Tenant shall keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense, in default of which Landlord may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant. Tenant agrees to pay for water consumed, as shown on said meter, as and when bills are rendered, and on default in making such payment, Landlord may pay such charges and collect the same from Tenant. Any such costs or expenses incurred, or payments made by Landlord for any of the reasons or purposes hereinabove stated shall be deemed to be additional rent payable by Tenant and collectible by Landlord as such.
EXHIBIT C
(e) Provide janitor service to the Premises, provided the same are kept reasonably in order by Tenant, and if to be kept clean by Tenant, no one other than persons approved by Landlord shall be permitted to enter the Premises for such purposes. If the Premises are not used exclusively as offices, they shall be kept clean and in order by Tenant, at Tenant's expense, and to the satisfaction of Landlord, and by persons approved by Landlord. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish, to the extent that the same exceeds the refuse and rubbish usually attendant upon the use of the Premises as offices.
(f) Landlord reserves the right to stop service of the elevator, plumbing, ventilation, air conditioning and electric systems, when necessary, by reason of accident or emergency or for repairs, alterations or improvements, in the judgment of Landlord desirable or necessary to be made, until said repairs, alterations or improvements shall have been completed, and shall further have no responsibility or liability for failure to supply elevator facilities, plumbing, ventilating, air conditioning or electric service, when prevented from so doing by strike or accident or by any cause beyond Landlord's reasonable control, or by laws, rules, orders, ordinances, directions, regulations or requirements of any federal, state, county or municipal authority or failure of gas, oil or other suitable fuel supply or inability by exercise of reasonable diligence to obtain gas, oil or other suitable fuel. It is expressly understood and agreed that any covenants on Landlord's part to furnish any service pursuant to any of the terms, covenants, conditions, provisions or agreements of this Lease, or to perform any act or thing for the benefit of Tenant, shall not be deemed breached if Landlord is unable to furnish or perform the same by virtue of a strike or labor trouble or any other cause whatsoever beyond Landlord's control.
(g) Landlord shall maintain and repair the riser closet on the ground floor of the Building and shall maintain or cause the appropriate telecommunications service company to maintain the telecommunications cabling and wiring to the Building. The cost of such maintenance and repair shall be included in Direct Expenses. Tenant shall be responsible for the installation, maintenance and repair at its expense of the telecommunications cabling and wiring from the riser closet to the Premises and shall use only SBC for such purposes. Tenant shall also be responsible for the installation, maintenance and repair of any telecommunications cabling and wiring within the Premises but may use any telecommunications service company to perform such work.
EXHIBIT C
EXHIBIT D
RULES AND REGULATIONS
Signature Center
1. Except as specifically provided in the Lease to which these Rules and Regulations are attached, no sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved by Landlord.
2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, or placed on any windowsill, which is visible from the exterior of the Premises, Tenant shall immediately discontinue such use. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises.
3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators, or stairways of the Building. The halls, passages, exits, entrances, elevators, and stairways are not open to the general public, but are open, subject to reasonable regulation, to Tenant's business invitees. Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Building and its tenants; provided that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal or unlawful activities. No tenant and no employee or invitee of any tenant shall go upon the roof of any building of the Project.
4. The directory of the building will be provided exclusively for the display of the name and location of tenants only, and Landlord reserves the right to exclude any other names therefrom.
5. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord, and except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises.
EXHIBIT D
6. Landlord will furnish Tenant, free of charge, with two keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor.
7. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation.
8. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight, which platforms shall be provided at Tenant's expense. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Premises or to any space therein to such a degree to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Premises must be acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Premises, by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant.
9. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Premises any birds or animals.
10. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord.
11. Tenant shall not waste electricity, water or air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Premises' heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and shall refrain from attempting to adjust controls. Tenant shall keep corridor doors closed, and shall close window coverings at the end of each business day.
EXHIBIT D
12. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Premises.
13. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 7 a.m. the following day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action.
14. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and electricity, gas or air outlets before tenant and its employees leave the Premises. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule.
15. Tenant shall not obtain for use on the Premises ice, drinking water, food beverages, towel or other similar services upon the Premises, except at such hours and under such regulations as may be fixed by Landlord.
16. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage of damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it.
17. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Building. Tenant shall not use the Premises for any business or activity other than that specifically provided for in Tenant's Lease.
18. Tenant shall not install any radio or television antenna, loudspeaker or other devices on the roof or exterior walls of the Premises. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere.
EXHIBIT D
19. Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof, except in accordance with the provisions of the Lease pertaining to alterations. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule.
20. Tenant shall not install, maintain or operate upon the Premises any vending machines without the written consent of Landlord.
21. Canvassing, soliciting and distributing of handbills or any other written material, and peddling in the Building are prohibited, and Tenant shall cooperate to prevent such activities.
22. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Building.
23. Tenant shall store all its trash and garbage within its Premises or in other facilities provided by Landlord. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord.
24. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral or objectionable purpose. No cooking shall be done or permitted on the Premises without Landlord's consent, except that use by Tenant of Underwriter's Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages or use of microwave ovens for employee use shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations.
25. Tenant shall not use in the Premises any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Premises.
EXHIBIT D
26. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address.
27. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency.
28. Tenant and its employees, guests and invitees shall not enter into the waterways located in the Building. No object of any kind may be floated or submerged in the waterways, and no foreign substance of any kind may be thrown in the waterways. The expense of any breakage or damage to any mechanical equipment related to the waterways resulting from violation of this rule or any expense incurred restoring the waterways to their normal condition shall be borne by the tenant who, or whose employees or invitees, shall have caused such damage.
29. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed.
30. Tenant's requirements will be attended to only upon appropriate application to the Building management office by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord.
31. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building.
32. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of Tenant's lease of its Premises in the Building.
33. Landlord reserves the right to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted.
34. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests.
EXHIBIT D
EXHIBIT E
PARKING RULES AND REGULATIONS
The following rules and regulations shall govern use of the parking facilities which are appurtenant to the Building.
1. All claimed damage or loss must be reported and itemized in writing delivered to the Landlord within ten business days after any claimed damage or loss occurs. Any claim not so made is waived. Landlord has the option to make repairs at its expense of any claimed damage within two business days after filing of any claim. In all court actions the burden of proof to establish a claim remains with Tenant. Court actions by Tenant for any claim must be filed in the court of jurisdiction where a claimed loss occurred within ninety days after date of damage or loss. Landlord is not responsible for damage by water, fire, or defective brakes, or parts, or for the act of omissions of others, or for articles left in the car. The total liability of Landlord is limited to $250.00 for all damages or loss to any car. Landlord is not responsible for loss of use.
2. Tenant shall not park or permit the parking of any vehicle under its control in any parking areas designated by Landlord as areas for parking by visitors to the Building. Tenant shall not leave vehicles in the parking areas overnight nor park any vehicles in the parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks.
3. Parking stickers or any other device or form of identification supplied by Landlord as a condition of use of the Parking Facilities shall remain the property of Landlord. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable and any device in the possession of an unauthorized holder will be void.
4. No overnight or extended term storage of vehicles shall be permitted.
5. Vehicles must be parked entirely within the painted stall lines of a single parking stall.
6. All directional signs and arrows must be observed.
7. The speed limit within all parking areas shall be 5 miles per hour.
EXHIBIT E
8. Parking is prohibited:
(a) in areas not striped for parking;
(b) in aisles;
(c) where "no parking" signs are posed;
(d) on ramps;
(e) in cross hatched areas; and
(f) in such other areas as may be designated by Landlord or
Landlord's Parking Operator.
9. Every parker is required to park and lock his own vehicle. All responsibility for damage to vehicles is assumed by the parker.
10. Loss of theft of parking identification devices from automobiles must be reported immediately, and a lost or stole report must be filed by the customer at that time. Landlord has the right to exclude any car from the parking facilities that does not have an identification.
11. Any parking identification devices reported lost or stolen found on any unauthorized car will be confiscated and the illegal holder will be subject to prosecution.
12. Lost or stolen devices found by the purchaser must be reported immediately to avoid confusion.
13. Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited.
14. Landlord reserves the right to refuse the sale of monthly stickers or other parking identification devices to any tenant or person and/or his agents or representatives who willfully refuse to comply with these Rules and Regulations and all unposted City, State or Federal ordinances, laws or agreements.
15. Landlord reserves the right to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities, as it deems necessary for the operation of the parking facilities. Landlord may refuse to permit any person who violates these rules to park in the parking facilities, and any violation of the rules shall subject the car to removal.
EXHIBIT E
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors
The Children's Internet, Inc.
We consent to the use of our Independent Auditors' Report dated February 26, 2004 covering the financial statements of The Children's Internet, Inc. (A Development Stage Company) for the years ended December 31, 2003 and 2002 and for the period from September 25, 1996 (inception) to December 31, 2003, to be included in a Form SB-2 registration statement to be filed with the Securities and Exchange Commission on approximately April 6, 2004.
We also consent to the reference to us as experts in matters of accounting and auditing in this registration statement.
/s/ Stonefield Josephson, Inc. STONEFIELD JOSEPHSON, INC. Certified Public Accountants Santa Monica, California April 6, 2004 |