<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 September 30, 1998.
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)
Not applicable
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, 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 November 10, 1998, there were issued and outstanding 9,579,106 shares of
Common Stock, $.01 par value.
<PAGE>
THE TESSERACT GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed consolidated balance sheets as of
September 30, 1998 and June 30, 1998 3
Condensed consolidated statements of operations for
the three months ended September 30, 1998 and 1997 4
Condensed consolidated statements of cash flows for
the three months ended September 30, 1998 and 1997 5
Notes to condensed consolidated financial statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 8
Signatures 9
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
(DOLLARS IN THOUSANDS) 1998 1998
------------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,940 $ 5,543
Settlement receivable - 650
Accounts receivable, net 2,224 2,370
Other current assets 2,690 1,927
-------- --------
Total current assets 9,854 10,490
INTANGIBLE ASSETS, NET 17,539 18,984
PROPERTY AND EQUIPMENT, NET 26,254 19,479
OTHER ASSETS 356 310
-------- --------
$ 54,003 $ 49,263
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ - $ 470
Accounts payable 1,109 984
Other current liabilities 8,580 5,767
-------- --------
Total current liabilities 9,689 7,221
LONG-TERM OBLIGATIONS 13,763 8,578
OTHER 714 715
-------- --------
COMMITMENTS AND CONTINGENCIES
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
9,579,106 shares at September 30, 1998
and 9,570,803 at June 30, 1998 96 96
Additional paid-in capital 57,702 57,673
Accumulated deficit (27,961) (25,020)
-------- --------
Total shareholders' equity 29,837 32,749
-------- --------
$ 54,003 $ 49,263
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) September 30,
-----------------------
1998 1997
------------ ---------
<S> <C> <C>
REVENUE $ 6,955 $ 777
OPERATING EXPENSES 8,588 1,222
------- -------
SCHOOL OPERATING LOSS (1,633) (445)
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 1,106 944
------- -------
OPERATING LOSS (2,739) (1,389)
------- -------
OTHER INCOME (EXPENSE)
Investment Income 56 330
Interest expense (258) -
------- -------
(202) 330
------- -------
LOSS BEFORE INCOME TAX EXPENSE (2,941) (1,059)
INCOME TAX EXPENSE - -
------- -------
NET LOSS $(2,941) $(1,059)
------- -------
------- -------
NET LOSS PER COMMON SHARE $ (.31) $ (.14)
------- -------
------- -------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(BASIC AND DILUTED) 9,577 7,490
------- -------
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE>
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
(IN THOUSANDS) September 30,
-----------------------
1998 1997
------------ ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,941) $ (1,059)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 602 81
Changes in operating assets and liabilities 2,761 1,995
------- --------
Net cash provided by operating activities 422 1,017
------- --------
INVESTING ACTIVITIES
Additions to property and equipment (6,896) (2,987)
Cash of Preschool Services, Inc. 1,137 -
------- --------
Net cash used in investing activities (5,759) (2,987)
------- --------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 30 19
Proceeds from financing transactions 5,247 -
Repayment of long-term debt (543) -
------- --------
Net cash provided by financing activities 4,734 19
------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (603) (1,951)
Cash and cash equivalents at beginning of period 5,543 23,246
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,940 $21,295
------- --------
------- --------
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE>
THE TESSERACT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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 period ended September 30, 1998, are not necessarily
indicative of the results that may be expected for the year ending June 30,
1999. 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, 1998.
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. PRESCHOOL SERVICES, INC.
The Company adopted the general guidelines of Emerging Issues Task Force
97-2 effective July 1, 1998 and accordingly has consolidated Preschool
Services, Inc. ("PSI"), a Hawaii non-profit corporation in which the
Company has a controlling interest. Prior to the Company's December 1997
acquisition of Sunrise Educational Services, Inc. ("Sunrise"), Sunrise had
transferred a portion of its operations to PSI. Sunrise provides PSI with
management, administration, and educational programs for PSI's child care
centers and charter schools and leases substantially all of the equipment
and other property necessary for the operation of the related educational
facility to PSI under an Administrative Services Agreement, License and
Equipment Lease (the "PSI Agreement"). The PSI Agreement stipulates that
Sunrise is to receive a fee for providing the services described above.
The results of operations of PSI for the period from the acquisition of
Sunrise (December 18, 1997) through June 30, 1998, were not material to the
consolidated financial statements of the Company for the year ended June
30, 1998.
Prior to its acquisition by the Company, Sunrise had written off amounts
due from PSI due to the historical and anticipated inability of PSI to
generate sufficient cash flow to make the lease and other payments due to
Sunrise. As of June 30, 1998, the cumulative amount written off by
Sunrise related to the PSI Agreement approximated $1,800,000. During the
three months ended September 30, 1998, PSI generated sufficient cash flow
to reimburse Sunrise approximately $1,035,000 of the amount previously
written off. This reimbursement has been recorded as a reduction of
previously recorded goodwill associated with the Sunrise acquisition.
4. LONG TERM OBLIGATIONS
During the three months ended September 30, 1998, the Company completed
the refinancing of an owned private school facility. Total proceeds
from the refinancing were $5,200,000, representing the facility cost.
Interest payments on the financing, amounting to approximately $550,000
on an annual basis, are subject to annual increases based upon changes in
the Consumer Price Index. The financing obligations are structured as
leases, having an initial term of 15 years, with the Company having two
10-year renewal options. The terms of the lease require that the Company
prepay, on September 1 of each year, the next 12 months rent and estimated
property taxes and insurance premiums into an account jointly controlled
by the Company and the lender.
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS No. 131"), will
be effective for the Company's fiscal year ending June 30, 1999. SFAS No.
131 requires disclosures of business and geographic segments in the
consolidated financial statements of the Company. The Company is currently
analyzing the impact it will have on the disclosures in its financial
statements.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the three months ended September 30, 1998, was $6,955,000 compared
to $777,000 for the same period in the prior year. Operating expenses for the
current year three month period totaled $8,588,000, compared to $1,222,000 for
the prior year. The increase in both revenue and operating expenses is due to
the acquisition of Sunrise Educational Services, Inc. ("Sunrise") in December
1997 and Academy of Business, Inc. ("ABC") in January 1998. In addition, the
Company began operations at four new TesseracT schools in September 1998. The
first quarter represents a disproportionately small part of full year revenues
and operating margins because of the September school start date for the
Company's private and charter schools. In addition, preschool enrollment tends
to be lower in the summer months.
Selling, general, and administrative expenses were $1,106,000 for the three
months ended September 30, 1998, compared to $944,000 for the same period in
the prior year. The increase reflects added personnel, travel and other costs
associated with the integration of Sunrise and ABC.
The Company recorded interest expense of $258,000 in the three months ended
September 30, 1998, primarily resulting from the three school financing
transactions completed by the Company in the fourth quarter of fiscal 1998. In
addition, the Company finalized the refinancing of a fourth private school
facility during the current quarter. Investment income totaled $56,000 in the
three months ended September 30, 1998, compared to $330,000 for the same period
of the prior year. The reduction is due to lower investment levels in the
current year three month period.
The Company reported a net loss of $2,941,000 or $.31 per share in the three
months ended September 30, 1998, compared to a net loss of $1,059,000 or $.14
per share in the same period of the prior year. The increase in the current
period net loss is due to higher operating and integration expenses associated
with the Sunrise and ABC acquisitions, as well as full periods of expenses
related to the new schools opened in the quarter.
CAPITAL RESOURCES AND LIQUIDITY
During the three months ended September 30, 1998, net cash provided by
operating activities totaled $422,000, primarily due to changes in operating
assets and liabilities, offset by the net loss incurred during the three month
period.
Additions to property and equipment during the first quarter of fiscal 1999
totaled $6,896,000, primarily related to facility construction costs at two new
private school facilities in the Phoenix metropolitan area. The refinancing of
one of these schools was finalized during the current period, generating
proceeds of approximately $5,200,000. The refinancing of the other school is
anticipated to occur in the second quarter, resulting in additional proceeds to
the Company of approximately $6,500,000.
Management currently believes that the cash on hand, cash from the proceeds
from financing transaction anticipated to be finalized in the second quarter
of fiscal 1999 and cash projected to be generated from operations will be
adequate to ensure uninterrupted performance of its operating obligations as
currently structured and anticipated. If the Company does not achieve its
projected operating results and/or is unable to secure adequate equipment
financing, management believes that it has options available to obtain
necessary capital, including the issuance of subordinated debt or private
placement equity financing. There can be no assurance, however, that these
sources would be available to the Company on acceptable terms.
YEAR 2000 ISSUE
Based on internal analysis, the Company does not believe that the Year 2000
issue will materially affect its information technology systems. The Company
is in the process of integrating its current multiple financial systems into
a consolidated system that will be Year 2000 compliant. The Company
anticipates incurring costs approximating $200,000 over the next twelve
months to replace its current financial systems and replace or upgrade
related hardware.
The Company does not believe that the Year 2000 compliance of its suppliers
or customers will affect the Company's operations. The products purchased
from the Company's suppliers are available from numerous sources and are not
fundamental to the Company's operations as a service provider. In addition,
the Company's customers consist primarily of individuals who make tuition
payments to the Company on behalf of themselves or their children in exchange
for educational services. The ability of those customers to make tuition
payments is not expected to be affected by the Year 2000 issue.
-7-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
27 Financial Data Schedule (EDGAR version only).
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the three months ended September
30, 1998.
-8-
<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: November 12, 1998 By /s/ John T. Golle
-----------------------------
John T. Golle
Chairman and Chief
Executive Officer
Date: November 12, 1998 By /s/ Tony L. Verbeten
-----------------------------
Tony L. Verbeten
Chief Financial Officer
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FORM 10Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,940
<SECURITIES> 0
<RECEIVABLES> 2,224
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,854
<PP&E> 26,254
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,003
<CURRENT-LIABILITIES> 9,689
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> 29,741
<TOTAL-LIABILITY-AND-EQUITY> 54,003
<SALES> 0
<TOTAL-REVENUES> 6,955
<CGS> 0
<TOTAL-COSTS> 8,588
<OTHER-EXPENSES> 1,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 258
<INCOME-PRETAX> (2,941)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,941)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,941)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
