<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 March 31, 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 May 14, 1998, there were issued and outstanding 9,544,908 shares of Common
Stock, $.01 par value.
<PAGE>
THE TESSERACT GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1998
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed consolidated balance sheets as of
March 31, 1998 and June 30, 1997 3
Condensed consolidated statements of operations for
the three months ended March 31, 1998 and 1997 4
Condensed consolidated statements of operations for
the nine months ended March 31, 1998 and 1997 5
Condensed consolidated statements of cash flows for
the nine months ended March 31, 1998 and 1997 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 6. EXHIBITS AND REPORTS ON FORM 8-K 10
Signatures 11
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
(DOLLARS IN THOUSANDS) 1998 1997
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,949 $ 23,246
Settlement receivable - 650
Accounts receivable, net 1,740 20
Other current assets 942 315
--------- ---------
Total current assets 9,631 24,231
PROPERTY AND EQUIPMENT, NET 13,050 4,826
GOODWILL 18,532 -
OTHER ASSETS 1,096 -
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$ 42,309 $ 29,057
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 432 $ -
Accounts payable 859 571
Other current liabilities 6,266 3,606
--------- ---------
Total current liabilities 7,557 4,177
LONG-TERM DEBT 785 -
OTHER LIABILITIES 777 -
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value,
5,000,000 shares authorized; no shares
issued and outstanding - -
Common stock, $.01 par value,
25,000,000 shares authorized; issued
and outstanding
9,524,908 shares at March 31, 1998
and 7,489,637 shares at June 30, 1997 95 75
Additional paid-in capital 57,498 46,388
Accumulated deficit (24,403) (21,583)
--------- ---------
Total shareholders' equity 33,190 24,880
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$ 42,309 $ 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>
Three months ended
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) March 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUE $ 6,206 $ 1,459
DIRECT OPERATING COSTS 5,975 1,051
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GROSS PROFIT 231 408
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,430 913
--------- ---------
OPERATING LOSS (1,199) (505)
--------- ---------
OTHER INCOME
Investment income 119 311
Settlement income - 312
Interest expense (35) (1)
--------- ---------
84 622
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (1,115) 117
INCOME TAX EXPENSE - -
--------- ---------
NET EARNINGS (LOSS) $ (1,115) $ 117
--------- ---------
--------- ---------
EARNINGS (LOSS) PER COMMON SHARE - BASIC $ (.12) $ .02
--------- ---------
--------- ---------
EARNINGS (LOSS) PER COMMON SHARE -
ASSUMING DILUTION $ (.12) $ .02
--------- ---------
--------- ---------
SHARES USED IN CALCULATION OF EARNINGS (LOSS)
PER COMMON SHARE:
BASIC 9,465 7,490
DILUTED 9,465 7,590
</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>
Nine months ended
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) March 31,
------------------------------
1998 1997
----------- ----------
<S> <C> <C>
REVENUE $ 8,751 $ $3,718
DIRECT OPERATING COSTS 8,734 2,787
----------- ----------
GROSS PROFIT (LOSS) (17) 931
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,503 2,693
----------- ----------
OPERATING LOSS (3,486) (1,762)
----------- ----------
OTHER INCOME
Investment income 703 1,070
Settlement income - 1,250
Interest expense (37) (16)
----------- ----------
666 2,304
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (2,820) 542
INCOME TAX EXPENSE - -
----------- ----------
NET EARNINGS (LOSS) $ (2,820) $ 542
----------- ----------
----------- ----------
EARNINGS (LOSS) PER COMMON SHARE - BASIC $ (.34) $ .07
----------- ----------
----------- ----------
EARNINGS (LOSS) PER COMMON SHARE -
ASSUMING DILUTION $ (.34) $ .07
----------- ----------
----------- ----------
SHARES USED IN CALCULATION OF EARNINGS (LOSS)
PER COMMON SHARE:
BASIC 8,249 7,489
DILUTED 8,249 7,557
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
(IN THOUSANDS) March 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (2,820) $ 542
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 477 238
Changes in operating assets and liabilities 84 (473)
-------- --------
Net cash provided by (used in) operating activities (2,259) 307
-------- --------
INVESTING ACTIVITIES
Purchase of Sunrise Educational Services, Inc.,
net of cash acquired (6,465) -
Purchase of Academy of Business College, Inc.,
net of cash acquired (1,526) -
Proceeds from sales and maturities of marketable securities - 9,597
Additions to property and equipment (6,341) (49)
-------- --------
Net cash provided by (used in) investing activities (14,332) 9,548
-------- --------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 417 2
Repayment of long-term debt (123) (646)
-------- --------
Net cash provided by (used in) financing activities 294 (644)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,297) 9,211
Cash and cash equivalents at beginning of period 23,246 15,391
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,949 $ 24,602
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
THE TESSERACT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 and nine-month periods ended March 31, 1998, 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.
4. ACQUISITIONS
On January 15, 1998, the Company acquired all of the outstanding stock of
Academy of Business, Inc. ("ABC"), a Phoenix, Arizona-based post-secondary
career college, for approximately $1,600,000. This acquisition has been
accounted for as a purchase, with goodwill recorded on the transaction
being amortized on the straight-line method over a period of 25 years.
ABC is accredited by the North Central Association of Colleges and Schools,
and is an Authorized Academic Training Provider (AATP) for Microsoft. In
addition to offering traditional business courses, ABC offers comprehensive
training to students preparing for various Microsoft certifications.
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.
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<PAGE>
Summarized below are the unaudited proforma combined results of operations
of the Company for the nine month periods ended March 31, 1998 and 1997,
assuming the Sunrise acquisition was consummated as of July 1, 1996.
Sunrise's operating results included in the proforma calculation for the
nine months ended March 31, 1998, are for the nine month period ended
January 31, 1998. Excluded from the results for the nine months ended
March 31, 1998, 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 centers with a non-profit organization. The results of
operations of ABC prior to its acquisition on January 15, 1998 have not
been included in the Company's proforma results of operations for the nine
months ended March 31, 1998 and 1997 because such results are not material
to the Company's results of operations taken as a whole. 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>
Nine months ended
------------------------------------------
March 31, March 31,
1998 1997
----------------- ----------------
<S> <C> <C>
Revenue $ 16,625,000 $ 14,405,000
Net earnings (loss) (3,682,000) 132,000
Net earnings (loss) per share $ (.39) $ .01
</TABLE>
5. SETTLEMENT OF DISPUTES
During the nine months ended March 31, 1997, 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. Total settlement proceeds of $1,250,000 were
received and recorded in income during the nine months ended March 31,
1997.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the three and nine months ended March 31, 1998, was $6,206,000 and
$8,751,000, respectively, compared to $1,459,000 and $3,718,000 for the same
periods of the prior year. The increase in revenue in the current year three
and nine month periods is primarily the result of the acquisitions of Sunrise
Educational Services, Inc. ("Sunrise") in December 1997 and Academy of Business,
Inc. ("ABC") in January 1998. In addition, the increase reflects the September
1997 opening of new private schools in Mays Landing, New Jersey, and South Bend,
Indiana, along with tuition and enrollment increases at the Company's private
schools in Eagan, Minnesota, and Paradise Valley, Arizona.
Direct operating costs for the three and nine months ended March 31, 1998,
totaled $5,975,000 and $8,734,000, respectively, compared to $1,051,000 and
$2,787,000 for the same periods of the prior year. The increase, as previously
discussed, is primarily related to the acquisitions made by the Company in
fiscal 1998. In addition, the current year three and nine month periods include
start-up costs relating to the September 1997 opening of the New Jersey and
Indiana private schools and the expansion of the Company's school in Eagan,
Minnesota.
Selling, general, and administrative expenses totaled $1,430,000 and
$3,503,000 in the three and nine-month periods ended March 31, 1998,
respectively, compared to $913,000 and $2,693,000 for the same periods of the
prior year. The increase over the prior year relates to additional
personnel, travel and other pre-opening costs associated with the development
of new school opportunities, along with costs associated with the pursuit of
acquisition opportunities.
Other income for the current year three and nine month periods was $84,000 and
$666,000, respectively, compared to $622,000 and $2,304,000 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 nine month periods
included $312,000 and $1,250,000, respectively, received on the settlement of
issues with the Company's investment management firm.
The Company reported a net loss of $1,115,000 or $.12 per share in the three
months ended March 31, 1998, compared to net earnings of $117,000 or $.02 per
share in the same period of the prior year. For the nine months ended March 31,
1998, the Company reported a net loss of $2,820,000 or $.34 per share, compared
to net earnings of $542,000 or $.07 per share for the same period of the prior
year. The change is primarily due to the new school start-up and pre-opening
costs incurred in the current year and the settlement income recorded in the
prior year.
CAPITAL RESOURCES AND LIQUIDITY
During the nine months ended March 31, 1998, net cash used in operating
activities totaled $2,259,000, resulting from the net loss recorded in the
nine-month period.
The Company invested $6,341,000 in property and equipment in the nine months
ended March 31, 1998, primarily related to the expansion of the Eagan facility
to include a middle school and the opening of two new private schools. The
Company is currently in the process of arranging for the sale/leaseback of its
private school facilities and anticipates having the initial phase of the
transaction completed by June 30, 1998. As the Company undertakes its future
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. The Company's anticipated financing strategy
is a forward looking statement. The Company's ability to complete its financing
strategy will depend on the availability of financial sources willing to lend
money to the Company on satisfactory terms and conditions.
The Company has working capital of $2,074,000 at March 31, 1998, compared to
$20,054,000 at June 30, 1997. The decrease is primarily due to the acquisitions
of Sunrise and ABC along with the investments in property and equipment
previously discussed.
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<PAGE>
The Company believes that with the anticipated proceeds from the
sale/leaseback of its school facilities and cash on hand, it has sufficient
cash to ensure uninterrupted performance on its operating obligations as
currently anticipated.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10 Employment Agreement between the Company and Tony Verbeten
dated February 16, 1998.
27 Financial Data Schedule (EDGAR version only).
(b) REPORTS ON FORM 8-K:
On January 2, 1998, the Company filed a report on Form 8-K
related to the consummation of the merger between The TesseracT
Group, Inc. and Sunrise Educational Services, Inc.
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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: May 15, 1998 By
------------------------
John T. Golle
Chairman and Chief
Executive Officer
Date: May 15, 1998 By
------------------------
Tony L. Verbeten
Chief Financial Officer
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<PAGE>
THE TESSERACT GROUP, INC.
3800 West 80th Street
Suite 1400
Minneapolis, Minnesota 55431
EMPLOYMENT AGREEMENT
with
TONY L. VERBETEN
THIS AGREEMENT is made as of February 16, 1998, between THE
TESSERACT GROUP, INC., a Minnesota corporation (the "Company"), and TONY L.
VERBETEN ("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 Chief Financial
Officer.
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 Employee and
Employee shall serve the Company as Chief Financial Officer 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 of a senior officer of the Company as may be determined by the
Chief Executive Officer or the Board of Directors 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 the date hereof and shall continue upon the
terms and conditions contained herein, until terminated in accordance with
paragraph 3 hereof.
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<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 his then current monthly compensation (exclusive of any benefits) for (6)
six 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.
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<PAGE>
4. COMPENSATION.
(a) BASE SALARY. Employee shall receive a base salary of
$10,416.67 per month ($125,000 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 $50,000 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 1992 Long-Term Executive Stock Option Plan, as Amended and
Restated (1992 Plan), Employee shall receive non-statutory options to
purchase 40,000 shares of the Company's common stock, par value $.01 per
share, at a price equal to the fair market value of a share of common stock
on the date of grant. The date of grant shall be February 16, 1998. The
options are Class II options under the 1992 Plan and vest in 20% annual
increments beginning five years from the date of grant. Vesting of these
options may be accelerated by the Company's Board of Directors based upon the
achievement of individual and Company goals.
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
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<PAGE>
confidential, or (c) any other aspect of the business, products, or
activities of the Company, its 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 February 16, 1998, 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 the
Company or such affiliates or subsidiaries during the term of this Agreement.
Employee
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<PAGE>
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 7, 8, and 9 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:
Tony L. Verbeten
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.
16. TERMINATION OF PRIOR AGREEMENT. This Agreement terminates,
in its entirety, the prior employment agreement between the Company and
Employee dated June 25, 1993.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date and year first above written.
THE TESSERACT GROUP, INC. EMPLOYEE
By /s/ John T. Golle By /s/ Tony L. Verbeten
- -------------------- ------------------------
Its Chief Executive Officer Tony L. Verbeten
-5-
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 6,949
<SECURITIES> 0
<RECEIVABLES> 1,740
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,631
<PP&E> 13,050
<DEPRECIATION> 0
<TOTAL-ASSETS> 42,309
<CURRENT-LIABILITIES> 7,557
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 33,095
<TOTAL-LIABILITY-AND-EQUITY> 42,309
<SALES> 0
<TOTAL-REVENUES> 8,751
<CGS> 0
<TOTAL-COSTS> 8,734
<OTHER-EXPENSES> 3,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> (2,820)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,820)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
