<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________.
Commission File Number 1-11111
THE TESSERACT GROUP, INC.
----------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1581297
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3800 West 80th Street
Suite 1400
Minneapolis, Minnesota 55431
- ---------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(612) 837-8700
-----------------------------------------------
(Registrant's telephone number, including area code)
1300 Norwest Financial Center
7900 Xerxes Avenue South
Minneapolis, MN 55431
---------------------------------------------------------
(Former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
As of January 31, 1998, there were issued and outstanding 9,443,297 shares of
Common Stock, $.01 par value.
<PAGE>
THE TESSERACT GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
DECEMBER 31, 1997
Page
Number
------
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed consolidated balance sheets as of
December 31, 1997 and June 30, 1997 3
Condensed consolidated statements of operations for
the three months ended December 31, 1997 and 1996 4
Condensed consolidated statements of operations for
the six months ended December 31, 1997 and 1996 5
Condensed consolidated statements of cash flows for
the six months ended December 31, 1997 and 1996 6
Notes to condensed consolidated financial statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
Signatures 12
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
(DOLLARS IN THOUSANDS) 1997 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 18,202 $ 23,246
Settlement receivable - 650
Accounts receivable, net 869 20
Other current assets 1,129 315
----------- -----------
Total current assets 20,200 24,231
PROPERTY AND EQUIPMENT, NET 10,890 4,826
GOODWILL 16,692 -
OTHER ASSETS 861 -
----------- -----------
$ 48,643 $ 29,057
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 432 $ -
Accounts payable 546 571
Cash due to Sunrise shareholders and other
transaction costs 6,280 -
Other current liabilities 5,929 3,606
----------- -----------
Total current liabilities 13,187 4,177
LONG-TERM DEBT 850 -
OTHER LIABILITIES 696 -
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares issued and
outstanding - -
Common stock, $.01 par value, 25,000,000
shares authorized; issued and outstanding
9,443,297 shares at December 31, 1997 and
7,489,637 shares at June 30, 1997 94 75
Additional paid-in capital 57,104 46,388
Accumulated deficit (23,288) (21,583)
----------- -----------
Total shareholders' equity 33,910 24,880
----------- -----------
$ 48,643 $ 29,057
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three months ended
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
TUITION AND OTHER REVENUE $ 1,768 $ 1,512
PRIVATE SCHOOL COSTS AND OTHER EXPENSES 1,537 1,023
----------- -----------
GROSS PROFIT 231 489
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,130 831
----------- -----------
OPERATING LOSS (899) (342)
----------- -----------
OTHER INCOME
Investment income 253 306
Settlement income - 313
----------- -----------
253 619
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (646) 277
INCOME TAX EXPENSE - -
----------- -----------
NET EARNINGS (LOSS) $ (646) $ 277
----------- -----------
----------- -----------
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (.08) $ .04
----------- -----------
----------- -----------
Diluted $ (.08) $ .04
----------- -----------
----------- -----------
Shares used in calculation of earnings
(loss) per Common Share:
Basic 7,791 7,489
Diluted 7,791 7,571
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Six months ended
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
TUITION AND OTHER REVENUE $ 2,545 $ $2,259
PRIVATE SCHOOL COSTS AND OTHER EXPENSES 2,759 1,736
----------- -----------
GROSS PROFIT (LOSS) (214) 523
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,074 1,780
----------- -----------
OPERATING LOSS (2,288) (1,257)
----------- -----------
OTHER INCOME
Investment income 583 744
Settlement income - 938
----------- -----------
583 1,682
----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (1,705) 425
INCOME TAX EXPENSE - -
----------- -----------
NET EARNINGS (LOSS) $ (1,705) $ 425
----------- -----------
----------- -----------
EARNINGS (LOSS) PER SHARE COMMON SHARE:
Basic $ (.22) $ .06
----------- -----------
----------- -----------
Diluted $ (.22) $ .06
----------- -----------
----------- -----------
Shares used in calculation of earnings
(loss) per Common Share:
Basic 7,642 7,489
Diluted 7,642 7,573
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE>
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS) Six months ended
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (1,705) $ 425
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 189 159
Changes in operating assets and liabilities 1,284 (285)
----------- -----------
Net cash provided by (used in) operating activities (232) 299
----------- -----------
INVESTING ACTIVITIES
Purchase of Sunrise Educational Services, Inc.,
net of cash acquired (667) -
Proceeds from sales and maturities of marketable securities - 9,597
Additions to property and equipment (4,168) (20)
----------- -----------
Net cash provided by (used in) investing activities (4,835) 9,577
----------- -----------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 23 1
Repayment of long-term debt - (646)
----------- -----------
Net cash provided by (used in) financing activities 23 (645)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,044) 9,231
Cash and cash equivalents at beginning of period 23,246 15,391
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,202 $ 24,622
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
THE TESSERACT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the three-month and six-month periods ended December 31, 1997, are not
necessarily indicative of the results that may be expected for the year
ending June 30, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended June 30, 1997.
2. ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
Intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and contingency
disclosures included in the financial statements. Ultimate results could
differ from these estimates.
3. EARNINGS PER SHARE
The Company follows the procedures of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128
establishes accounting standards for computing and presenting earnings
per share. Basic earnings per common share are computed by dividing net
income by the weighted average number of shares of common stock
outstanding during the period. No dilution for potentially dilutive
securities is included. Diluted earnings per share are computed under
the treasury stock method and is calculated to compute the dilutive
effect of outstanding options, warrants and other securities.
-7-
<PAGE>
4. ACQUISITIONS
On December 18, 1997, the Company completed the purchase of Sunrise
Educational Services, Inc. ("Sunrise"), a Scottsdale, Arizona-based
operator of 32 preschool centers, primarily in Arizona. Sunrise has
expanded into the operation of private schools and has a contract to manage
public charter schools in many of its Arizona centers. This acquisition
has been accounted for as a purchase. The Company issued shares of common
stock and cash to Sunrise shareholders with a value of approximately
$13,800,000. Goodwill recorded on this transaction will be amortized on
the straight-line method over a period of 25 years.
Summarized below are the unaudited proforma combined results of operations
of the Company for the six month periods ended December 31, 1997 and 1996,
assuming the Sunrise acquisition was consummated as of July 1, 1996.
Sunrise's results included in the 1997 proforma amounts are for the six
month period ended October 31, 1997. Excluded from the results for the six
months ended December 31, 1997, is a charge of $1,114,000 or $.12 per share
which provided for impaired assets and rental commitments in connection
with Sunrise's management of seven preschool centers with a non-profit
organization. The proforma results are not necessarily indicative of the
operating results that would have been achieved had the acquisition
occurred on the date indicated, nor are they indicative of future operating
results.
<TABLE>
<CAPTION>
Six months ended
---------------------------
December 31, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Revenue $ 10,643,000 $ 9,116,000
Net earnings (loss) (1,944,000) 218,000
Net earnings (loss) per share $ (.21) $ .02
</TABLE>
In January 1998, the Company acquired all of the outstanding stock of
Academy of Business College, Inc., a Phoenix-based post secondary career
college, for cash of approximately $1,600,000. This acquisition will be
accounted for as a purchase.
5. SETTLEMENT OF DISPUTES
During the quarter ended December 31, 1996, the Company entered into a
final settlement agreement with its investment management firm, resolving
all remaining disputes relating to the firm's management of the Company's
investment portfolio. The investment management firm agreed to pay the
Company $1,250,000, of which $938,000 was received and recorded in income
during the six months ended December 31, 1996.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Tuition and other revenue for the three and six months ended December 31, 1997,
was $1,768,000 and $2,545,000, respectively, compared to $1,512,000 and
$2,259,000 for the same periods of the prior year. Revenues consist primarily
of tuition from the Company's private schools. The revenue increase in the
three and six month periods reflects the September opening of new schools in
Mays Landing, New Jersey, and South Bend, Indiana. It also reflects enrollment
and tuition increases at the Company's two other private schools in Eagan,
Minnesota, and Paradise Valley, Arizona. Operating results for Sunrise,
acquired by the Company in the latter part of December, were not material.
Private school costs and other expenses for the three and six months ended
December 31, 1997, were $1,537,000 and $2,759,000, respectively, compared to
$1,023,000 and $1,736,000 for the same periods of the prior year. The current
year three and six month periods include start-up costs relating to the opening
of the two new schools and the expansion of the Company's school in Eagan,
Minnesota.
Selling, general, and administrative expenses totaled $1,130,000 and $2,074,000
for the three and six months ended December 31, 1997, respectively, compared to
$831,000 and $1,780,000 for the same periods of the prior year. The increase
over the prior year relates to additional personnel and travel costs associated
with the development of new school opportunities and the pursuit of acquisition
opportunities.
Other income for the current year three and six month periods was $253,000 and
$583,000, respectively, compared to $619,000 and $1,682,000 for the same periods
of the prior year. The decrease in investment income from a year ago is due to
lower cash investment levels. Also, the prior year three and six month periods
included $313,000 and $938,000, respectively, received on the settlement of
issues with the Company's investment management firm.
The Company reported a net loss of $646,000 or $.08 per share in the three
months ended December 31, 1997, compared to net earnings of $277,000 or $.04 per
share in the same period of the prior year. For the six months ended December
31, 1997, the Company reported a net loss of $1,705,000 or $.22 per share,
compared to net earnings of $425,000 or $.06 per share for the same period of
the prior year. The change is primarily due to the start-up costs incurred at
the new schools in the current year and the settlement income recorded in the
prior year.
-9-
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
During the six months ended December 31, 1997, net cash used in operating
activities totaled $232,000, resulting from the net loss recorded in the
six-month period, offset by changes in operating assets and liabilities during
the six months.
The Company invested $4,168,000 in property and equipment in the six months
ended December 31, 1997, primarily related to the expansion of the Eagan
facility to include a middle school and the opening of the two new schools.
The Company has working capital of $7,013,000 at December 31, 1997, compared to
$20,054,000 at June 30, 1997. The decrease is primarily due to the acquisition
of Sunrise along with the investments in property and equipment previously
discussed. As part of the Sunrise acquisition, shareholders elected to receive
the maximum amount of cash available under the terms of the transaction. As a
result, the Company will disburse to Sunrise shareholders approximately
$4,200,000 in January 1998 in payment of the cash portion of the acquisition.
In addition, the Company has incurred an additional $2,100,000 in transaction
related fees and expenses.
Subsequent to December 31, 1997, the Company acquired all of the outstanding
stock of Academy of Business College, Inc. for approximately $1,600,000.
As the Company undertakes its school expansion plans, it expects to lease all
future school sites and related equipment in order to reduce the significant
capital requirements of acquiring and equipping school facilities.
Although no assurances can be made, the Company believes it has sufficient cash
on hand to ensure uninterrupted performance on its operating obligations as
currently anticipated.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 1997 Annual Meeting of Shareholders on December 18, 1997, the
shareholders approved the following:
1. Proposal to issue shares of common stock of the Company in accordance with
the terms of the Agreement and Plan of Merger dated September 2, 1997,
among the Company, Sun Delaware, Inc., a wholly-owned subsidiary of the
Company and Sunrise Educational Services, Inc., pursuant to which, among
other things, Sunrise will be merged with and into Sun Delaware, Inc. The
proposal received 4,567,248 votes for and 16,565 votes against. There were
9,538 abstentions and 2,587,473 broker nonvotes.
2. Proposal to amend the 1988 Education Alternatives, Inc. Stock Option Plan,
to increase the shares reserved for issuance thereunder to 1,900,000. The
proposal received 4,023,353 votes for and 541,306 votes against. There
were 28,692 abstentions and 2,587,473 broker nonvotes.
3. Election of directors to serve until his or her successor is duly elected.
The directors were elected as follows:
<TABLE>
<CAPTION>
Votes for which authority
Director-Nominee Votes for withheld
---------------- --------- --------
<S> <C> <C>
John T. Golle 6,813,934 366,890
Martha Taylor Thomas 6,813,639 367,185
</TABLE>
4. Proposal to amend Article I of the Company's Restated Articles of
Incorporation to change the name of the corporation to The TesseracT Group,
Inc. The proposal received 7,090,033 votes for and 86,146 votes against.
There were 4,645 abstentions and no broker nonvotes.
5. Proposal to ratify the appointment of Arthur Andersen LLP as independent
auditors for the 1998 fiscal year. The proposal received 7,164,556 votes
for and 4,780 votes against. There were 11,488 abstentions and no broker
nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10 Employment Agreement between the Company and Todd Severson dated
November 3, 1997.
27 Financial Data Schedule (EDGAR version only).
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K have been filed by the Company during the three
months ended December 31, 1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TESSERACT GROUP, INC.
Date: February 13, 1998 By
----------------------
John T. Golle
Chairman and Chief
Executive Officer
Date: February 13, 1998 By
----------------------
Tony L. Verbeten
Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,202
<SECURITIES> 0
<RECEIVABLES> 869
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,200
<PP&E> 10,890
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,643
<CURRENT-LIABILITIES> 13,187
<BONDS> 0
0
0
<COMMON> 94
<OTHER-SE> 33,816
<TOTAL-LIABILITY-AND-EQUITY> 48,643
<SALES> 0
<TOTAL-REVENUES> 2,545
<CGS> 0
<TOTAL-COSTS> 2,759
<OTHER-EXPENSES> 2,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,705)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,705)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
<PAGE>
EDUCATION ALTERNATIVES, INC.
1300 Norwest Financial Center
7900 Xerxes Avenue South
Minneapolis, Minnesota 55431
EMPLOYMENT AGREEMENT
with
TODD K. SEVERSON
THIS AGREEMENT is made as of November 3, 1997, between EDUCATION
ALTERNATIVES, INC., a Minnesota corporation (the "Company"), and Todd K.
Severson ("Employee").
RECITALS
The Company's current business activities include, among other
things, designing, developing, marketing and providing educational services.
Employee desires to be employed, and the Company desires to employ
Employee, in connection with its business in the position of Vice President of
Human Resources.
Accordingly, in consideration of the mutual promises and agreements
contained herein, the parties hereto agree as follows:
1. NATURE OF EMPLOYMENT. The Company shall employ corporate
Employee and Employee shall serve the Company as the Vice President of Human
Resources of the Company upon the terms and conditions contained herein.
Employee agrees to devote his full time and best efforts to the business of the
Company and the performance of his duties hereunder. Such duties shall be
consistent with the position description of the Company and which such
description may be changed by the Company from time to time. Employee shall be
subject to the supervision and direction of the Chief Executive Officer of the
Company, as to assignment and performance of his duties.
2. TERM OF EMPLOYMENT. The term of Employee's employment under
this Agreement shall commence on November 7, 1997, and continue, upon the terms
and conditions contained herein, until terminated in accordance with
paragraph 3 hereof.
<PAGE>
3. TERMINATION. This Agreement and Employee's employment hereunder
may be terminated in accordance with the following provisions:
(a) DISABILITY. If Employee at any time is prevented from
performing his duties under this Agreement by reason of illness, injury or
mental incapacity for an aggregate of one hundred twenty (120) days in any
twelve consecutive months during the term of this Agreement, the Company shall
have the right to terminate this Agreement and Employee's employment hereunder
by giving Employee fourteen (14) days' prior written notice of termination.
(b) CAUSE. The Company shall have the right to terminate this
Agreement and Employee's employment hereunder for cause by giving Employee
thirty (30) days' prior written notice of termination. "Cause" shall include
gross negligence, gross neglect of duties, gross insubordination, Employee's
unauthorized appropriation of the Company's property, willful violation of any
law applicable to the conduct of the Company's business and affairs, the
violation of which could have a material adverse effect upon the business or
financial condition of the Company, and conviction of or plea of no contest to
any crime involving moral turpitude.
(c) WITHOUT CAUSE. The Company shall have the right to terminate this
Agreement and Employee's employment hereunder without cause at any time by
giving Employee thirty (30) days' prior written notice of termination,
provided, that the Company shall be obligated to make severance payments to
Employee (provided that Employee has not violated the terms of his non-
competition agreement set forth in paragraph 9 hereof) in an amount equal to
$10,000 per month (exclusive of any benefits) for six (6) months.
(d) BY EMPLOYEE. This Agreement may be terminated at any time by
Employee upon thirty (30) days' prior written notice to the Company.
(e) RETURN OF PROPERTY. No later than the date of cessation of his
employment by the Company, Employee shall deliver to an executive officer of
the Company (or another Company employee designated by an executive officer)
all keys, credit cards, travel advances, business plans and records (including
all copies and extracts thereof) and other property of the Company in
Employee's possession, custody or control.
(f) RIGHT TO RECEIVE COMPENSATION AND BENEFITS. Employee's right to
receive compensation and benefits pursuant to paragraphs 4 and 5 of this
Agreement (except for disability or other benefits that, by their terms, arise
or are operative after termination) shall cease upon the effective date of
termination under this paragraph 3.
-2-
<PAGE>
4. COMPENSATION.
(a) BASE SALARY. Employee shall receive a base salary of $10,000 per
month ($120,000 annualized), payable semi-monthly, on the 15th and last day of
each calendar month commencing with the first day of employment, or such higher
compensation as the Company in its discretion may from time to time determine
to be appropriate.
(b) PERFORMANCE BONUS. Employee shall be eligible to receive annual
performance bonuses to be determined by the Board of Directors in amounts not
to exceed $25,000 per year based upon the achievement (as determined by the
Board of Directors) of mutually agreed performance objectives.
5. EMPLOYEE BENEFITS.
(a) BENEFIT PLANS AND PROGRAMS. During his term of employment Employee
shall be entitled to participate in such benefit plans and programs as the
Company may make available from time to time. The details of the availability
and operation of benefit plans and programs are governed by the plan or program
documents or by the Company's employee handbook, where applicable. The Company
reserves the right to change or discontinue any benefit plan or program at any
time upon reasonable notice to employees.
(b) OPTIONS. In addition to any benefits received under subparagraph
5(a) above and subject to the terms and conditions of a definitive stock
option agreement between Employee and the Company pursuant to the Company's
1988 Stock Option Plan, as Amended and Restated, Employee shall receive
options to purchase 25,000 shares of the Company's common stock, par value
$.01 per share, at a price as determined by the then current market price at
date of grant (hire). Vesting of these options will be subject to the
Employees performance as assessed by the CEO and approved by the Board of
Directors.
6. REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Employee for all reasonable and necessary business expenses incurred in the
performance of his duties hereunder.
7. TRADE SECRETS. Employee shall not, during the term of this
Agreement or at any time thereafter, divulge, furnish or make accessible to
anyone other than the directors, officers, employees and agents of the Company
any knowledge or information with respect to (a) processes, plans, software,
formulae, machinery, devices or material relating to the business, products, or
activities of the Company, its affiliates or subsidiaries which is maintained
by the Company as secret or confidential, or (b) any development or research
work of the Company, its affiliates or subsidiaries which is maintained by the
Company as secret or confidential, or (c) any other aspect of the business,
products, or activities of the Company, its
-3-
<PAGE>
affiliates or subsidiaries which is maintained by the Company as secret or
confidential, or (d) any customer or student lists of the Company, its
affiliates or subsidiaries which are maintained by the Company as secret or
confidential. This restriction shall not apply to any information (a) that
becomes generally available to the public other than as a result of
unauthorized disclosure by Employee, (b) that was available to Employee on a
nonconfidential basis prior to the date hereof or is received hereafter from
a third party without restriction, or (c) that is disclosed pursuant to a
requirement of a government agency.
8. INTELLECTUAL PROPERTY. As one of the conditions to Employee's
employment hereunder, Employee shall do all in his power to promote the
interests of the Company and shall exercise his inventive faculties for the
benefit of the Company. If Employee shall discover or invent anything related
to the business of the Company, or its affiliates or subsidiaries, at the
specific request or instruction of the Company, the same shall be the exclusive
property of the Company. Employee shall forthwith disclose in writing such
discoveries or inventions to the Company but to no other person and shall
forthwith assign to the Company full and exclusive rights to any such discovery
or invention and to any trademark, copyright or patent to the full end of the
term of such trademark, copyright or patent. Employee, upon request of the
Company, shall forthwith execute all documents necessary or advisable in the
opinion of the Company to direct the issuance of trademarks, copyrights or
patents to the Company or to vest title in the Company to such inventions or
discoveries. The expense of securing any trademark, copyright or patent shall
be borne by the Company. The continuance of Employee in the Company's employ
for a definite period is not made obligatory upon either party hereto as a
condition hereof. Employee shall hold any secret process, software, plans,
formula, methods or applications developed for the Company or its affiliates or
subsidiaries but for which no trademark, copyright or patent is issued, as
trustee for the benefit of the Company. This paragraph does not apply to an
invention which was developed entirely on Employee's own time and (a) which
does not relate (i) directly to the business of the Company or (ii) to the
Company's actual or demonstrably anticipated research or development, or (b)
which does not result from any work performed by the Employee for the Company.
9. NON-COMPETITION. Employee covenants and agrees that, commencing on
November 7, 1997, and thereafter during the term of this Agreement and without
the express consent of the Board of Directors of the Company, he will not give
advice or render services as an employee or consultant to, nor invest or
acquire any interest in, any corporation or any other business organization, a
substantial portion of the business of which is the same as, related to, or
complementary to the business of the Company or its affiliates or subsidiaries,
provided, however, that Employee may invest in securities of any company which
is listed on a national securities exchange. Employee also covenants and
agrees that for one (1) year(s) following termination of this Agreement (unless
such termination is involuntary and effected by the Company without cause), he
will not in any manner personally solicit or cause to be solicited in
competition with the Company or its affiliates or subsidiaries any persons or
companies who were or are employees, customers or reasonably firm prospective
customers of
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<PAGE>
the Company or such affiliates or subsidiaries during the term of this
Agreement. Employee hereby agrees to these restrictions in recognition that
the imposition of such restrictions may be essential to the success of the
Company and the livelihood of the Employee's associates.
10. SPECIFIC ENFORCEMENT. Employee acknowledges and agrees that a
breach by him of the provisions of this Agreement, including without limitation
the provisions of paragraphs 8, 9, and 10 hereof, may cause the Company
irreparable injury and damage which cannot be reasonably or adequately
compensated by damages at law. Employee, therefore, expressly agrees that the
Company shall be entitled to injunctive relief or other equitable relief to
prevent a breach of this Agreement or any part thereof, in addition to any
other remedies legally available to it.
11. INVALIDITY. In case any one or more of the provisions of this
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality, and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
12. NOTICES. Any notices required to be given to the Company hereunder
shall be deemed properly given if addressed to its registered office. Any
notices required to be given to Employee hereunder shall be deemed properly
given if addressed to:
3800 West 80th Street
Suite 1400
Minneapolis, Minnesota 55431
13. GOVERNING LAW. This Agreement shall be construed under and
governed by the laws of the State of Minnesota.
14. ASSIGNMENTS. This Agreement shall not be assignable, in whole or
in part, by either party.
15. AMENDMENTS. This Agreement may be amended, terminated or
superseded only by an agreement in writing between the Company and the
Employee.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
EDUCATION ALTERNATIVES, INC. EMPLOYEE
By /s/ John T. Golle /s/ Todd K. Severson
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11/5/97
Its Chairman and CEO
--------------------------
11/3/97
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