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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to Form 10-K on
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9977 NORTH 90TH STREET, SUITE 180, SCOTTSDALE, ARIZONA 85258
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (480) 767-2300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At September 30, 1999, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $22,617,015 based upon the
closing sale price of the common stock on such date, as reported on The Nasdaq
Stock Market.
At September 30, 1999, the number of shares of common stock outstanding was
9,780,331.
DOCUMENTS INCORPORATED BY REFERENCE
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DRAFT SUBJECT TO FINAL REVISION
PART I
ITEM 1. BUSINESS
OVERVIEW
The TesseracT Group, Inc. (the "Company") is an integrated education management
organization which provides proprietary educational services from preschool
through post-secondary education. Formed in 1986 as a Minnesota corporation, the
Company now operates 37 school sites in six states serving over 8,000 preschool
to post-secondary students. The Company consists of three components:
- THE TESSERACT SCHOOLS. The TesseracT Schools operate both private and
public charter schools serving preschool through grade 12. Currently, there are
four TesseracT Schools in operation in four states.
- SUNRISE EDUCATIONAL SERVICES, INC. ("SUNRISE"). Sunrise, acquired by the
Company on December 18, 1997, operates 24 preschools in four states with the
majority of operations concentrated in Arizona. In addition, Sunrise currently
serves in excess of 700 public charter school students in Arizona.
- ACADEMY OF BUSINESS, INC. ("ABC"). ABC, acquired by the Company in
January 1998, is a two-year college accredited by the North Central Association
of Colleges and Schools. In addition to offering traditional business and
paralegal training, ABC provides various Microsoft certifications and Novell
training.
The strategy of the Company is to integrate all of these capabilities in
specific high growth markets and deliver these services wherever possible from
one single educational facility that is conveniently located in neighborhoods
under the banner of a TesseracT Family Learning Center. The Company's objective
is to leverage its investment through high asset utilization and scalable
economies into significant profitable growth. Typically, these centers will be
established in conjunction with large, master-planned community developers who
donate the land to the project.
The Company's mission is to provide a proprietary alternative of high quality
educational services from preschool through post-secondary education. To achieve
its objective, the Company plans to build on its experience and expertise in
both the private and public education sectors.
PAST ACTIVITIES
After initially focusing on the development of a network of private preschool
and elementary schools, the Company in 1989 temporarily shifted its strategic
focus to contract management of public schools from 1990 through 1996. This
strategy proved to be unsuccessful and the management contracts for public
schools in Hartford, Connecticut, Baltimore, Maryland and South Miami Beach,
Florida were terminated.
CURRENT OPERATIONS
Following the Company's experiences with contract management of public schools
along with the related restrictions and problems and the rapidly evolving
acceptance of a "private" alternative, the Company made
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the strategic decision to focus its attention and resources on becoming an
integrated education management organization. Execution of this strategy has
focused on entrance into the growing public charter school market, and vertical
integration of the range of services provided by the Company through the
acquisitions of Sunrise and ABC and expansion of the Company's private school
business.
TESSERACT FAMILY LEARNING CENTERS. The Company has developed a family learning
center model. The model incorporates private preschools, extended day services,
enrichment services and adult education into the facilities being specifically
developed for charter schools and such additional uses.
CHARTER SCHOOLS. Both The TesseracT Schools and Sunrise are utilizing public
charter schools in the implementation of the Company's strategy.
Public charter schools are generally autonomous entities authorized by the state
or locality to conduct operations independent from the surrounding public school
district. Laws vary by state but generally charters are granted by state boards
of education, either directly or in conjunction with local school districts or
public universities, which can also revoke a charter if the school fails to meet
its obligations under the charter.
Although charter operators are required to meet certain educational standards,
they often will be free from various state and local regulations. Therefore, in
many states, charter schools can hire their own teachers and other staff, use
their own curriculum and manage their operations independent from public school
district bureaucracy.
Whereas traditional public schools often hold near monopolies on education,
charters must attract students based on their educational approach and program
offerings. Charters compete for students, with a per-pupil allocation of funds
generally comparable, although sometimes less than that available to, other
public schools. Charters can only succeed if they deliver an education of
sufficiently high quality to attract students, while keeping costs at a level
that generates a reasonable return to the operator.
Presently, 39 states plus the District of Columbia have enacted some form of
charter legislation. The charter school application and approval process is
highly competitive, with many individuals, non-profit organizations, and private
and for-profit companies all pursuing a limited number of available charters. In
addition, traditional public schools and the teachers' unions have provided
strong opposition to the charter movement in many states.
During 1997, the Company received a charter from the state of Arizona to open
and operate 12 charter schools. The first such charter school opened in
September 1998 in Paradise Valley, Arizona, and currently serves approximately
300 students. In addition, Sunrise has entered into a contract to manage the
charter operations of Preschool Services, Inc. ("PSI"), a non-profit
organization (see "Certain Relationships and Related Transactions"). The PSI
charter schools are located in many of the Phoenix area Sunrise preschools.
During fiscal 2000, the Company anticipates submitting additional applications
to operate charter schools in various states. However, there can be no assurance
that the Company will be successful in obtaining all or a portion of the
charters requested. In addition, the Company believes that in selected high
growth communities, it may be able to partner with real estate developers who
will subsidize a portion of the Company's capital costs in return for the
Company's agreement to operate a public charter school in a new housing
development. The Company believes that funding levels in various charter states
will allow the Company to open and operate elementary and secondary public
charter schools that will be successful, both educationally and financially.
Public charter schools offer a more immediate opportunity for financial return
than private schools since no tuition is required for attendance and therefore,
they generally open at or near capacity.
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SUNRISE. Sunrise operates high quality private preschools, many of which also
include kindergarten through third grade public charter schools. Sunrise's
private preschools offer comprehensive educational child care services for
children beginning at age six weeks. Sunrise currently operates 24 preschools in
Arizona and Colorado. Sunrise's preschools currently serves approximately 3,500
students. Sunrise offers both full and half-day programs, before and after
school programs for older students, as well as extended hours at several of its
preschools. Where permitted by local ordinances, the Company plans to operate
ABC classes in certain of its preschool facilities subject to demand and space
availability. There are currently two such facilities integrated in this manner.
Sunrise differentiates itself from most preschools by offering a comprehensive
education-based curriculum that incorporates innovative teaching techniques and
programs, and by offering its parents and children modern facilities and
equipment. Sunrise's education-based programs emphasize, among other things, the
use of learning centers to enhance a child's development. The programs are
designed to appeal to parents who consider education and development, rather
than custodial care, as being most important in choosing a child care facility.
In addition to the regular learning programs, all of the Sunrise child care
centers offer computer-based learning programs using state-of-the-art software
and a number of extra-curricular programs.
In June 1997, Sunrise was selected to manage the charter school operations of
PSI. These charter schools, operating as Sunray Charter Schools, opened in
September 1997 providing kindergarten through third grade classes at many of
Sunrise's Arizona facilities. In consideration for the management of the charter
program and for the use of certain of Sunrise's preschool facilities and
personnel, Sunrise earns a management fee and is reimbursed for the facility
costs and lease expense of the occupied space. In addition, Sunrise benefits
from having the preschoolers of new families attracted to Sunray Charter Schools
along with the retention of the kindergarten and elementary-age children for the
Company's before and after school programs.
ABC. ABC is a two-year college offering courses primarily in business and
paralegal training, with its main campus in Phoenix, Arizona. In addition to
offering traditional business courses, ABC offers comprehensive training to
students preparing for various Microsoft certifications, including Systems
Engineer, Solutions Provider and Office User certifications. ABC also provides
Novell training. ABC intends to expand its Microsoft certification and training
programs in order to benefit from the high demand in the workplace for systems
engineers and other trained technicians as well as for ongoing training for such
personnel. ABC currently serves over 350 students.
ABC is focused on providing post-secondary education to working adults and it
strives to meet the unique needs of these individuals by providing services that
meet the following criteria. First, ABC provides convenient access to the
educational environment through both location and user friendly delivery of the
curriculum. This criteria will be further enhanced as the Company develops more
combined educational facilities in conjunction with its TesseracT Schools and
Sunrise facilities that will allow adult students to participate in ABC programs
at neighborhood facilities with on-site child care. Second, ABC programs provide
knowledge and skills with immediate practical value in the workplace and can be
completed in a reasonable amount of time. Third, ABC programs are instructed by
faculty with practical experience in fields related to those they instruct and
the classroom environment is characterized by a low student-to-faculty ratio.
Finally, ABC's educational programs and administrative services are designed to
accommodate the working adult's schedule.
ABC is accredited by the North Central Association of Colleges and Schools, a
regional accrediting association recognized by the United States Department of
Education ("DOE"). Accreditation provides the basis for the recognition and
acceptance by employers, other post-secondary education institutions and
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governmental entities of the degrees and credits earned by students, and the
ability to participate in Federal Financial Aid programs under Title IV.
THE TESSERACT PRIVATE SCHOOLS. The Company was originally organized to design,
develop, market and operate a network of for-profit, private preschool and
elementary schools utilizing the TesseracT teaching philosophy. In September
1987, the Company began operation of its first school in Eagan, Minnesota, and a
year later, opened its second school in Paradise Valley, Arizona. These two
preschool and elementary schools provide the foundation for the TesseracT
Schools component of the Company's current operations. Through its affiliation
with the TesseracT Schools, the Company has developed a number of teacher
training materials for schools utilizing the TesseracT educational system and
other materials for overall school improvement. The TesseracT Schools will
continue to be used by the Company to further develop and refine these
materials. The Company's TesseracT system is an educational program developed to
meet children's individual needs by redesigning the classroom environment,
changing the role of the teacher and increasing the use of technology in the
classroom.
During school year 1998-1999, the Company opened three additional
TesseracT private schools. Private preschools through eighth grade schools were
opened in the Phoenix suburbs of Ahwatukee and North Scottsdale in September
1998. In addition, a preschool and elementary school was opened in Northfield,
New Jersey to serve as a feeder school to the college preparatory school in Mays
Landing, but both schools were closed in fiscal year 1998-1999 due to low
enrollments. For school year 1999, the TesseracT private schools will serve
approximately 1,400 students. The Company believes that its TesseracT
educational system can be implemented in other preschool, elementary and
secondary schools throughout the United States.
In addition to the significant capital requirements of acquiring a satisfactory
school facility and providing all necessary improvements, fixtures, equipment
and furniture, there will likely be a long lead time required to establish a new
private school's reputation and attract a sufficient number of students willing
to pay the private school tuition. Accordingly, the Company anticipates that its
new private schools will generally take two to three years to operate profitably
and therefore will be expanded more slowly than its charter schools.
COMPETITION
Competition in the Company's markets is highly fragmented. The Company faces
competition from non-profit private entities and from the public school system
and public colleges. Many of the Company's competitors in both the private and
public sector have greater financial and other resources than the Company. In
addition, the Company anticipates integration of new services by certain of its
competitors that will provide additional competition for the Company. This
includes the addition of before and after school programs by public school
systems and the entrance into the private school market by large for-profit
childcare companies. There is no assurance that the Company will be able to
compete effectively in any of the markets in which it operates.
For preschool age children, the Company competes with other curriculum-based
preschools. Also seeking enrollments of preschool age children are large
for-profit childcare companies, as well as other childcare providers (including
in-home individual childcare providers and corporations that provide childcare
for their employees). However, the Company believes that persons in its target
market - parents seeking curriculum-based programs for their children - seek
services not commonly provided by these childcare providers.
For school age children, the Company competes with other for-profit private
schools, with non-profit schools and, more importantly, with the public school
system. The Company is not aware of any secular
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competitor that currently competes beyond a regional level. Several charter
school providers like Edison Schools and National Heritage are growing rapidly.
The Company believes the growth of other like providers is a positive indicator
the industry is maturing and views this as a positive event.
The post-secondary education market is highly fragmented with no private or
public institution enjoying a significant market share. The Company competes for
students with two-year and four-year degree granting institutions, which include
nonprofit public and private colleges and proprietary institutions. Competition
among educational institutions is believed to be based on the quality of the
educational program, perceived reputation of the institution, cost of the
program, and employability of the graduates.
While price is an important factor in competition, the Company believes that
other important factors include offering professionally developed educational
programs, well-equipped facilities, trained teachers, and other related
services. Particularly in the preschool market, many of these services are not
offered by the Company's competition.
REGULATION
Schools and preschools are subject to a variety of state and local regulations
and licensing requirements. These regulations and licensing requirements vary
greatly from jurisdiction to jurisdiction. Generally, the governmental agencies
review the safety, fitness and adequacy of the buildings and equipment, the
ratio of staff personnel to enrolled children, the dietary program, the daily
curriculum, compliance with health standards and the qualifications of the
Company's personnel. In most jurisdictions, these agencies conduct scheduled and
unscheduled inspections of the schools and preschools, and licenses must be
renewed periodically. Repeated failures by a school or preschool to comply with
applicable regulations can subject it to sanctions that might include probation,
suspension, or revocation of the license to operate. The Company believes that
each of its schools and preschools is in substantial compliance with such
requirements.
The Company's post-secondary operations are subject to the Higher Education Act
of 1986, as amended (the "HEA"), in order for students to participate in Federal
Financial Aid programs under Title IV of the HEA. The Company's post-secondary
operations are also subject to the general oversight of the DOE and are required
to be accredited by an association recognized by the DOE. The DOE reviews all
institutions participating in Title IV for compliance with applicable HEA
standards and regulations. Under the HEA, accrediting associations are required
to include the monitoring of certain aspects of Title IV compliance as part of
their accreditation evaluations. The Company is also subject to regulation
promulgated by applicable state higher education regulatory bodies.
The Company's participation in Title IV programs, through its wholly-owned
subsidiary ABC, is subject to audit by independent auditors annually and to
program reviews by the Department of Education and other federal, state, or
accrediting agencies. Instances of noncompliance, should they exist and be
discovered through the audit process, could result in refunds of financial
assistance and imposition of fines and penalties.
The DOE has regulations that contain objective measurement criteria to determine
the financial capabilities of educational institutions participating in student
financial assistance programs. The regulations apply only to those institutions
offering post-secondary courses and training. The criteria, which are applied on
the subsidiary level, include among other things having cash and receivables
from unrelated parties equal to or greater than current liabilities, maintaining
a positive tangible net worth, and restrictions on the amount of operating
losses incurred within a two-year period.
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Due to operating losses incurred by ABC prior to the acquisition by the Company,
the financial capability tests have not been met at June 30, 1999. As a result,
the Company may be required to post a letter of credit for at least one-half of
the Title IV funds received by ABC during 1998, which amounted to $1,709,000.
Any changes in or new interpretations of applicable laws, rules or regulations
could have a material adverse effect on the Company by limiting its
authorizations to operate or permissible activities, or by increasing the costs
of doing business in the Company's markets. The failure to maintain any required
licenses, approvals, authorizations, or accreditations could also have a
material adverse effect on the Company.
To assist the Company in complying with all of these regulations, TesseracT
recently "outsourced" the processing of this function to Arthur Andersen LLP.
(See footnote 17 included in the accompanying financial statements under Item
14 herein)
INSURANCE
The Company currently maintains comprehensive general liability insurance,
workers compensation, automobile liability, property, excess umbrella liability
and student accident insurance. The policies provide for a variety of coverage
and are subject to various limits. Companies involved in the education and care
of children, however, may not be able to obtain insurance for the total risks
inherent in their operations. In particular, general liability coverage can have
reduced limits per claim for child abuse. The Company carries fire and other
casualty insurance on its facilities and liability insurance in amounts which
management feels are adequate for its operations in the foreseeable future.
The company self-insures for potential employee health care costs with certain
stop loss insurance coverage. Claims expense is recorded in the year of
occurrence through the accrual of claim reserve based upon ultimate claim costs.
SEASONALITY
The Company historically has lower operating revenues in the summer due to lower
summer enrollment at the TesseracT Schools and Sunrise facilities. The Company
seeks to improve summer results through camps and other programs.
EMPLOYEES
At September 15, 1999, the Company had approximately 980 employees, of which 280
were teachers or administrators at the TesseracT Schools, 625 (including 140
part-time employees) were employed by Sunrise and 60 were employed by ABC. The
Company is not subject to any collective bargaining agreement and believes that
its employee relations are good.
ITEM 2. PROPERTIES
At September 15, 1999, the Company operated 37 school sites, including 24
preschool centers, 4 private schools, 17 charter schools, and 5 college
campuses. Primarily all of the facilities are leased by the Company. The leases
generally include option renewal periods of 5 to 25 years, at the Company's
discretion. Each of the leases contain provisions for lease payment increases
based on the Consumer Price Index or other similar formulas. The Company is
generally responsible for taxes, insurance, maintenance, and other expenses
related to the operation of the leased facilities.
The Company leases 12,940 square feet of space for its corporate offices in
Scottsdale, Arizona.
At June 30, 1999, the Company had two Charter schools in Arizona under
construction pursuant to a development agreement. During the first quarter of
fiscal year 2000, the Company plans to finalize the financing related to
these schools.
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ITEM 3. LEGAL PROCEEDINGS
At June 30, 1999, the Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by the Company during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock trades on The NASDAQ Stock Market under the symbol
TSST. As of June 30, 1999, the Company's common stock was held by approximately
3,000 shareholders of record or through nominee or street name accounts with
brokers.
PRICE RANGE OF COMMON STOCK:
<TABLE>
<CAPTION>
COMMON STOCK PRICE
------------------
1999 HIGH LOW
------------------
<S> <C> <C>
First Quarter $5.00 $2.69
Second Quarter 4.00 2.38
Third Quarter 5.00 2.81
Fourth Quarter 3.63 2.63
1998
First Quarter $6.25 $4.13
Second Quarter 5.63 4.31
Third Quarter 6.63 4.06
Fourth Quarter 6.31 4.81
</TABLE>
DIVIDEND POLICY:
The Company has never paid cash dividends on its stock and anticipates that it
will continue to retain its earnings, if any, to finance the growth of the
business.
ITEM 6. SELECTED FINANCIAL DATA
The table below shows selected financial data for the periods indicated. This
information should be read in conjunction with the Consolidated Financial
Statements and related notes contained in Item 14 herein and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Item 7 herein.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONAL
DATA:
Revenue $ 37,276 $ 15,294 $ 4,835 $ 115,090 $ 213,582
School operating profit (loss) 3,862 409 1,082 (2,672) (3,745)
Net earnings (loss) (10,689) (3,437) 566 (9,507) (7,443)
Net earnings (loss) per common
share (diluted) (1.12) (.40) .08 (1.27) (1.09)
Weighted average shares
outstanding 9,579 8,574 7,501 7,477 6,822
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $(10,478) $ 3,269 $ 20,054 $ 12,927 $ (6,986)
Long-term marketable securities -- -- -- 7,322 28,972
Total assets 63,224 49,263 29,057 29,684 43,481
Long-term debt 21,605 8,578 -- 309 636
Shareholders' equity 22,760 32,749 24,880 24,312 29,825
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The accompanying consolidated financial statements for the fiscal year ended
June 30, 1999, reflect the results of operations of the Company and its wholly
owned subsidiaries, Sunrise Educational Services, Inc. ("Sunrise") and Academy
of Business, Inc. ("ABC"). The Company acquired Sunrise, a Scottsdale,
Arizona-based operator of 32 preschool centers, primarily in Arizona, in
December 1997. Sunrise has also expanded into the operation of private schools
and has a contract to manage public charter schools in many of its Arizona
sites.
For the year ended June 30, 1999, the results of operations for Preschool
Services, Inc. ("PSI"), a Hawaii non-profit corporation, have been combined in
the accompanying consolidated financial statements due to implied control. (See
Note 2 of the consolidated financial statements contained in Item 14 herein).
The results were immaterial for fiscal 1998 and were not combined.
Operating results for the year ended June 30, 1997, reflect the operations of
the two private schools owned and operated by the Company during 1997.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED JUNE 30, 1999 AND 1998. Total revenue in 1999
increased 144% to $37,276,000 as compared to $15,294,000 in 1998. This increase
is primarily the result of a full year's operation related to the acquisitions
of Sunrise and ABC and an increase in the number of charter schools open during
1999. During 1999, the Company provided services to approximately 1,257 private
school students and 480 charter school students.
Operating expenses, representing costs directly associated with the school
operations, were $33,414,000 in 1999 compared to $14,885,000 in 1998. The
increase primarily relates to a full year of costs associated with the
operations of Sunrise and ABC along with costs associated with the increased
private and charter schools open during 1999, as discussed above.
New school development costs represent costs incurred in the current year for
schools set to open in the subsequent year. During 1999, costs totaling $967,000
were incurred associated with the September 1999 anticipated opening of two new
TesseracT charter schools in Arizona. One of these sites has opened and the
other remains unopened. These costs relate to personnel, advertising, student
recruitment, and facility set-up. In 1998, costs totaling $646,000 were incurred
related to the opening of three new private schools in September 1998.
Selling, general, and administrative expenses in 1999 were $9,404,000 or 25.2%
of revenue compared to $4,469,000 or 29.2% of revenue in 1998. The increase
reflects added personnel, travel and other costs associated with establishing
necessary administrative support for anticipated growth, and costs associated
with other acquisition opportunities pursued by the Company during 1999.
During the fourth quarter of 1999, the Company entered into an agreement with
Arthur Andersen LLP. ("AA") under which AA will provide the Company with certain
agreed upon accounting, tax, and information technology services. In return for
services provided under the agreement, the Company incurred AA implementation
costs of $1,500,000 during 1999. This fee, along with costs incurred by the
Company in relocating the corporate headquarters from Minnesota to Arizona in
the fourth quarter of 1999, is included as restructuring and relocation expenses
on the accompanying consolidated statement of operations.
School closure expenses represent costs incurred related to the Company's
decision to close certain schools in New Jersey, Hawaii and Arizona. During the
fourth quarter of 1999, management made the
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decision to close the Mays Landing and Northfield private schools effective the
end of the school year. This decision was primarily due to the low level of
enrollment at the school in 1999 as well as the lack of a significant increase
in enrollment projected for 2000. Additionally, the Company also decided to
close certain under-performing schools in Hawaii. The school closure expenses
primarily relate to remaining lease commitment liabilities at these schools as
well as a write down of the remaining fixed assets to their estimated net
realizable value.
Other income (expense) in 1999 was a net expense of $321,000 compared to income
of $1,269,000 in 1998. Other income for both 1999 and 1998 includes settlement
proceeds of $650,000 related to the final settlement of issues regarding amounts
owed to the Company under the Hartford management contract. The reduction of
other income (expense) was primarily due to a reduction in investment income in
1999 compared to 1998 is due to lower investment levels in the current year and
an increase in interest expense in 1999 primarily related to the financing
transactions entered into by the Company during 1999 and 1998.
For 1999, the Company recorded a net loss of $10,689,000 or $1.12 per share
compared to a net loss of $3,437,000 or $.40 per share in 1998. The increase in
the net loss is primarily due to restructuring and relocation expenses of
$1,654,000, school closure expenses of $2,205,000, $1,000,000 of additional
interest expense, poor operating performance at ABC, and increased site
operating costs.
COMPARISON OF THE YEARS ENDED JUNE 30, 1998 AND 1997. Total revenue in 1998 was
$15,294,000 compared to $4,835,000 in 1997. The increase is the result of the
acquisitions of Sunrise and ABC and an increase in the number of private schools
open during 1998. Revenue recorded on the operations of Sunrise and ABC
subsequent to their acquisition was $8,027,000 and $1,464,000, respectively.
In September 1997, the Company opened new college preparatory high schools in
Mays Landing, New Jersey, and South Bend, Indiana. These two schools, along with
the original two TesseracT private schools in Eagan, Minnesota, and Paradise
Valley, Arizona, brought to four the number of private TesseracT schools owned
and operated by the Company.
Private school and other costs, representing costs directly associated with the
school operations, were $14,885,000 in 1998 compared to $3,753,000 in 1997. The
increase primarily relates to costs associated with the operations of Sunrise
and ABC subsequent to their acquisition. In addition, the current year includes
start-up costs relating to the September 1997 opening of the Mays Landing and
South Bend private schools and the expansion of the Company's private school in
Eagan.
During 1998, the Company decided to close the South Bend College Preparatory
High School. This decision was primarily due to the low level of enrollments at
the school in 1998 as well as the lack of a significant increase in enrollments
projected for 1999. The majority of computers and furniture at the school has
been transferred to other TesseracT schools. Total costs anticipated to be
incurred related to the closing of the school have been included in the 1998
financial statements.
New school development costs represent costs incurred in the current year for
schools set to open in the subsequent year. During 1998, costs totaling $646,000
were incurred associated with the September 1998 opening of three new TesseracT
private schools. These costs relate to personnel, advertising, student
recruitment, and facility set-up. In 1997, costs totaling $363,000 were incurred
related to the opening of the two college preparatory schools in September 1997.
Selling, general, and administrative expenses in 1998 were $4,469,000 compared
to $3,421,000 in 1997. The increase reflects added personnel, travel and other
costs associated with the integration of the
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acquisitions of Sunrise and ABC and costs associated with other acquisition
opportunities pursued by the Company during 1998.
Other income in 1998 was $1,269,000 compared to $3,268,000 in 1997. Other income
for both 1998 and 1997 includes settlement proceeds of $650,000 related to the
final settlement of issues regarding amounts owed to the Company under the
Hartford management contract. Settlement income for 1997 also includes
$1,250,000 received from the Company's investment management firm to resolve all
issues relating to the firm's management of the company's investment portfolio.
The reduction in investment income in 1998 compared to 1997 is due to lower
investment levels in the current year.
Interest expense in 1998 was $125,000 compared to $17,000 in 1997. Interest
expense totaling $68,000 was incurred on equipment financing debt at Sunrise.
The remaining interest expense in 1998 relates to the financing transactions
entered into by the company on three school properties during 1998.
For 1998, the Company recorded a net loss of $3,437,000 or $.40 per share
compared to net earnings of $566,000 or $.08 per share in 1997. The change is
primarily due to the new school start-up and development costs, costs associated
with the integration of the two acquisitions during the year and the settlement
income recorded in the prior year.
CAPITAL RESOURCES AND LIQUIDITY
During 1999, the Company satisfied its working capital needs principally from
cash on hand at the beginning of the year and cash received from financing
transactions entered into during the year. The net decrease in cash of
$2,998,000 is primarily comprised of the following:
- - Net cash used in operating activities totaled $5,331,000, primarily due to
the net loss incurred in 1999 along with changes in current assets and
liabilities.
- - Net cash used in investing activities totaled $19,678,000 primarily due to
purchases of furniture, fixtures and equipment for schools along with new
school construction expenditures.
- - Cash generated from financing activities totaled $22,011,000 during 1999
primarily from proceeds on sale/leaseback and mortgage financing transactions
along with draws on available lines of credit.
As discussed in Note 4 to the consolidated financial statements contained in
Item 14 herein, during fiscal 1997, the Company reached final agreement with
Hartford officials on the remaining amounts owed to the Company in settlement of
a disputed contract amount. Under the terms of the agreement, the Company is
scheduled to receive additional annual installments of $650,000 on each of July
10, 1999, 2000 and 2001.
As discussed in Note 18 to the consolidated financial statements contained in
Item 14 herein, due to operating losses incurred by ABC subsequent to its
acquisition by the Company, the financial capability tests have not been met at
June 30, 1999. As a result, the Company may be required to post a letter of
credit for at least one-half of the Title IV funds received by ABC during 1999,
which amounted to approximately $1,709,000.
During 2000, the Company anticipates investing approximately $5,360,000 to
complete construction on two schools in Arizona and approximately $750,000 to
outfit new schools and upgrade technology at existing schools. The Company
anticipates financing a significant portion of the construction costs and other
capital asset purchases through equipment financing leases. If the Company is
unable to secure financing on terms acceptable to the Company, the capital asset
purchases will have to be deferred or made from available cash reserves.
10
<PAGE> 12
During the three years ended June 30, 1999, the Company has incurred cumulative
net losses totaling approximately $13,560,000. As a result of these losses and
investments the Company has made in acquisitions and for the purchase of capital
assets, the Company has used cash of approximately $12,846,000 during the past
three years. The Company has a cash balance of $2,545,000 and negative working
capital of $10,478,000 as of June 30, 1999. These factors, among other things,
may indicate that the Company will be unable to continue as going concern for a
reasonable period of time.
Management continues to pursue various options in order to provide necessary
financing. As discussed in Note 18 to the consolidated financial statements,
management's plans to resolve near term cash flow issues include the following
transactions:
- - A private placement equity financing to provide approximately $7,500,000 in
cash flow, less offering costs. A restructuring of both the $5,000,000 and
$1,000,000 credit lines, which are currently payable, into long-term debt.
- - At June 30, 1999, the Company has approximately $5,385,000 of construction in
process. The Company is seeking permanent financing for these projects in
order to convert this asset into necessary cash.
Management believes that if it can finalize some of the financing alternatives
that it is pursing together with its projected improvement in operating results
for 2000, the Company will generate sufficient resources to ensure uninterrupted
performance of its operating obligations as currently structured and
anticipated. The Company's continuance as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations in a timely
manner, to obtain additional financing as required, and ultimately to attain
profitability. There can be no assurance, however, that these sources will be
available to the Company on acceptable terms or when necessary.
YEAR 2000 ISSUE
The Year 2000 issue ("Y2K") refers to a condition in computer software where a
two digit field rather than a four digit field is used to distinguish a calendar
year. Unless corrected, some computer programs, hardware and non-information
system technology systems could be unable to process information containing
dates subsequent to December 31, 1999. As a result, such programs and systems
could experience miscalculations, malfunctions or disruptions.
The Company has recently completed its initial assessment of potential exposure
of its own core business information systems for Y2K readiness and is in the
process of assessing the readiness of significant suppliers, business partners,
banking agencies and governmental agencies.
During the fourth quarter of 1999, the Company entered into an agreement with
Arthur Andersen, LLP. ("AA") to provide certain agreed upon accounting, tax and
information technology services. In connection with the information technology
services, the Company has begun a system conversion, integrating its current
multiple financial systems into a consolidated system and implementing
PeopleSoft for all financially significant systems. Management expects the
conversion process to be completed for all critical internal information systems
prior to the end of 1999. All hardware and software upgrades required for the
system conversion are Y2K compliant.
To date, excluding the cost of upgrading our current information system, the
amount the Company has spent on Year 2000 efforts was immaterial. Additionally,
excluding the cost of upgrading our current information systems, we currently
believe that the additional costs of implementing our Y2K plan will not exceed
$200,000 and will not have a material effect on the Company's financial
position. These expenditures include our evaluation of our systems and the
replacement and upgrading of non-compliant hardware and software. There can be
no assurance that the cost estimates associated with the Company's Y2K issues
will prove to be accurate or that those actual costs will not have a material
adverse effect on the Company's results from operations and financial condition.
The Company is in the process of contacting our key business partners asking
for assurances that they have taken steps to evaluate their Year 2000
compliance. The Company is not dependent upon a single source for any products
or services. In the event a significant supplier, bank or other business
partner or vendor is unable to provide products or services to the Company due
to a Y2K failure, the Company believes it has adequate alternate sources for
such products or services. For the year ending June 30, 1999 67% of the
Company's revenue was for tuition and programs funded from state and federal
sources. Processing of payments due to the Company by state and federal
agencies will be handled by their respective computer systems. The Company is in
the process of assessing the Y2K state of readiness at these federal agencies
and will complete that assessment prior to December 1999. However, any prolonged
interruption would have a material adverse impact on the education industry and
upon the Company's business, results of operations, liquidity and financial
condition.
A significant number of the Company's customers consist of individuals who make
tuition payments to the Company on behalf of themselves or their children in
exchange for educational services. The ability of these customers to make
tuition payments is not expected to be affected by the Year 2000 issue.
The Company has developed a preliminary contingency plan for the IT systems and
material non-IT systems that we control. In the event that we have not completed
the system enhancement to our IT systems prior to January 1, 2000, we will use
contingent manual systems as required. Due to the AA agreement, management
believes we would be able to respond effectively. Our contingency plan for
material Non-IT systems that we control includes, among other things,
investigating the availability and replacement costs of such systems that are
not Y2K compliant and adjusting clocks on such Non-IT systems that are not date
sensitive.
11
<PAGE> 13
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1999, the Company adopted Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
No. 131") SFAS No. 131 requires disclosures of business and geographic segments
in the consolidated financial statements of the Company. The adoption did not
have an impact on the Company's financial position or its results from
operations since it only impacted disclosures in its financial statements.
Management does not expect the impact of accounting standards that are not yet
effective to have a material impact on the Company's financial position or
results from operations.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements involve risks and uncertainties, and actual
results may be materially different. These forward-looking statements include,
but are not limited to, statements herein regarding the opening of additional
private schools, the application for and receipt of additional public charter
school contracts and the opening of new charter schools, the completion of
future strategic acquisitions, the integration of services into single education
facilities, the profitability of existing and new private and public charter
schools, the development of partnerships with real estate developers in high
growth communities, the ability to secure financing on acceptable terms, and the
ability of the Company to compete in the education industry.
Factors that could cause actual results to differ from those expected include,
but are not limited to, general economic conditions such as inflation and
interest rates, both nationally and in Arizona where the Company's operations
are concentrated; competitive conditions within the Company's markets, including
the acceptance of the education services offered by the Company; unanticipated
expenses; the ability of the Company to successfully integrate all of its
services into single education facilities; the ability of the Company to obtain
public charter school contracts; changes in government regulation of the
education industry or in state charter school statutes; the availability of
equipment financing at acceptable terms; and future claims for accidents at the
Company's education facilities and the extent of insurance coverage for such
claims.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes and schedule are
included in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In May 1999, Arthur Andersen LLP, the Company's independent public accountants,
resigned in order to enter into an agreement to provide professional accounting
and information processing services that would impair Arthur Andersen LLP's
independence. The report of independent public accountants received from Arthur
Andersen LLP on the Company's financial statements as of and for the years ended
June 30, 1998 and 1997, did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
During the fiscal years ended June 30, 1998 and 1997, there were no
disagreements between the company and Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreement, if not resolved to the satisfaction of
12
<PAGE> 14
Arthur Andersen LLP would have caused it to make reference of the subject matter
of the disagreement in connection with its reports.
In July 1999, PricewaterhouseCoopers LLP. was appointed by the Board of
Directors as the Company's independent public accountant.
13
<PAGE> 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to the
information set forth under the captions "Proposal Number One: Election of
Directors" and "Executive Officers and Compensation" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information set forth under the caption "Executive Officers and Compensation" in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
information set forth under the captions "Certain Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider
Participation" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(b) REPORTS ON FORM 8-K
Form 8-K dated May 14, 1999, regarding the resignation of Arthur Andersen
LLP as the Company's independent accountant.
(c) EXHIBITS
The following exhibits are filed as part of this Annual Report on Form
10-K for the year ended June 30, 1999.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
<S> <C>
3.1 Restated Articles of Incorporation of the Company, as
amended. (1)
3.2 By-Laws of the Company. (2)
4.1 Specimen Certificate of Common Stock. (1)
4.2 Share Rights Plan dated September 8, 1993. (3)
</TABLE>
14
<PAGE> 16
<TABLE>
<S> <C>
10.1* Employment Agreement between the Company and Philip E.
Geiger dated August 10, 1993. (4)
10.2* 1988 The TesseracT Group, Inc. Stock Option Plan, as
amended. (5)
10.3* Employment Agreement between the Company and John T. Golle
dated January 1, 1991. (6)
10.4* Amendment to Employment Agreement between the Company and
John T. Golle dated September 8, 1993. (7)
10.5* 1992 The TesseracT Group, Inc. Long-Term Executive Stock
Option Plan, as amended. (8)
10.6* Amendment to Employment Agreement between the Company and
John T. Golle dated March 20, 1992. (9)
10.7 Lease dated June 9, 1998, between EduCorp Properties, Inc.
as lessor and The TesseracT Group, Inc. as lessee. (1)
10.8 Amended and Restated Lease dated June 9, 1998, between
EduCorp Properties, Inc. as lessor and The TesseracT Group,
Inc. as lessee. (1)
10.9* Employment Agreement dated November 3, 1997, between the
Company and Todd K. Severson. (10)
10.10* Employment Agreement dated February 16, 1998, between the
Company and Tony L. Verbeten. (11)
10.11 Lease Agreement dated January 31, 1983, between Earl H.
Jones and Venture Educational Programs, Inc. (12)
10.12 Lease Agreement dated April 1, 1984, between McClintock
Associates Limited Partnership, an Arizona Limited
Partnership, and Venture Educational Programs, Inc. (12)
10.13 Lease Agreement dated October 24, 1986, between Peoria
Investment Company, Inc., an Arizona corporation, and Sunrise
Educational Services, Inc., an Arizona corporation.
(12)
10.14 Lease Agreement dated October 16, 1986, between Sun School I
Limited Partnership, an Arizona limited partnership, and
Sunrise Educational Services, Inc., an Arizona corporation.
(12)
10.15 Lease Agreement dated April 1, 1986, between Sunrise
Partners, an Arizona corporation, and Sunrise Educational
Services, Inc., an Arizona corporation. (12)
10.16 Lease Agreement dated February 5, 1987 between Sun School II
Limited Partnership, an Arizona limited partnership, and
Sunrise Educational Services, Inc., an Arizona corporation.
(12)
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C>
10.17 Lease Agreement dated June 26, 1987, between Huber Farm
Service of Phoenix, Inc., an Arizona corporation and Sunrise
Educational Services, Inc., an Arizona corporation. (12)
10.18 Lease Agreement, dated July 29, 1988, between Sunrise
Educational Services, Inc. and Investad, Inc. (13)
10.19 Lease Agreement, dated July 25, 1988, between Sunrise
Educational Services, Inc., and LV Properties, an Arizona
general partnership. (13)
10.20 Lease Agreement, dated May 12, 1988, between Sunrise
Educational Services, Inc. and Jaymark Komer and Eugene
Victor Komer and Ruth Lena Komer, as Trustees of the Komer
Family Trust dated December 30, 1980. (13)
10.21 Lease Agreement, dated July 29, 1988, between Sunrise
Educational Services, Inc. and Kailua Beach Center, Inc. (13)
10.22 Lease Agreement, dated January 11, 1988, between Sunrise
Educational Services, Inc. and Mercado Developers. (14)
10.23 Amendment of Lease Agreement dated March 8, 1990, between
Sunrise Educational Services, Inc. and Jaymark Komer and
Komer Family Trust dated May 12, 1988. (15)
10.24 Purchase Agreement and Registration Rights Agreement dated
April 6, 1990, between Sunrise Educational Services, Inc.
and Lepercq Capital Management, Inc. (16)
10.25 Lease Agreement, dated July 1, 1991, between Sunrise
Educational Services, Inc. and Maruni Arizona, Inc. (17)
10.26 Purchase Agreement, dated November 18, 1991, between Sunrise
Educational Services, Inc., LN Investment Capital Limited
Partnership, Lepercq Investment Limited Partnership II and LN
Investment Capital Limited Partnership II. (18)
10.27 Amendment of Lease Agreement dated July 22, 1998, between
Sunrise Educational Services, Inc. and Jaymark Komer and
Komer Family Trust. (19)
10.28 Management Agreement, dated November 14, 1993, between
United Church of Christ and Sunrise Educational Services,
Inc. (20)
10.29 Term Sheet Agreement, dated December 7, 1992, between Joy of
Christ Lutheran Church and Sunrise Educational Services,
Inc.(21)
10.30 Agreement between Lutheran Church of Honolulu and Sunrise
Educational Services, Inc., dated May 19, 1993. (22)
10.31 Administrative Services Agreement, License, and Equipment
Lease, dated February 1, 1994, between Sunrise Educational
Services, Inc., and Preschool Services, Inc. (20)
</TABLE>
16
<PAGE> 18
<TABLE>
<S> <C>
10.32 Asset Purchase Agreement between Children's Choice Learning
Center, Inc. and Sunrise Preschool, Inc. dated June 26,
1996, with one amendment dated June 28, 1996. (22)
10.33 Form of Credit and Security Agreement between Imperial Bank
and Sunrise Educational Services, Inc. dated April 24, 1997.
(23)
10.34* Employment Agreement dated March 15, 1999, between the Company
and Lucian P. Spataro, Jr.
10.35* Employment Agreement dated April 28, 1999, between the Company
and Richard C. Yonker.
10.36 Securities Purchase Agreement dated March 31, 1999, between
the Company and Pioneer Venture Fund, L.L.C. ("Pioneer").
10.37 12% Convertible Note dated March 31, 1999, issued to Pioneer.
10.38 12% Convertible Note dated April 16, 1999, issued to Pioneer.
10.39 12% Convertible Note dated May 17, 1999, issued to Pioneer.
10.40 12% Convertible Note dated June 9, 1999, issued to Pioneer.
11 Statement re Computation of Per Share Earnings (Loss). (24)
23.1 Consent of PricewaterhouseCoopers LLP. (24)
23.2 Consent of Arthur Andersen LLP. (24)
27 Financial Data Schedule (EDGAR version only). (24)
</TABLE>
------------------------------
* Management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to the same numbered Exhibit
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1998.
(2) Incorporated herein by reference to Exhibit 3.3 to the
Company's Form S-18 Registration Statement (Registration
Number 33-39481-C).
(3) Incorporated herein by reference to the same numbered Exhibit
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1993.
(4) Incorporated herein by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended December 31, 1994.
(5) Incorporated herein by reference to Exhibit 10.17 to the
Company's Amendment No. 1 to Form S-18 Registration Statement
(Registration Number 33-39481-C).
(6) Incorporated herein by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1993.
(7) Incorporated herein by reference to Exhibit Number 10.26 to
the Company's Annual Report on Form 10-K for the year ended
June 30, 1993.
(8) Incorporated herein by reference to Exhibit 10.24 to Amendment
No. 2 to the Company's Form S-1 Registration Statement
(Registration Number 33-46791).
(9) Incorporated herein by reference to Exhibit 10 to the
Company's Form 10-Q for the quarter ended December 31, 1997.
(10) Incorporated herein by reference to Exhibit 10 to the
Company's Form 10-Q for the quarter ended March 31, 1998.
(11) Incorporated herein by reference to exhibits to Sunrise
Educational Services, Inc, Commission File Number 0-16425
("Sunrise") Form S-1 filed July 10, 1987.
17
<PAGE> 19
(12) Incorporated herein by reference to exhibits to Sunrise Form
10-K filed on or about October 31, 1988.
(13) Incorporated herein by reference to exhibits to Sunrise Form
10-K filed on or about October 30, 1989.
(14) Incorporated herein by reference to exhibits to Sunrise Form
10-Q filed on or about January 31, 1990.
(15) Incorporated herein by reference to exhibits to Sunrise Form
8-K filed on or about April 20, 1990.
(16) Incorporated herein by reference to exhibits to Sunrise Form
10-K filed on or about October 28, 1991.
(17) Incorporated herein by reference to exhibits to Sunrise Form
10-Q filed on or about December 16, 1991.
(18) Incorporated herein by reference to exhibits to Sunrise Form
10-K filed on or about October 21, 1992.
(19) Incorporated herein by reference to exhibits to Sunrise Form
10-KSB for the year ended July 31, 1994.
(20) Incorporated herein by reference to exhibits to Sunrise Form
10-KSB filed on or about October 8, 1993.
(21) Incorporated herein by reference to exhibits to Sunrise Form
8-K filed on or about September 9, 1996.
(22) Incorporated herein by reference to exhibits to Sunrise Form
10-QSB filed on March 11, 1997.
(23) Incorporated herein by reference to the same numbered Exhibit
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1996.
(24) Incorporated herein by reference to the same numbered Exhibit
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1999.
18
<PAGE> 20
THE TESSERACT GROUP, INC. [DRAFT]
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants - PricewaterhouseCoopers LLP 20
Report of Independent Public Accountants - Arthur Andersen LLP 21
Consolidated Statements of Operations 22
Consolidated Balance Sheets 23
Consolidated Statements of Shareholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26-39
Schedule II - Valuation and Qualifying Accounts 40
</TABLE>
19
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of
Directors of The TesseracT Group, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of The
TesseracT Group, Inc. and its subsidiaries at June 30, 1999, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 20, the Company
incurred a net loss of $10,689,000 during the year ended June 30, 1999. In
addition, as of June 30, 1999, the Company had a working capital deficit of
$10,478,000. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 20. The financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
Our audit was conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements and schedules is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. The 1999 information on
this schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
PricewaterhouseCoopers LLP
Phoenix, Arizona
September 27, 1999
20
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The TesseracT Group, Inc.
We have audited the accompanying consolidated balance sheet of The TesseracT
Group, Inc. (a Minnesota corporation) and subsidiaries as of June 30, 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years ended June 30, 1998 and 1997. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 TesseracT Group, Inc. and
subsidiaries as of June 30, 1998, and the results of their operations and their
cash flows for the years ended June 30, 1998 and 1997, in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements and schedules is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
September 3, 1998
21
<PAGE> 23
THE TESSERACT GROUP, INC. [DRAFT]
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
School tuition and other $ 37,276 $ 15,294 $ 4,835
OPERATING EXPENSES:
Personnel costs 19,309 7,269 2,487
Site operating costs 7,230 4,061 749
Insurance, taxes, rent and other 4,156 2,437 299
Depreciation and amortization 2,719 1,118 218
-------- -------- --------
33,414 14,885 3,753
-------- -------- --------
SCHOOL OPERATING PROFIT (LOSS) 3,862 409 1,082
-------- -------- --------
NEW SCHOOL DEVELOPMENT COSTS 967 646 363
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,404 4,469 3,421
RESTRUCTURING AND RELOCATION EXPENSES 1,654 -- --
SCHOOL CLOSURE EXPENSES 2,205 -- --
-------- -------- --------
OPERATING LOSS (10,368) (4,706) (2,702)
-------- -------- --------
OTHER INCOME (EXPENSE):
Settlement income 650 650 1,900
Investment income 284 744 1,385
Interest expense (1,255) (125) (17)
-------- -------- --------
(321) 1,269 3,268
-------- -------- --------
Earnings (loss) before income tax expense (10,689) (3,437) 566
Income tax expense -- -- --
Net earnings (loss) $(10,689) $ (3,437) $ 566
======== ======== ========
Net earnings (loss) per common share
(basic and diluted) $ (1.12) $ (.40) $ .08
======== ======== ========
Weighted average common shares outstanding
(basic and diluted) 9,579 8,574 7,501
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
22
<PAGE> 24
THE TESSERACT GROUP, INC. [DRAFT]
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,545 $ 5,543
Settlement receivable 650 650
Accounts receivable, net of allowance (1999 - $131, 1998 - $248) 1,958 2,370
Prepaid rent 719 834
Other current assets 1,509 1,093
-------- --------
Total current assets 7,381 10,490
INTANGIBLE ASSETS, NET 17,291 18,984
PROPERTY AND EQUIPMENT, NET 37,002 19,479
DEPOSITS AND OTHER ASSETS 1,550 310
-------- --------
$ 63,224 $ 49,263
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 5,999 470
Accounts payable 1,999 984
Other current liabilities 9,861 5,767
-------- --------
Total current liabilities 17,859 7,221
-------- --------
LONG-TERM OBLIGATIONS 21,615 8,578
OTHER 990 715
-------- --------
22,605 9,293
-------- --------
TOTAL LIABILITIES 40,464 16,514
-------- --------
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 1999 - 9,780,331 shares; 1998 - 9,570,803
shares 98 96
Additional paid-in capital 58,371 57,673
Accumulated deficit (35,709) (25,020)
-------- --------
Total shareholders' equity 22,760 32,749
-------- --------
$ 63,224 $ 49,263
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
23
<PAGE> 25
THE TESSERACT GROUP, INC. [DRAFT]
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional
Number Paid-in Accumulated
of Shares Amount Capital Deficit Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 7,489 $ 75 $ 46,386 $(22,149) $ 24,312
Net earnings -- -- -- 566 566
Issuance of common stock upon exercise
of stock options 1 -- 2 -- 2
-------- -------- -------- -------- --------
BALANCE, JUNE 30, 1997 7,490 75 46,388 (21,583) 24,880
Net loss -- -- -- (3,437) (3,437)
Issuance of common stock upon exercise
of stock options 133 1 589 -- 590
Common stock issued for acquisitions 1,948 20 9,604 -- 9,624
Fair value of Sunrise Educational
Services, Inc. options and warrants at
acquisition date -- -- 1,092 -- 1,092
-------- -------- -------- -------- --------
BALANCE, JUNE 30, 1998 9,571 96 57,673 (25,020) 32,749
Net loss -- -- -- (10,689) (10,689)
Issuance of common stock upon
exercise of stock options 9 -- 30 -- 30
Issuance of common stock in
connection with agreement for
professional services 200 2 398 -- 400
Issuance of warrants in connection
with line of credit -- -- 270 -- 270
-------- -------- -------- -------- --------
BALANCE, JUNE 30, 1999 9,780 $ 98 $ 58,371 $(35,709) $ 22,760
======== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
24
<PAGE> 26
THE TESSERACT GROUP, INC. [DRAFT]
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $(10,689) $ (3,437) $ 566
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities:
Depreciation and amortization 2,886 1,264 316
Provision for doubtful accounts (482) 87 10
Gain on marketable securities -- -- (49)
School closure reserve 1,600 -- --
Changes in operating assets and liabilities:
Accounts receivable 894 (1,265) (14)
Other current assets (301) (1,211) (603)
Deposits and other assets (1,240) -- --
Intangibles 962 -- --
Accounts payable 1,015 (101) 101
Other current liabilities 24 (1,026) (524)
-------- -------- --------
Net cash used in operating activities (5,331) (5,689) (197)
-------- -------- --------
INVESTING ACTIVITIES:
Payment for acquisitions, net of cash acquired -- (7,106) --
Purchases of property and equipment (25,242) (11,822) (896)
Proceeds from sales and maturities of marketable securities 5,564 -- 9,592
-------- -------- --------
Net cash provided by (used in) investing
activities (19,678) (18,928) 8,696
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings 20,745 6,550 --
Payments on long-term debt borrowings (2,179) -- --
Increase in bank overdraft 1,045 -- --
Issuance of warrants/common stock and
exercise of stock options 700 590 2
Proceeds/(repayments) on short-term borrowings 1,700 (226) (646)
-------- -------- --------
Net cash provided by (used in) financing
activities 22,011 6,914 (644)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (2,998) (17,703) 7,855
Cash and cash equivalents at beginning of year 5,543 23,246 15,391
-------- -------- --------
Cash and cash equivalents at end of year $ 2,545 $ 5,543 $ 23,246
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
25
<PAGE> 27
THE TESSERACT GROUP, INC. [DRAFT]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
The TesseracT Group, Inc. (the "Company"), formerly known as Education
Alternatives, Inc., is an integrated education management company, serving
preschool students, private and public charter elementary, middle, and high
school students, and post-secondary career college students primarily in
Arizona, with additional schools located in Colorado, Minnesota, Texas and
Washington, D.C.
In May 1999, the Company relocated its corporate headquarters from Minneapolis,
Minnesota to Scottsdale, Arizona. Costs incurred in connection with the move
totaled $154,000 and have been reflected in the accompanying financial
statements in restructuring and relocation expenses.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION: The Company recognizes revenue for each school
ratably as earned over the related school year.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Due to the implied control of Preschool Services, Inc. ("PSI"), a Hawaii
non-profit corporation, by the Company's management presence on PSI's Board of
Directors, the accounts of PSI have been combined in the accompanying financial
statements. Prior to its acquisition by the Company in December 1997, Sunrise
had transferred a portion of its operations to PSI. Sunrise provided PSI with
management, administration, and educational programs for PSI's child care
centers and leased substantially all of the equipment and other property
necessary for the operation of the related child care centers to PSI under an
Administrative Services Agreement, License and Equipment Lease (the "PSI
Agreement"). The PSI Agreement stipulated that Sunrise was to receive an
administrative services fee equal to 9% of revenue for providing the services
described above. The results of PSI for the period from the acquisition of
Sunrise (December 1977) through June 30, 1998, were not included in the
consolidated financial statements for the year ended June 30, 1998 due to
immateriality.
During 1997, Sunrise entered into an additional agreement with PSI to provide
management, administration and educational programs to the public charter
schools operated by PSI. In return for providing these services, Sunrise
receives an administrative fee equal to 12.5% of total charter school revenue
received by PSI. In addition, PSI operates these charter schools in certain of
the Sunrise preschool centers.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES: Cash and cash equivalents,
consisting of highly liquid investments with maturities of three months or less
when purchased, are stated at cost which approximates market.
INTANGIBLE ASSETS: Intangible assets are a result of business acquisitions,
which include costs in excess of net assets acquired, non-compete agreements,
and customer base. Intangibles are stated at cost and are being amortized on a
straight-line basis over various periods up to 25 years. Amortization expense
for the
26
<PAGE> 28
years ended June 30, 1999, 1998, 1997 was $731,000, $426,000 and $0,
respectively. The Company periodically evaluates the recoverability of
intangibles resulting from business acquisitions and measures the amount of
impairment, if any, by assessing current and future levels of cash flows as well
as other factors, such as business trends and prospects and other market
conditions.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and
depreciated on the straight-line method over their estimated useful lives,
ranging from three to thirty years. The Company uses accelerated methods of
depreciation for income tax purposes.
ADVERTISING COSTS: Advertising costs consist primarily of print media and
brochures and are expensed when the related advertising occurs. Total
advertising expense totaled $1,517,000 for the year ended June 30, 1999 and was
immaterial for years ending June 30, 1998 and 1997.
DEBT ACQUISITION COSTS: Costs incurred related to the acquisition of debt are
capitalized and amortized over the term of the related debt under the effective
interest method. Upon early payment of debt, related debt acquisition costs are
removed from the accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash
equivalents, receivables, other current assets, accounts payable, and amounts
included in other current liabilities meeting the definition of financial
instruments approximate fair value because of the short-term maturity of these
instruments.
The carrying amount of long-term obligations, including the current portion of
long-term debt, approximates fair value based on quoted market prices for
similar issues or on the current rates offered to the Company for debt of the
same maturity.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF: The
Company follows the provisions of Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of ("SFAS No. 121"). SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are recorded at the lower of the carrying amount or net realizable
value (fair value less costs to sell).
CLOSED SCHOOLS: In fiscal 1999 the Company closed two schools in New Jersey. In
connection with the closings, the Company established a reserve for estimated
loss on impairment of assets and lease commitments of approximately $1,600,000
of which approximately $300,000 relates to lease payments.
EARNINGS (LOSS) PER COMMON SHARE: The Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128") in the second
quarter of fiscal 1998 and has restated previously reported amounts. Basic
earnings per share ("EPS") and diluted EPS replace primary EPS and fully diluted
EPS. Basic EPS is calculated by dividing net earnings (loss) by the weighted
average number of common shares outstanding for the period. Diluted EPS is
calculated by dividing net earnings (loss) by the weighted average number of
common shares and dilutive potential common shares outstanding for the period.
27
<PAGE> 29
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.
FINANCIAL STATEMENT RECLASSIFICATIONS: Certain prior year amounts have been
reclassified to conform to the current year presentation. These
reclassifications had no effect on the previously reported results of operations
or shareholders' equity.
SELF INSURANCE: The Company self-insures for potential employee health care
costs with certain stop loss insurance coverage. Claims expense is recorded in
the year of occurrence through the accrual of claim reserve based upon ultimate
claim costs.
STOCK-BASED COMPENSATION: Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("FAS 123") defines a fair value based method of
accounting for employee stock options or similar equity instruments. However, it
allows an entity to continue to account for these plans according to Accounting
Principles Board Opinion No. 25 ("APB 25"), provided pro forma disclosures of
net income are made as if the fair value based method of accounting defined in
FAS 123 had been applied. The Company has elected to continue to measure
compensation expense under APB 25. See Note 12 for required pro forma
disclosures.
NOTE 3 - ACQUISITIONS
In January 1998, the Company acquired all of the outstanding stock of Academy of
Business, Inc. ("ABC"), a Phoenix, Arizona-based post-secondary career college,
for cash of approximately $1,600,000. ABC is accredited by the North Central
Association of Colleges and Schools, and is an Authorized Academic Training
Provider for Microsoft. In addition to offering traditional business courses,
ABC offers comprehensive training to students preparing for various Microsoft
certifications. 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.
In December 1997, the Company acquired Sunrise Educational Services, Inc.
("Sunrise"), a Scottsdale, Arizona-based operator of approximately 30 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
purchase price was approximately $13,800,000 and consisted of $4,200,000 in cash
and 1,950,000 shares of the Company's common stock. In addition, transaction
costs approximating $3,300,000 were incurred in the consummation of this
acquisition. Goodwill recorded on the transaction is being amortized on the
straight-line method over a period of 25 years. In accordance with the terms of
the merger agreement, the Company granted stock options and warrants to purchase
553,724 shares of common stock at exercise prices ranging from $1.27 to $6.04
per share to Sunrise employees and directors as replacement options and warrants
for previously issued Sunrise options and warrants.
Summarized below are the unaudited pro forma combined results of operations of
the Company for the years ended June 30, 1998 and 1997, assuming the Sunrise
acquisition was consummated as of the beginning of each period presented.
Excluded from the pro forma results of operations for the years ended June 30,
1998 and 1997, are charges of $1,114,000 or $.12 per share and $602,000 or $.06
per share, respectively, which provided for impaired assets and rental
commitments in connection
28
<PAGE> 30
with Sunrise's management of seven centers with a non-profit organization. The
pro forma 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>
Year Ended June 30,
1998 1997
------- --------
<S> <C> <C>
Revenue $22,997 $ 19,251
Net loss (5,249) (204)
Net loss per common share $ (.55) $ (.02)
</TABLE>
NOTE 4 - SETTLEMENT AGREEMENT
During 1997, the Company reached a final agreement with Hartford, Connecticut
officials on amounts owed the Company under its school management contract that
was canceled in January 1996. Under the final settlement, the Company will
receive $3,250,000, payable in five annual installments of $650,000, which began
in July 1997. These annual payments are being recorded in income as they are
received. A settlement receivable of $650,000 is recorded on the Company's
balance sheet to account for this. In addition, both parties released each other
from any further claims under the management contract.
NOTE 5 - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist of primarily cash and cash equivalents.
The Company's cash and cash equivalents are placed with major banks and
financial institutions. The Company, in the normal course of business, maintains
cash balances in excess of Federal Deposit Insurance Corporation's insurance
limits. Historically, the Company has not experienced any losses related to cash
and cash equivalents due to such concentration of credit risk.
The Company receives a significant amount of charter school revenues from state
and federal agencies. As of and for the year ended June 30, 1999, approximately
56% and 27% of the Company's accounts receivable and revenue, respectively,
were from state and federal agencies.
NOTE 6 - MARKETABLE SECURITIES
During 1995, the company and the firm hired to manage the Company's investment
portfolio became involved in a dispute over the purchase and management of
certain securities included in the Company's investment portfolio. The Company
and its investment management firm entered into a preliminary settlement
agreement on June 30 1995, whereby the investment management firm agreed to
reimburse the Company $3,000,000 for losses on the Company's portfolio. During
fiscal 1997, the company and its investment management firm entered into a final
settlement agreement whereby the investment management firm agreed to pay the
company an additional $1,250,000 in fiscal 1997 to resolve all remaining
disputes relating to the firm's management of the Company's investment
portfolio.
During 1997, the Company received proceeds of $9,592,000 on the sale and
maturity of marketable securities and realized gains of $49,000 during 1997. For
purposes of calculating realized gains and losses on sales of marketable
securities, the amortized cost of each security sold was used.
29
<PAGE> 31
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment at June 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 10,264,000 $ 6,928,000
Buildings 13,436,000 6,062,000
Leasehold improvements 3,041,000 1,621,000
Furniture and equipment 7,247,000 3,222,000
Vehicles 1,081,000 711,000
Construction in progress 5,698,000 2,385,000
Less accumulated depreciation and
amortization (3,765,000) (1,450,000)
------------ ------------
$ 37,002,000 $ 19,479,000
============ ============
</TABLE>
Property and equipment held under capital lease arrangements totaled $13,794,000
and $7,946,000 as of June 30, 1999 and 1998, respectively. Accumulated
depreciation for capital leases is included with owned assets above.
Depreciation expense, including property and equipment held under capital lease
arrangements, totaled $2,155,000, $692,000 and $218,000 for the years ended June
30, 1999, 1998 and 1997, respectively.
NOTE 8 - LINES OF CREDIT
The Company currently has a $5,000,000 working capital line of credit from a
related party, bearing interest at 12%. Total borrowings outstanding at June 30,
1999, totaled approximately $4,999,000. The line of credit is due and payable on
September 30, 1999. The Company has the option to extend payment until March 31,
2000 with the issuance of 250,000 additional warrants for the purchase of the
Company's common stock at $3.00 per share. At March 31, 2000, if unpaid, the
related party holder of the line of credit can elect to convert the debt into
the Company's common stock at the lesser of $1.00 per share for each dollar owed
or the lowest closing price during the previous thirty days prior to the
conversion of shares.
In addition, the Company has outstanding a $1,000,000 working capital line of
credit with a bank bearing interest at 9.75%. Total borrowings outstanding at
June 30, 1999 were $1,000,000. The line is due and payable on September 29,
1999. Interest is due on outstanding borrowings at September 29, 1999.
At June 30, 1998, the Company had available a $500,000 working capital line of
credit bearing interest at prime 8.5% plus 1.5%. Total borrowings outstanding
amounted to $470,000. The line of credit was paid off in fiscal 1999.
30
<PAGE> 32
NOTE 9 - OTHER CURRENT LIABILITIES
Other current liabilities at June 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred revenue and prepaid tuition $ 2,648,000 $ 2,279,000
School closure reserve 1,600,000 -
Cash overdraft 1,045,000 -
Reserve for contract and other contingencies 178,000 1,254,000
Amount due on Sunrise acquisition - 722,000
Accrued payroll and related costs 1,134,000 597,000
Current portion of long-term debt 1,970,000 270,000
Other 1,286,000 645,000
----------- -----------
$ 9,861,000 $ 5,767,000
=========== ===========
</TABLE>
NOTE 10 - LONG -TERM OBLIGATIONS
Financing Obligation: During 1999 and 1998, the Company entered into sale
leaseback agreements related to four properties. Total proceeds from these
financings in 1999 and 1998 amounted to $5,796,000 and $7,917,000, respectively.
Under the terms of the agreements, the Company is required to prepay, on
September 1 of each year, the next 12-months lease payments, estimated property
taxes and insurance premiums into an escrow account. The account is jointly
controlled by the lender and the Company. Each month funds are transferred from
the escrow account to pay rent, property taxes and or insurance, if applicable.
Amounts in this account have been reflected as prepaid rent in the accompanying
financial statements. Interest on funds remaining in the escrow account are
credited to the Company. The leases require the Company to pay all applicable
real estate taxes, utility expenses, and insurance costs. In addition, the
leases prohibit the Company from buying back any shares of the Company's stock,
declaring dividends, or repaying any indebtedness to affiliates of the Company,
unless certain financial ratios are met as defined in the agreements.
These agreements are reflected as financings in the accompanying financial
statements, and have an initial term of 15 years with provisions for two 10-year
renewals.
Long-term obligations at June 30, consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---------- ----------
<S> <C> <C>
Note payable; principal and interest payable
monthly through August 2003; interest payable
monthly at prime plus 1.75%, 10.42% at June 30,
1998; collateralized with certain of the
Company's accounts receivable and equipment. $ -- $ 903,000
Note payable; on April 15, 1999, the Company
refinanced the note payable described above;
principal and interest at 9.5%, payable
monthly through January 2000. 741,000 --
Note payable; principal and interest at 10%,
payable monthly through August 2001. 900,000 --
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Note payable; principal and interest at 10%, payable monthly
through April 2006; collateralized by leasehold improvements 45,000 --
Note payable; principal and interest at 11%, payable monthly with a
balloon note due December 2003; collateralized by real estate 8,151,000 --
Financing obligations; principal, interest at 6.2%, property tax and
insurance payments prepaid annually each September 1 through 2013;
collateralized by school facilities and property 13,130,000 7,917,000
Capital lease obligation; principal and interest at 12.63%, payable
monthly through February 2003; collateralized by furniture and fixtures 233,000 --
Capital lease obligation; principal and interest at 9.75%., payable
monthly through December 2001; collateralized by computer
equipment 184,000 --
Capital lease obligation; principal and interest at 7.44%, payable
monthly through May 2002; collateralized by communication
equipment 104,000 --
Capital lease obligations; principal and interest at various rates,
payments monthly through December 2001; collateralized by three buses 60,000 --
Capital lease obligations; principal and interest at 13.61%, payments
monthly through June 2001; collateralized by office equipment 37,000 28,000
------------ ------------
23,585,000 8,848,000
Less current portion (1,970,000) (270,000)
------------ ------------
Long-Term Obligations $ 21,615,000 $ 8,578,000
============ ============
</TABLE>
Future minimum principal payments of long-term obligations for the next five
years consists of:
<TABLE>
<CAPTION>
<S> <C>
June 30, 2000 $ 1,970,000
2001 1,403,000
2002 986,000
2003 863,000
2004 7,028,000
Thereafter 11,335,000
-----------
$23,585,000
===========
</TABLE>
32
<PAGE> 34
Total interest paid in the years ended June 30, 1999, 1998 and 1997 was
$1,209,000, $125,000 and $17,000, respectively. Capitalized interest totaled
$138,000 for the year ended June 30, 1999 and was immaterial for the years
ending June 30, 1998 and 1997.
NOTE 11 - OPERATING LEASES
The Company leases certain school facilities, office space, vehicles, and
equipment under various operating lease agreements, the last of which expires in
2013. At June 30, 1999, future minimum lease payments under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
<S> <C>
2000 $ 3,250,000
2001 3,042,000
2002 2,723,000
2003 2,113,000
2004 1,342,000
2005 and thereafter 6,896,000
-----------
$19,366,000
</TABLE>
Total rent expense for the years ended June 30, 1999, 1998, and 1997 was
$3,839,000, $2,065,000 and $313,000 respectively.
The facility leases generally require the Company to pay all applicable real
estate taxes, utility expenses, and insurance costs. In addition, certain of the
agreements provide for the escalation of future rents based on the Consumer
Price Index or other formulas. Renewal of the facility lease agreements is for
periods of five to 25 years. For those leases that require fixed rental
escalations during their lease terms, rent expense is recognized on a
straight-line basis, resulting in deferred rent of approximately $313,000 and
$368,000 at June 30, 1999 and 1998, respectively. This liability will be
satisfied through future rental payments.
NOTE 12 - SHAREHOLDERS' EQUITY
STOCK OPTIONS: Under the terms of the Company's 1988 Stock Option Plan, as
Amended and Restated, 1,900,000 shares of common stock have been reserved for
issuance under the plan to directors, officers, employees or other individuals
or entities who are not employees but who provide services to the Company. The
stock options are exercisable over periods of up to ten years from the date of
grant and may be issued as incentive or nonqualified stock options.
Under the terms of the Company's 1992 Long-Term Executive Stock Option Plan,
1,100,000 shares of common stock have been reserved for issuance to key
employees of the Company, upon the exercise of stock options. The stock options
issuable under the 1992 Plan are nonqualified and are exercisable over periods
of up to ten years from the date of grant.
33
<PAGE> 35
At June 30, 1999, 775,000 shares are available for grant under the two option
plans. Stock option activity was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
July 1 1,744,390 $ 4.50 1,356,767 $ 4.97 1,367,405 $ 5.43
Granted 471,667 4.10 751,982 4.29 267,200 3.15
Exercised (9,528) 3.38 (132,654) 4.45 (667) 2.94
Canceled or expired (305,628) 4.49 (231,705) 6.57 (277,171) 5.47
---------- ------------- ---------- ------------- ---------- -------------
Options outstanding,
June 30 1,900,901 4.41 1,744,390 4.50 1,356,767 5.79
---------- ------------- ---------- ------------- ---------- -------------
Options exercisable,
June 30 925,635 $ 4.50 777,962 $ 4.50 410,881 $ 5.79
</TABLE>
The following table summarizes information relating to currently outstanding and
exercisable options as of June 30, 1999:
<TABLE>
<CAPTION>
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Options Exercise Options Exercise
Prices Life in Years Outstanding Price Exercisable Price
- ------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$2.55 - $3.85 5.71 456,102 $ 3.41 235,288 $ 3.48
$4.00 - $5.75 7.48 1,421,466 4.68 667,014 4.75
$7.50 - $9.00 5.88 23,333 7.71 23,333 7.71
------------- ------------ ------------ ------------ ------------
7.03 1,900,901 $ 4.41 925,635 $ 4.50
</TABLE>
In accordance with the terms of the Merger agreement between the Company and
Sunrise, the Company granted options to purchase 252,982 shares of common stock
at exercise prices ranging from $1.27 to $6.04 per share to Sunrise employees
and directors as replacement options for previously issued Sunrise options.
These grants are included in the 1998 grants above.
WARRANTS: In accordance with the terms of the merger agreement between the
Company and Sunrise, the Company issued warrants to purchase 300,742 shares of
common stock at exercise prices ranging from $3.10 to $5.87 per share as
replacement warrants for previously issued Sunrise warrants. All of these
warrants, which expire at various times through November 2001, were exercisable
at June 30, 1998.
During fiscal 1999 the Company obtained a $5,000,000 line of credit from a
related party (Note 17). In connection with the agreement, the Company issued
warrants for the purchase of 150,000 shares of the Company's common stock at
$3.00 per share.
SHARE RIGHTS PLAN: Under the terms of the Company's share rights plan, the
Company distributed as a dividend one right for each share of the Company's
common stock outstanding on October 1, 1993. Each right entitles its holder to
buy one one-hundredth of a share of a new series of junior participating
preferred stock at an exercise price of $175, subject to adjustment. The rights
will be exercisable only if a
34
<PAGE> 36
person or group acquires ownership of at least 20% of the Company's outstanding
common stock or announces a tender offer to acquire 20% or more of the common
stock.
As permitted under the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), the Company
has elected to continue to account for stock option and warrant grants under APB
Opinion No. 25, under which no compensation cost has been recognized. Had the
Company accounted for its stock option and warrant grants and recorded
compensation cost in accordance with SFAS No. 123, the Company's pro forma net
earnings (loss) and net earnings (loss) per common share for the year ended June
30 would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings (loss) - as reported $(10,689,000) $ (3,437,000) $ 566,000
Net loss - proforma (12,443,000) (4,267,000) (6,000)
Net earnings (loss) per common share
- - as reported (basic and diluted) $ (1.12) $ (.40) $ .08
Net earnings (loss) per common share
- - proforma (basic and diluted) $ (1.30) $ (.50) $ --
</TABLE>
The fair value of each option and warrant grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Risk free interest rate 5.1% 5.5%-6.2% 5.3%-6.4%
Expected life 5 years 3 to 7 years 7 years
Expected volatility 74.1% 58.4% 58.5%
Dividend yield 0% 0% 0%
</TABLE>
NOTE 13 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) as of June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Federal net operating loss benefit, net of
amount to be credited to equity $ 9,915,000 $ 7,240,000
Capital loss carryforward benefit 701,000 701,000
Accrued expenses 61,000 411,000
Other 378,000 444,000
-------------- --------------
11,055,000 8,796,000
Valuation allowance (11,055,000) (8,796,000)
-------------- --------------
Net deferred income taxes $ - $ -
============== ==============
</TABLE>
At June 30, 1999, the Company had net operating loss carryforwards of
$39,600,000 for federal tax purposes expiring from 2004 through 2019 and capital
loss carryforwards of $2,063,000, expiring through 2002. The Company has
determined that the realization of the loss carryforwards and the other deferred
tax assets does not meet the recognition criteria under SFAS No. 109 and,
accordingly, a valuation allowance has been established for the tax benefit of
these items as of June 30, 1999 and 1998.
35
<PAGE> 37
As a result of the acquisitions discussed in Note 3, the Company acquired net
operating loss carryforwards for federal tax purposes approximating $3,000,000,
which are available to offset future taxable income, if any, through 2013.
Section 382 of the Internal Revenue Code of 1986 as amended, restricts the use
of net operating losses where a corporation has had a change in ownership as
defined. Potential limitation of the acquired net operating loss carryforwards
has not been determined. Any tax benefit realized from the use of the acquired
operating loss carryforwards will be applied to reduce goodwill.
Consolidated income tax expense differed from the expected amount computed by
applying the U.S. federal income tax rate of 34% to income before income taxes
for the years ended June 30 as follows:
NOTE 14 - SEGMENT INFORMATION
The Company is organized primarily on the basis of educational product lines
offered. Segment data does not include a charge for corporate overhead
allocation or restructuring and relocation charges. Presentation of segment
information for the year ended June 30, 1998, has not been included since the
information is impractical to present and the cost to develop would be
excessive. The table below presents information about reportable segments for
the year ended June 30, 1999:
<TABLE>
<CAPTION>
Charter Preschools Private College Total
<S> <C> <C> <C> <C> <C>
Revenue $ 5,100,000 $ 17,496,000 $ 11,851,000 $ 2,829,000 $ 37,276,000
------------ ------------ ------------ ------------ ------------
Operating Income (Loss)
Before Depreciation,
Amortization and Taxes 386,000 585,000 1,364,000 (1,067,000) 1,268,000
Depreciation and
amortization 78,000 1,369,000 1,055,000 217,000 2,719,000
Interest -- 105,000 1,130,000 -- 1,235,000
------------ ------------ ------------ ------------ ------------
Income (loss) before
corporate general
and other 308,000 (889,000) (821,000) (1,284,000) (2,686,000)
Corporate general and
administrative cost
and restructuring and
relocation expenses (8,003,000)
Net loss $(10,689,000)
=============
Long-Lived Assets:
Property and,
equipment, net $ 795,000 $ 2,039,000 $ 32,831,000 $ 589,000 $ 36,254,000
Net Intangible assets -- 14,161,000 -- -- 14,161,000
Other corporate
assets 3,878,000
------------
Total long-lived
assets $ 54,293,000
============
</TABLE>
Geographic information has not been provided because the company's schools are
located primarily in the Southwestern United States and disclosure would not be
meaningful.
36
<PAGE> 38
NOTE 15 - RELATED PARTY TRANSACTIONS
In addition to the related-party transactions described elsewhere, certain
shareholders and directors provided legal and accounting services to the
Company. Total amounts incurred for these services for the years ended June 30,
1999, 1998, and 1997 were $321,000, $490,000 and $216,000 respectively.
In January 1998, the Company terminated a real estate development agreement with
TesseracT Development Company II ("TDC II"), a general partnership in which the
chairman and chief executive officer of the Company had a 25% interest, for an
aggregate payment of $240,000. This agreement granted TDC II the opportunity to
develop the next ten TesseracT schools, with an option to develop the succeeding
twenty TesseracT schools.
As more fully described in Note 8, the Company currently has a $5,000,000
working capital line of credit from a related party. Total borrowings
outstanding at June 30, 1999, totaled $4,999,000. The line of credit is due and
payable on September 30, 1999. The Company has the option to extend payment
until March 31, 2000, with the issuance of warrants for the purchase of
additional 250,000 shares of the Company's common stock at $3.00 per share. At
March 31, 2000, if unpaid, the related party holder of the note can elect to
convert the debt into the Company's common stock at $1.00 per share for each
dollar owed.
NOTE 16 - PARTICIPATION IN STUDENT FINANCIAL ASSISTANCE PROGRAMS
The Company's participation in the U.S. Department of Education's Title IV
programs, through its wholly-owned subsidiary ABC, is subject to audit by
independent auditors annually and to program reviews by the Department of
Education and other federal, state, or accrediting agencies. Instances of
noncompliance, should they exist and be discovered through the audit process,
could result in refunds of financial assistance and imposition of fines and
penalties.
The Department of Education has regulations that contain objective measurement
criteria to determine the financial capabilities of educational institutions
participating in student financial assistance programs. The regulations apply
only to those institutions offering post-secondary courses and training. The
criteria, which are applied on the subsidiary level, include among other things
having cash and receivables from unrelated parties equal to or greater than
current liabilities, maintaining a positive tangible net worth, and restrictions
on the amount of operating losses incurred within a two-year period.
Due to additional operating losses incurred by ABC, the financial capability
tests had not been met at June 30, 1999. As a result, the Company may be
required to post a letter of credit for at least one-half of the Title IV funds
received by ABC during 1999, which amounted to approximately $1,709,000.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT: The Company has employment agreements with executive
officers of the Company which would require severance benefits to be paid if
employment is terminated for various reasons, including termination following a
change of ownership or control of the Company as defined by the agreements. The
estimated maximum contingent liability for severance payments that the Company
would be required to make under the employment agreements is approximately
$820,000 at June 30, 1999.
DEVELOPMENT AGREEMENT: During 1999, the Company entered into a development
agreement for the construction of two schools in Arizona. As of June 30, 1999,
the Company has advanced approximately $4,400,000 related to those projects
which is reflected in the accompanying financial statements as
37
<PAGE> 39
construction in progress. The terms of the related leases are for periods from
twenty to twenty-five years with certain provisions for extension. Additional
commitments for the completion of the schools amounted to approximately
$5,600,000. Although management believes that these projects will be completed,
in the event that the developer is unable to complete these projects, the
Company may have to provide necessary funds for completion. One of the schools
opened in August 1999 and under the terms of the lease agreement has monthly
lease payments of approximately $59,000.
AGREEMENT FOR PROFESSIONAL SERVICES: In May 1999, the Company entered into an
agreement for professional services with Arthur Andersen LLP. ("AA") Under the
terms of the agreement, AA will provide certain agreed upon accounting services,
tax services and information technology services. The term of the agreement is
for five years beginning July 1, 1999, with an option to extend for five years.
In return for services as provided under the agreement, the Company will pay AA
implementation costs of approximately $1,500,000 and a monthly fee based upon a
percentage of the Company's annual revenue ranging from 3.0% to 3.8%. For the
year ended June 30, 1999 the cost incurred related to implementation was
$1,500,000 which is reflected in the accompanying financial statements as a
restructuring expense. The implementation fee was paid with a $200,000 cash
payment, a $900,000 note payable and the issuance of 200,000 shares of the
Company's common stock.
Additionally, in the event that the average closing price of the Company's
common stock for the ten days preceding July 1, 2000 ("average share price"), is
less than $5 but more than $3 per share, the Company is required to either issue
additional shares of the Company's common stock so that the total number of
shares held by AA times the average share price totals $1,000,000 or pay the
difference between $5 and the average share price times the 200,000 shares
currently held by AA.
The agreement contains certain performance incentives under a service level
document that provides for incentive fees of at least $1,200,000 over the term
of the agreement. Performance incentives earned will be payable, at the
Company's option, in options for the Company's common stock or cash.
REGULATION: Schools and preschools are subject to a variety of state and local
regulations and requirements. Additionally, the Company operates public schools
under certain charter agreements and management contracts. The Department of
Education has regulatory criteria related to financial requirements of financial
institutions participating in student financial assistance programs for
post-secondary courses and training. Although management believes that the
Company will be able to meet federal, state and local regulations, the failure
to maintain required licenses, charters, approvals or accreditations could have
a material adverse effect on the Company's financial position and results from
operations.
NOTE 18 - GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements during the years ended June 30, 1999 and 1998, the Company incurred
losses of $10,689,000 and $3,437,000, respectively. As of June 30, 1999, the
Company had a negative working capital of $10,478,000. These factors, among
other things, may indicate that the Company will be unable to continue as a
going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Management has plans in process to resolve near term cash flow issues which
include the following transactions:
- - A private placement equity financing to provide approximately
$7,500,000 in cash flows, less offering costs.
38
<PAGE> 40
- - A restructuring of both the $5,000,000 and $1,000,000 credit lines,
which are currently payable, into long-term debt.
- - At June 30, 1999, the Company has approximately $5,385,000 of
construction in progress. The Company is seeking permanent financing
for these projects to provide necessary cash.
Management believes that if it can finalize financing alternatives that it is
pursuing together with its projected improvement in operating results for 2000,
the Company will generate sufficient resources to permit uninterrupted
performance of its operating obligations as currently structured and
anticipated. The Company's continuance as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations in a timely
manner, to obtain additional financing as required, and ultimately to attain
profitability. There can be no assurance, however, that these sources would be
available to the Company on acceptable terms or when necessary.
NOTE 19 -- SUPPLEMENTAL CASH FLOW DISCLOSURE
Supplemental disclosure of non-cash investing and financing information for the
year ending June 30, 1999 (in thousands)
1999
Issuance of warrants to Pioneer for debt $270
Financing
Note payable to Arthur Andersen $900
Issuance of common stock to Arthur
Andersen for debt financing $400
Note receivable on sale of land/building $640
NOTE 20 - SUBSEQUENT EVENTS
SALE OF CLOSED SCHOOL: In August 1999 the Company sold property related to a New
Jersey school closed in June 1999. The related loss on sale of $245,000 was part
of the closed school reserve at June 30, 1999.
MANAGEMENT AGREEMENTS: In July 1999, the Company entered into management
contracts with two 501(c)3 corporations for the management and operation of
charter schools in Texas and Washington D.C. Under the terms of the agreement,
the Company will receive a management fee of approximately 12.5% of each
school's charter revenue. Funds required for operations will be advanced to the
Company and distributed by the Company to cover related costs.
39
<PAGE> 41
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THE TESSERACT GROUP, INC.
<TABLE>
<CAPTION>
Column C
Column A Column B Additions Column D Column E
- ---------------------------- ------------ ------------------------------ -------------- ---------------
Balance at Charged to Charged
Beginning of Costs and to Other Balance at
Description Period Expenses Accounts Deductions End of Period
- ---------------------------- ------------ ------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1999:
Allowance for uncollectible
accounts receivable $ 248,000 $ 482,000 $ 13,000 $612,000(1) $ 131,000
Closed School Reserve $ -- $ 1,600,000(2) $ -- $ -- $1,600,000
Year ended June 30, 1998:
Allowance for uncollectible
accounts receivable $ 30,000 $ 87,000 $ 131,000(3) $ -- $ 248,000
Year ended June 30,1997:
Allowance for uncollectible
accounts receivable $ 53,000 $ 10,000 $ -- $(33,000)(4) $ 30,000
</TABLE>
(1) The reduction in the allowance for uncollectible accounts receivable
was made to bring the allowance in line with the anticipated
uncollectible accounts receivable at June 30, 1999.
(2) The Company established a closed school reserve during fiscal 1999
related for schools that were approved for closure by the Board of
Directors prior to June 30, 1999.
(3) The addition is the result of the allowance for uncollectible accounts
receivable existing at the date of acquisition of Sunrise and ABC.
(4) The reduction in the allowance for uncollectible accounts receivable
was made to bring the allowance in line with the anticipated
uncollectible accounts receivable at June 30, 1997.
40
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE TESSERACT GROUP, INC.
By /s/ Richard C. Yonker
------------------------
Richard C. Yonker
Date: October 20, 1999 Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ John T. Golle October 20, 1999
- --------------------------------------
John T. Golle
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ Robert I. Karon October 20, 1999
- --------------------------------------
Robert I. Karon
Director
/s/ Gale R. Mellum October 20, 1999
- --------------------------------------
Gale R. Mellum
Director
/s/ Benjamin Nazarian October 20, 1999
- --------------------------------------
Benjamin Nazarian
Director
/s/ Martha Taylor Thomas October 20, 1999
- --------------------------------------
Martha Taylor Thomas
Director
/s/ Harold Nelkin October 20, 1999
- --------------------------------------
Harold Nelkin
Director
/s/ Richard C. Yonker October 20, 1999
- --------------------------------------
Richard C. Yonker
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE> 43
] EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
<S> <C>
3.1 Restated Articles of Incorporation of the Company, as
amended. (1)
3.2 By-Laws of the Company. (2)
4.1 Specimen Certificate of Common Stock. (1)
4.2 Share Rights Plan dated September 8, 1993. (3)
</TABLE>
<PAGE> 44
<TABLE>
<S> <C>
10.1* Employment Agreement between the Company and Philip E.
Geiger dated August 10, 1993. (4)
10.2* 1988 The TesseracT Group, Inc. Stock Option Plan, as
amended. (5)
10.3* Employment Agreement between the Company and John T. Golle
dated January 1, 1991. (6)
10.4* Amendment to Employment Agreement between the Company and
John T. Golle dated September 8, 1993. (7)
10.5* 1992 The TesseracT Group, Inc. Long-Term Executive Stock
Option Plan, as amended. (8)
10.6* Amendment to Employment Agreement between the Company and
John T. Golle dated March 20, 1992. (9)
10.7 Lease dated June 9, 1998, between EduCorp Properties, Inc.
as lessor and The TesseracT Group, Inc. as lessee. (1)
10.8 Amended and Restated Lease dated June 9, 1998, between
EduCorp Properties, Inc. as lessor and The TesseracT Group,
Inc. as lessee. (1)
10.9* Employment Agreement dated November 3, 1997, between the
Company and Todd K. Severson. (10)
10.10* Employment Agreement dated February 16, 1998, between the
Company and Tony L. Verbeten. (11)
10.11 Lease Agreement dated January 31, 1983, between Earl H.
Jones and Venture Educational Programs, Inc. (12)
10.12 Lease Agreement dated April 1, 1984, between McClintock
Associates Limited Partnership, an Arizona Limited
Partnership, and Venture Educational Programs, Inc. (12)
10.13 Lease Agreement dated October 24, 1986, between Peoria
Investment Company, Inc., an Arizona corporation, and Sunrise
Educational Services, Inc., an Arizona corporation.
(12)
10.14 Lease Agreement dated October 16, 1986, between Sun School I
Limited Partnership, an Arizona limited partnership, and
Sunrise Educational Services, Inc., an Arizona corporation.
(12)
10.15 Lease Agreement dated April 1, 1986, between Sunrise
Partners, an Arizona corporation, and Sunrise Educational
Services, Inc., an Arizona corporation. (12)
10.16 Lease Agreement dated February 5, 1987 between Sun School II
Limited Partnership, an Arizona limited partnership, and
Sunrise Educational Services, Inc., an Arizona corporation.
(12)
</TABLE>
<PAGE> 45
<TABLE>
<S> <C>
10.17 Lease Agreement dated June 26, 1987, between Huber Farm
Service of Phoenix, Inc., an Arizona corporation and Sunrise
Educational Services, Inc., an Arizona corporation. (12)
10.18 Lease Agreement, dated July 29, 1988, between Sunrise
Educational Services, Inc. and Investad, Inc. (13)
10.19 Lease Agreement, dated July 25, 1988, between Sunrise
Educational Services, Inc., and LV Properties, an Arizona
general partnership. (13)
10.20 Lease Agreement, dated May 12, 1988, between Sunrise
Educational Services, Inc. and Jaymark Komer and Eugene
Victor Komer and Ruth Lena Komer, as Trustees of the Komer
Family Trust dated December 30, 1980. (13)
10.21 Lease Agreement, dated July 29, 1988, between Sunrise
Educational Services, Inc. and Kailua Beach Center, Inc. (13)
10.22 Lease Agreement, dated January 11, 1988, between Sunrise
Educational Services, Inc. and Mercado Developers. (14)
10.23 Amendment of Lease Agreement dated March 8, 1990, between
Sunrise Educational Services, Inc. and Jaymark Komer and
Komer Family Trust dated May 12, 1988. (15)
10.24 Purchase Agreement and Registration Rights Agreement dated
April 6, 1990, between Sunrise Educational Services, Inc.
and Lepercq Capital Management, Inc. (16)
10.25 Lease Agreement, dated July 1, 1991, between Sunrise
Educational Services, Inc. and Maruni Arizona, Inc. (17)
10.26 Purchase Agreement, dated November 18, 1991, between Sunrise
Educational Services, Inc., LN Investment Capital Limited
Partnership, Lepercq Investment Limited Partnership II and LN
Investment Capital Limited Partnership II. (18)
10.27 Amendment of Lease Agreement dated July 22, 1998, between
Sunrise Educational Services, Inc. and Jaymark Komer and
Komer Family Trust. (19)
10.28 Management Agreement, dated November 14, 1993, between
United Church of Christ and Sunrise Educational Services,
Inc. (20)
10.29 Term Sheet Agreement, dated December 7, 1992, between Joy of
Christ Lutheran Church and Sunrise Educational Services,
Inc.(21)
10.30 Agreement between Lutheran Church of Honolulu and Sunrise
Educational Services, Inc., dated May 19, 1993. (21)
10.31 Administrative Services Agreement, License, and Equipment
Lease, dated February 1, 1994, between Sunrise Educational
Services, Inc., and Preschool Services, Inc. (20)
</TABLE>
<PAGE> 46
<TABLE>
<S> <C>
10.32 Asset Purchase Agreement between Children's Choice Learning
Center, Inc. and Sunrise Preschool, Inc. dated June 26,
1996, with one amendment dated June 28, 1996. (22)
10.33 Form of Credit and Security Agreement between Imperial Bank
and Sunrise Educational Services, Inc. dated April 24, 1997.
(23)
10.34* Employment Agreement dated March 15, 1999, between the Company
and Lucian P. Spataro, Jr.
10.35* Employment Agreement dated April 28, 1999, between the Company
and Richard C. Yonker.
10.36 Securities Purchase Agreement dated March 31, 1999, between
the Company and Pioneer Venture Fund, L.L.C. ("Pioneer").
10.37 12% Convertible Note dated March 31, 1999, issued to Pioneer.
10.38 1% Convertible Note dated April 16, 1999, issued to Pioneer.
10.39 1% Convertible Note dated May 17, 1999, issued to Pioneer.
10.40 1% Convertible Note dated June 9, 1999, issued to Pioneer.
11 Statement re Computation of Per Share Earnings (Loss). (24)
23.1 Consent of PricewaterhouseCoopers LLP. (24)
23.2 Consent of Arthur Andersen LLP. (24)
27 Financial Data Schedule (EDGAR version only). (24)
</TABLE>
------------------------------
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1998.
(2) Incorporated herein by reference to Exhibit 3.3 to the
Company's Form S-18 Registration Statement (Registration
Number 33-39481-C).
(3) Incorporated herein by reference to the same numbered Exhibit
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1993.
(4) Incorporated herein by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended December 31, 1994.
(5) Incorporated herein by reference to Exhibit 10.17 to the
Company's Amendment No. 1 to Form S-18 Registration Statement
(Registration Number 33-39481-C).
(6) Incorporated herein by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1993.
(7) Incorporated herein by reference to Exhibit Number 10.26 to
the Company's Annual Report on Form 10-K for the year ended
June 30, 1993.
(8) Incorporated herein by reference to Exhibit 10.24 to Amendment
No. 2 to the Company's Form S-1 Registration Statement
(Registration Number 33-46791).
(9) Incorporated herein by reference to Exhibit 10 to the
Company's Form 10-Q for the quarter ended December 31, 1997.
(10) Incorporated herein by reference to Exhibit 10 to the
Company's Form 10-Q for the quarter ended March 31, 1998.
(11) Incorporated herein by reference to exhibits to Sunrise
Educational Services, Inc, Commission File Number 0-16425
("Sunrise") Form S-1 filed July 10, 1987.
<PAGE> 47
(12) Incorporated herein by reference to exhibits to Sunrise Form
10-K filed on or about October 31, 1988.
(13) Incorporated herein by reference to exhibits to Sunrise Form
10-K filed on or about October 30, 1989.
(14) Incorporated herein by reference to exhibits to Sunrise Form
10-Q filed on or about January 31, 1990.
(15) Incorporated herein by reference to exhibits to Sunrise Form
8-K filed on or about April 20, 1990.
(16) Incorporated herein by reference to exhibits to Sunrise Form
10-K filed on or about October 28, 1991.
(17) Incorporated herein by reference to exhibits to Sunrise Form
10-Q filed on or about December 16, 1991.
(18) Incorporated herein by reference to exhibits to Sunrise Form
10-K filed on or about October 21, 1992.
(19) Incorporated herein by reference to exhibits to Sunrise Form
10-KSB for the year ended July 31, 1994.
(20) Incorporated herein by reference to exhibits to Sunrise Form
10-KSB filed on or about October 8, 1993.
(21) Incorporated herein by reference to exhibits to Sunrise Form
8-K filed on or about September 9, 1996.
(22) Incorporated herein by reference to exhibits to Sunrise Form
10-QSB filed on March 11, 1997.
(23) Incorporated herein by reference to the same numbered Exhibit
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1996.
(24) Incorporated herein by reference to the same numbered Exhibit
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1999.
<PAGE> 1
EXHIBIT 10.34
THE TESSERACT GROUP, INC.
9977 North 90th Street, Suite 180
Scottsdale, AZ 85258
EMPLOYMENT AGREEMENT
with
LUCIAN SPATARO
THIS AGREEMENT is made as of March 15, 1999, between THE TESSERACT GROUP,
INC., a Minnesota corporation (the "Company"), and LUCIAN P. SPATARO
("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 Executive Vice
President.
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 Executive Vice President 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 March 15, 1999, and shall continue upon the terms and
conditions contained herein, until termination in accordance with paragraph
3 thereof.
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.
<PAGE> 2
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. Extended
severance at the same rate will be provided on a month to month basis
until Employee is re-employed, or up to a maximum of an additional six
months, whichever comes first.
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 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.
4) Compensation.
a) Base Salary. Employee shall receive a base salary of $12,500.00 per
month ($150,000.00 annualized), payable biweekly one week in arrears,
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, at a
target of 50% of base pay.
5) Employee Benefits.
a) Benefit Plans and Programs. During the term of employment, Employee
shall be entitled to participate in such benefit plans and programs as
the Company may make available
<PAGE> 3
from time to time. The details of the availability and operation of
benefits plans and programs are governed by the plan or program documents.
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 the definitive stock option
agreements between Employee and the Company, Employee shall receive options
to purchase 100,000 shares of the Company's common stock, par value $.01
per share, at the closing sale price of a common share on the date
immediately preceding the date of grant. The Company's Board of Directors
approved the granting of these options. Fifteen thousand (15,000) shares
were granted from the Company's 1988 Stock Option Plan, as Amended and
Restated, on July 14, 1998 at a price of $4.75 per share. These shares vest
pursuant to the following schedule: one third immediately upon date of
grant, one third on the first anniversary of the grant date, and one third
on the second anniversary of the grant date. Thirty-five thousand (35,000)
shares were granted from the Company's 1992 Long-Term Executive Stock
Option Plan on July 14, 1998 at a price of $4.75 per share. The vesting of
these options shall occur one fifth, one fifth, one fifth, one fifth, and
one fifth after years five, six, seven, eight and nine of employment. This
vesting schedule for the 35,000 shares from the 1992 Plan may be
accelerated by the Company's Board of Directors based upon the achievement
of individual and Company goals. The remaining fifty thousand (50,000)
shares were granted on March 15, 1999 from the Company's 1992 Long-Term
Executive Stock Option Plan at a price of $3.38 per share. These options
will vest pursuant to the following schedule: one fifth, one fifth, one
fifth, one fifth and one fifth after years five, six, seven, eight and nine
of employment. Vesting of these 50,000 shares from the 1992 Plan may be
accelerated by the Company's Board of Directors based upon the achievement
of individual and Company goals.
In addition, proposed with this agreement, you may be granted certain stock
awards based upon performance and achieving company targets.
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
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
3
<PAGE> 4
unauthorized disclosure by the Employee, (b) that was available to Employee
on a non-confidential 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 of 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 March 15,
1999, and thereafter during the term of this Agreement and without the
express consent of the Board of Directors of the Company, Employee 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 following
termination of this Agreement or last severance payment, whichever comes
later, Employee 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 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
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<PAGE> 5
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 the Employee hereunder shall be deemed
properly given if addressed to:
Lucian P. Spataro, Ph.D.
8311 Via De Ventura, E #1003
Scottsdale, AZ 85258
13) Governing Law. This Agreement shall be construed under and governed by
the laws of the State of Arizona.
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.
THE TESSERACT GROUP, INC.
/s/ John T. Golle 8/17/99
- ---------------------------------------------
Chief Executive Officer Date
EMPLOYEE
/s/ Lucian P. Spataro 8/22/99
- ---------------------------------------------
Lucian P. Spataro, Ph.D. Date
<PAGE> 1
EXHIBIT 10.35
THE TESSERACT GROUP, INC.
3800 West 80th Street
Suite 1400
Minneapolis, Minnesota 55431
EMPLOYMENT AGREEMENT
with
RICHARD C. YONKER
THIS AGREEMENT is made as of April 22, 1999, between THE TESSERACT GROUP,
INC., a Minnesota corporation (the "Company"), and RICHARD C. YONKER
("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 and Vice President.
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 and Vice President
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 April 23, 1999, and shall continue upon
the terms and conditions contained herein, until terminated in
accordance with paragraph 3 thereof.
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<PAGE> 2
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. Extended
severance at the same rate will be provided on a month to month basis
until employee is re-employed or up to a maximum of an additional six
months, whichever comes first.
(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.
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<PAGE> 3
(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.
4. Compensation.
(a) Base Salary. Employee shall receive a base salary of $14,583.33 per
month ($175,000.00 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, at a
target of 50% of base pay; up to 100% of base pay for "outstanding"
achievement. Employee's bonus for fiscal year 2000 (July 1, 1999
through June 30, 2000) is guaranteed and will be paid at the target of
50% base pay or higher if company results are above target.
(c) Signing Bonus. Employee will be paid a one-time signing bonus of
$25,000.00 payable in the first month of employment.
5. Employee Benefits.
(a) Benefit Plans and Programs. During the 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. 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, Employee shall
receive options to purchase 100,000 shares of the Company's common
stock, par value $.01 per share, at the closing sale price of a common
share on the date immediately preceding the date of grant. The
Company's Board of Directors has approved the granting of these
options on April 16, 1999. The pricing of these options will be equal
to the closing price of TesseracT stock on April 22, 1999. Fifty
thousand (50,000) shares will be granted from the Company's 1988 Stock
Option Plan, as Amended and Restated, and will vest 1/3, 1/3, 1/3
respectively,
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<PAGE> 4
after years one, two, and three of employment. The remaining fifty
thousand (50,000) shares will be granted from the Company's 1992
Long-Term Executive Stock Option Plan and will vest based upon
performance as agreed upon from year to year. Vesting of the 50,000
shares from the 1992 Plan may be accelerated by the Company's Board of
Directors based upon the achievement of individual and Company goals.
In addition, proposed with this agreement, you may be granted certain
stock awards based upon performance and achieving company targets.
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
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
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<PAGE> 5
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 April
23, 1999, and thereafter during the term of this Agreement and without the
express consent of the Board of Directors of the Company, Employee 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
following termination of this Agreement or last severance payment whichever
comes later, Employee 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 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
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<PAGE> 6
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:
Richard Yonker
2900 West Highland, #364
Chandler, AZ 85224
13. Governing Law. This Agreement shall be construed under and governed by
the laws of the State of Arizona.
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.
THE TESSERACT GROUP, INC. EMPLOYEE
/s/ John T. Golle 4/22/99 /s/ Richard C. Yonker
- --------------------------------- ---------------------
Its Chief Executive Officer Richard C. Yonker 22 APR 99
<PAGE> 1
Exhibit 10.36
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated
as of March 31, 1999, is between THE TESSERACT GROUP, INC., a Minnesota
corporation ("Company"), and PIONEER VENTURE FUND, L.L.C., a Delaware limited
liability company ("Buyer").
RECITALS
A. Company has issued, in favor of Buyer, that certain 12%
Note Due April 2, 1999, in the aggregate principal amount of $848,822.65 (the
"Interim Note"), of which $50,000 was paid on April 2, 1999.
B. In substitution for the Interim Note and to raise
additional capital for general corporate purposes Company has authorized an
issue of not more than ten (10) of its 12% Convertible Notes due September 30,
1999, in a maximum aggregate principal amount of $5,000,000.
C. Company has also authorized the issuance of warrants to
purchase an aggregate of 400,000 shares of its common stock at $3.00 per share.
D. Company wishes to issue to Buyer and Buyer wishes to
purchase from Company such convertible notes and one or more of such warrants,
all upon the terms and subject to the conditions of this Agreement.
NOW THEREFORE, in consideration of the above premises and of
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
AGREEMENT
ARTICLE 1.
DEFINITIONS AND INTERPRETATION
1.1 GENERAL DEFINITIONS. In this Agreement, the following
terms have the meanings specified or referred to in this Section 1.1 and shall
be equally applicable to both the singular and plural forms.
<PAGE> 2
"AFFILIATE" means, with respect to any Person, any other
Person which directly or indirectly controls, is controlled by or is under
common control with such Person; provided that Buyer shall not be deemed an
Affiliate of Company.
"ANCILLARY AGREEMENTS" means the Convertible Notes, the
Warrants, the Registration Rights Agreement and all other agreements,
instruments and documents being or to be executed and delivered to Buyer under
this Agreement or in connection herewith.
"BUYER" means Pioneer Venture Fund, L.L.C.
"BUYER GROUP MEMBER" means Buyer and any Affiliates of Buyer
and their respective successors and assigns hereunder or under any Convertible
Note or Warrant, each of which shall be an "accredited investor" as such term is
defined in Rule 501(a) promulgated under the Securities Act.
"CHANGE OF CONTROL" means either of the following: (a) any
person or group of persons (within the meaning of the Exchange Act) shall have
acquired, whether by merger or otherwise, beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the
issued and outstanding shares of capital stock of Company having the right to
vote for the election of directors of Company under ordinary circumstances; (b)
any sale by Company, other than in the ordinary course of business, of 50% or
more of the assets or properties of Company in one transaction or a series of
related transactions; or (c) during any period of twelve consecutive calendar
months, individuals who at the beginning of such period constituted the board of
directors of Company (together with any new directors whose election by the
board of directors of Company or whose nomination for election by the
stockholders of Company was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of
such period or whose elections or nomination for election was previously so
approved) cease for any reason other than death or disability to constitute a
majority of the directors then in office
"CLOSING" means any closing of an issuance by Company of
Convertible Notes and the purchase of such Convertible Notes by Buyer.
"CLOSING DATE" has the meaning set forth in Section 2.2.
"COMMON STOCK" means (i) the common stock, $0.01 par value per
share, of Company, and (ii) shares of capital stock of Company issued in respect
of or in exchange for shares of such Common Stock in connection with any stock
dividend or distribution, stock split-up, recapitalization, recombination or
exchange by Company generally of shares of such Common Stock.
"CONVERSION PRICE" shall mean the price per share of Common
Stock equal to the lesser of (a) $1.00 and (b) the Current Market Price as of
any date of determination.
2
<PAGE> 3
"CONVERTIBLE NOTE" means one or more of Company's 12%
Convertible Notes due September 30, 1999, each in the form of Exhibit A attached
hereto.
"COURT ORDER" means any judgment, order, award or decree of
any foreign, federal, state, local or other court or tribunal and any award in
any arbitration proceeding.
"CURRENT MARKET PRICE" means the lowest sale price for Common
Stock reported on the Nasdaq National Market during the 30 trading days prior to
any date of determination.
"DEFAULT" means any event which, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.
"EVENT OF DEFAULT" has the meaning set forth in Section 7.3.
"EXCESS PROCEEDS OF ISSUANCE OF STOCK OR INDEBTEDNESS" shall
mean cash proceeds received by Company at any time after the date hereof on
account of the issuance of (i) Common Stock (other than upon (A) the exercise of
a Warrant, (B) the conversion of a Convertible Note or (C) the exercise of stock
options or warrants reflected in Section 3.2 or issued to employees, officers or
directors of Company after the date hereof) or (ii) Indebtedness incurred to
provide working capital or for general corporate purposes, in each case net of
all transaction costs and underwriters' discounts with respect thereto.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any successor statute.
"EXPENSES" means any and all expenses incurred in connection
with investigating, defending or asserting any claim, action, suit or proceeding
incident to any matter indemnified against hereunder (including court filing
fees, court costs, arbitration fees or costs, witness fees, and reasonable fees
and disbursements of legal counsel, investigators, expert witnesses,
consultants, accountants and other professionals).
"EXTENDED MATURITY DATE" means March 31, 2000.
"GOVERNMENTAL BODY" means any federal, state, local or other
governmental authority or regulatory body.
"HOLDER" means the holder of any Convertible Note or Warrant.
"INDEBTEDNESS" of any Person shall mean all indebtedness of
such Person for borrowed money or for the deferred purchase price of any asset
or property of Company, payment for which is deferred six (6) months or more,
but excluding obligations to trade
3
<PAGE> 4
creditors incurred in the ordinary course of business that are not overdue by
more than six (6) months unless being contested in good faith
"LOSSES" means any and all losses, costs, obligations,
liabilities, settlement payments, awards, judgments, fines, penalties, damages,
expenses, deficiencies or other charges.
"MATERIAL ADVERSE EFFECT" means any condition, circumstance,
change or effect (or any development that, insofar as can be reasonably
foreseen, would result in any condition, circumstance, change or effect) that is
materially adverse to the assets, business, financial condition, results of
operations or prospects of Company.
"MATERIAL AGREEMENTS" means those leases, contracts and other
agreements to which Company is a party or to which Company or any of its
properties or assets are bound (a) that are "material contracts" as defined in
Item 601(b)(10) of Regulation S-K under the Securities Act and the Exchange Act
or (b) the breach or termination of which would have a Material Adverse Effect.
"MATURITY DATE" means September 30, 1999.
"PERSON" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company, trust,
company, bank, trust company, land trust, business trust or other organization,
whether or not a legal entity, and any Governmental Body.
"PRINCIPAL AMOUNT" means, as of any date of determination and
with respect to any Convertible Note, the then outstanding principal amount of
such Convertible Note.
"REGISTRATION RIGHTS AGREEMENT" means that certain
Registration Rights Agreement, dated as of the date hereof, between Buyer and
Company.
"REQUIREMENTS OF LAW" means any foreign, federal, state and
local laws, statutes, regulations, rules, codes or ordinances enacted, adopted,
issued or promulgated by any Governmental Body (including those pertaining to
electrical, environmental and occupational safety and health requirements) or
common law.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
or any successor statute.
"SUBSIDIARIES" means any corporation, partnership, limited
liability company, joint venture or other entity in which Company either (a)
owns, or at any relevant time owned, directly or indirectly, 50% or more of the
outstanding voting securities or equity interests or (b) is a general partner.
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<PAGE> 5
"TERMINATION DATE" means the date as of which all obligations
of Company then due and owing under this Agreement and all Ancillary Agreements
have been paid in full and all Warrants have been exercised or have expired
pursuant to their terms.
"WARRANT" means one or more warrants to purchase, at $3.00 per
share, shares of Common Stock, each in the form of Exhibit B attached hereto
1.2 INTERPRETATION.
(a) References to a Person are also references to its
assigns and successors in interest (by means of merger, consolidation
or sale of all or substantially all the assets or properties of such
Person or otherwise, as the case may be).
(b) References to a document are to it as amended,
waived and otherwise modified from time to time and references to a
statute or other governmental rule are to it as amended and otherwise
modified from time to time (and references to any provision thereof
shall include references to any successor provision).
(c) References to Sections or to Schedules or
Exhibits are to sections hereof or schedules or exhibits hereto, unless
the context otherwise requires. The Schedules and Exhibits referred to
herein shall be construed with and as an integral part of this
Agreement to the same extent as if they were set forth verbatim herein.
Titles to Articles and headings of Sections are inserted for
convenience of reference only and shall not be deemed a part of or to
affect meaning or interpretation of this Agreement.
(d) References herein to the knowledge of a party or
matters or information known to a party mean the actual knowledge or
conscious awareness of the executive officers and directors of such
party.
(e) The definitions set forth herein are equally
applicable both to the singular and plural forms and the feminine,
masculine and neuter forms of the terms defined.
(f) The term "including" and correlative terms shall
be deemed to be followed by "without limitation" whether or not
followed by such words or words of like import and the word "or" is not
exclusive.
(g) The term "hereof" and similar terms refer to this
Agreement as a whole.
(h) The "date of" any notice or request given
pursuant to this Agreement shall be determined in accordance with
Section 10.4.
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ARTICLE 2.
PURCHASE AND SALE OF SECURITIES; CLOSING
2.1 PURCHASE AND SALE OF CONVERTIBLE NOTES. Upon the terms and
subject to the conditions of this Agreement, on each Closing Date from the date
hereof until the Maturity Date, Company shall issue, sell, convey and deliver to
Buyer, and Buyer shall purchase from Company, one or more Convertible Notes in
an aggregate Principal Amount of up to $5,000,000. The Convertible Notes shall
initially be due and payable on September 30, 1999; provided, that if the
Principal Amount of a Convertible Note and accrued but unpaid interest thereon
is not repaid on or prior to the Maturity Date, the date for repayment of the
Principal Amount of such Convertible Note, together with accrued and unpaid
interest thereon, shall be automatically extended to March 31, 2000, upon the
delivery to Buyer of the Warrants described in Section 6.4 hereof.
2.2 CLOSING DATE. Each Closing shall take place upon the
satisfaction of the conditions precedent applicable thereto set forth in Section
2.6 hereof, on a date to be determined by mutual agreement between Company and
Buyer, at the offices of Sidley & Austin, 555 West Fifth Street, Los Angeles,
California 90013, or at such other place as shall be agreed upon by Buyer and
Company. The date on which any Closing is actually held is sometimes referred to
herein as a "Closing Date."
2.3 INITIAL CLOSING.
(a) Subject to fulfillment or waiver of the
conditions set forth in Section 2.6(b), at the initial Closing Buyer
shall deliver all of the following:
(i) The Initial Note, marked "Canceled."
(ii) The certificate contemplated by
Section 2.6(a)(iii), duly executed by the President or any
Vice President of Buyer.
(iii) This Agreement and the Registration
Rights Agreement, duly executed by Buyer.
(b) Subject to fulfillment or waiver of the
conditions set forth in Section 2.6(a), at the initial Closing Company
shall deliver to Buyer all of the following:
(i) This Agreement and the Registration
Rights Agreement, duly executed by Company;
(ii) The certificates contemplated by
Sections 2.6(b)(i) and 2.6(b)(ii), duly executed by Company;
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(iii) A signature and incumbency
certificate of the officers of Company executing any
Convertible Note, Warrant or other Ancillary Agreement to be
delivered by Company at such Closing, certified as of such
Closing Date by Company's corporate secretary or an assistant
secretary as being true, accurate, correct and complete;
(iv) A Convertible Note in the aggregate
Principal Amount of $798,822.65 duly executed by Company and
registered in the name of Buyer;
(v) The facility fee of (A) $50,000 in
immediately available funds, which is 1% of the maximum
aggregate Principal Amount of all Convertible Notes and which
was paid on April 2, 1999 in partial payment of the Interim
Note, and (B) a Warrant, duly executed by Company, to purchase
150,000 shares of Common Stock; and
(vi) A duly executed original of an
opinion of Faegre & Benson LLP, counsel to Company, dated the
initial Closing Date, in form satisfactory to Buyer.
2.4 BUYER'S DELIVERIES. Subject to fulfillment or waiver of
the conditions set forth in Section 2.6(b), at each subsequent Closing Buyer
shall deliver all of the following:
(a) The cash consideration for the Convertible Notes
to be issued at such Closing, payable by wire transfer of immediately
available funds in the manner and to the accounts set forth on Schedule
2.4(a).
(b) The certificate contemplated by Section
2.6(a)(iii), duly executed by the President or any Vice President of
Buyer.
2.5 COMPANY'S DELIVERIES. Subject to fulfillment or waiver of
the conditions set forth in Section 2.6(a), at each subsequent Closing Company
shall deliver to Buyer all of the following:
(a) The certificates contemplated by Sections
2.6(b)(i) and 2.6(b)(ii), duly executed by Company;
(b) A signature and incumbency certificate of the
officers of Company executing any Convertible Note, Warrant or other
Ancillary Agreement to be delivered by Company at such Closing (other
than officers who are listed on a certificate previously delivered
pursuant to Section 2.3(b)(iii)), certified as of such Closing Date by
Company's corporate secretary or an assistant secretary as being true,
accurate, correct and complete;
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(c) If applicable, one or more Warrants duly executed
by Company; and
(d) A Convertible Note in an aggregate Principal
Amount (together with all Convertible Notes then outstanding) not
exceeding $5,000,000, duly registered in the name of Buyer.
2.6 CONDITIONS TO OBLIGATIONS AT CLOSING.
(a) The obligations of Company to issue and sell the
Convertible Notes on any Closing Date pursuant to this Agreement shall,
at the option of Company, be subject to the satisfaction of the
following conditions: (i) there shall have been no material breach by
Buyer, on or prior to such Closing Date, in the performance of any of
its covenants and agreements herein; (ii) each of the representations
and warranties of Buyer contained or referred to in this Agreement
shall be true and correct in all material respects on such Closing Date
as though made on such Closing Date, except for changes therein
specifically permitted by this Agreement or resulting from any
transaction expressly consented to in writing by Company or any
transaction contemplated by this Agreement; and (iii) there shall have
been delivered to Company a certificate to such effect, dated such
Closing Date and signed on behalf of Buyer by the President or any Vice
President of Buyer, in addition to the other deliveries specified in
Section 2.4.
(b) The obligations of Buyer to purchase Convertible
Notes on any Closing Date pursuant to this Agreement shall, at the
option of Buyer, be subject to the satisfaction of the following
conditions:
(i) (A) There shall have been no material
breach by Company, on or prior to such Closing Date, in the
performance of any of its covenants and agreements herein or
in any Ancillary Agreement; (B) each of the representations
and warranties of Company contained or referred to herein or
therein shall be true and correct in all material respects on
such Closing Date as though made on such Closing Date, except
for changes specifically permitted by this Agreement or
resulting from any transaction expressly consented to in
writing by Buyer or any transaction permitted by Article 6;
(C) as of such Closing Date and after giving effect to such
Closing, no more than ten (10) Convertible Notes shall have
been issued and the aggregate Principal Amount of all
Convertible Notes shall not exceed $5,000,000; (D) after
giving effect to such Closing, no Default or Event of Default
under any Convertible Note shall have occurred and be
continuing; and (E) there shall have been delivered to Buyer a
certificate to such effect, dated such Closing Date, signed by
Company, in addition to the other deliveries specified in
Section 2.5.
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(ii) Between the date hereof and such
Closing Date, there shall have been (A) no material adverse
change in the assets, business, operations, liabilities,
profits or condition (financial or otherwise) of Company and
(B) no material damage to the assets or properties of Company
by fire, flood, casualty, act of God or the public enemy or
other cause, regardless of insurance coverage for such damage;
and there shall have been delivered to Buyer a certificate to
such effect, dated such Closing Date and signed by Company.
ARTICLE 3.
REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY
As an inducement to Buyer to enter into this Agreement and to
consummate the transactions contemplated hereby, Company represents and warrants
to Buyer and covenants as follows:
3.1 AUTHORITY OF COMPANY.
(a) Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Minnesota.
Company is duly qualified to transact business as a foreign corporation
and is in good standing in each jurisdiction in which the failure so to
qualify would have a Material Adverse Effect. Company has full power
and authority to own or lease and to operate and use its properties and
assets and to carry on its business as now conducted and as proposed to
be conducted.
(b) Company has full power and authority to execute,
deliver and perform this Agreement and all of the Ancillary Agreements
to which it is a party. The execution, delivery and performance of this
Agreement and the Ancillary Agreements by Company have been duly
authorized and approved by Company's board of directors and do not
require any further authorization or consent of Company or its
stockholders. This Agreement, when executed and delivered, is and will
have been duly authorized, executed and delivered by Company and is and
will be the legal, valid and binding obligation of Company enforceable
in accordance with its terms, and each of the Ancillary Agreements to
which Company is a party will, when executed and delivered, have been
duly authorized by Company and, upon execution and delivery by Company,
is and will be a legal, valid and binding obligation of Company
enforceable in accordance with its terms.
(c) Neither the execution and delivery of this
Agreement or any of the Ancillary Agreements by Company or the
consummation of any of the transactions contemplated hereby or thereby
by Company, nor compliance with or fulfillment of the terms, conditions
and provisions hereof or thereof, will (i) conflict with, result in a
breach of the terms, conditions or provisions of, or constitute a
default, an event of default or an
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event creating rights of acceleration, termination or cancellation or a
loss of rights under, or result in the creation or imposition of any
encumbrance upon any of the assets or properties of Company under (A)
the charter or Bylaws of Company, (B) any note, instrument, Material
Agreement, mortgage, lease, license, franchise, permit or other
authorization, right, restriction or obligation to which Company or is
a party or to which any of the assets or properties of Company is
subject or by which Company is bound, (C) any Court Order to which
Company is a party or to which any of the assets or properties of
Company is subject or by which Company is bound, or (D) any
Requirements of Law affecting Company or its assets or properties; or
(ii) require the approval, consent, authorization or act of, or the
making by Company of any declaration, filing or registration with, any
Person.
3.2 CAPITAL STRUCTURE OF COMPANY. As of the date hereof, the
authorized capital stock of Company consists of 25,000,000 shares of Common
Stock, of which 9,580,331 shares are issued and outstanding as of the date
hereof, together with options to purchase 1,729,506 shares of Common Stock and
warrants to purchase 300,742 shares of Common Stock; and 5,000,000 shares of
preferred stock, of which 200,000 have been designated as Series A Senior
Participating Preferred Shares and none of which are issued and outstanding.
Except for this Agreement and the Ancillary Agreements or as disclosed herein or
therein, there are no agreements, arrangements, options, warrants, calls, rights
or commitments of any character relating to the issuance, sale, purchase or
redemption of any shares of capital stock of Company, other than those disclosed
in Company's periodic filings under the Exchange Act and stock options granted
to employees, officers and directors. No holder of Common Stock has any
preemptive, stock purchase or other rights to acquire Common Stock. All of the
outstanding shares of Common Stock are validly issued, fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights.
3.3 FINANCIAL STATEMENTS. Company has made available to Buyer
its audited financial statements (balance sheet and profit and loss statement,
statement of stockholders' equity and statement of changes in financial
position) for the two most recent fiscal years and its unaudited financial
statements (balance sheet and profit and loss statement) for all fiscal quarters
since the end of the last fiscal year. Such financial statements have been
prepared in conformity with generally accepted accounting principles
consistently applied, and present fairly the financial position and results of
operations of Company as of their respective dates and for the respective
periods covered thereby. Except as set forth in the financial statements,
Company has no liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to December 31, 1998, and
(ii) obligations under contracts and commitments incurred in the ordinary course
of business and not required under generally accepted accounting principles to
be reflected in the financial statements, which, in both cases, individually or
in the aggregate, are not material to the financial condition or operating
results of Company. Except as disclosed in the financial statements, Company is
not a guarantor or indemnitor of any Indebtedness of any other person, firm or
corporation. Company maintains
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and will continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
3.4 NO VIOLATION, LITIGATION OR REGULATORY ACTION. Except as
previously disclosed to Buyer:
(a) there are no material lawsuits, claims, suits,
proceedings or investigations pending or, to the knowledge of Company,
threatened against or affecting Company which, if determined adversely
to Company, would have a Material Adverse Effect nor, to the knowledge
of Company, is there any basis for any of the same, and there are no
material lawsuits, suits or proceedings pending in which Company is the
plaintiff or claimant which, if determined adversely to Company, would
have a Material Adverse Effect;
(b) there is no material action, suit or proceeding
pending or, to the knowledge of Company, threatened which questions the
legality or propriety of the transactions contemplated by this
Agreement and which, if determined adversely to Company, would have a
Material Adverse Effect; and
(c) to the knowledge of Company, no legislative or
regulatory proposal or other proposal for the change in any
Requirements of Law or the interpretation thereof has been adopted or
is pending which could reasonably be expected to have a Material
Adverse Effect.
3.5 COMPLIANCE WITH LAWS. Company is in compliance with all
federal, state, local and foreign statutes, laws, ordinances, regulations,
rules, judgments, orders and decrees applicable to it or its respective assets,
properties, business or operations (including, without limitation, environmental
and health and safety laws and U.S. customs laws and regulations), other than
noncompliance which in the aggregate would not reasonably be expected to have a
Material Adverse Effect. There does not exist any valid basis for any claims of
default under or violation of any such statute, law, ordinance regulation, rule,
judgment, order or decree which, if determined adversely to Company, would have
a Material Adverse Effect.
3.6 CUSIP NUMBERS. Company shall obtain CUSIP numbers for the
Convertible Notes and the Warrant within twenty (20) days after the date hereof.
3.7 PUBLIC TRADING OF COMMON STOCK. At all times from and
after the date hereof and until the Termination Date, Common Stock shall be
listed on a national securities exchange or admitted for trading on the Nasdaq
National Market.
3.8 NO FINDER. Neither Company nor any Person acting on its
behalf has paid or become obligated to pay any fee or commission to any broker,
finder or intermediary for or on account of the transactions contemplated by
this Agreement.
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3.9 DISCLOSURE. None of the representations or warranties of
Company contained in this Agreement and none of the other information or
documents furnished to Buyer or any of its representatives by Company or its
representatives pursuant to the terms of this Agreement, is false or misleading
in any material respect or omits to state a fact herein or therein necessary to
make the statements herein or therein not misleading in any material respect.
All material information which has been made available to the board of directors
of Company and is required, under applicable Requirements of Law, to be
disclosed to the public has been so disclosed either in press releases issued by
Company or in filings by Company with the Securities and Exchange Commission.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF BUYER
As an inducement to Company to enter into this Agreement and
to consummate the transactions contemplated hereby, Buyer hereby represents and
warrants to Company and agrees as follows:
4.1 ORGANIZATION. Buyer is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has full power and authority to own or lease and to operate and use
its properties and assets and to carry on its business as now conducted or
proposed to be conducted.
4.2 AUTHORITY. Buyer has full power and authority to execute,
deliver and perform this Agreement and all of the Ancillary Agreements. The
execution, delivery and performance of this Agreement and the Ancillary
Agreements by Buyer have been duly authorized and approved, and do not require
any further authorization or consent of the governing body, or the partners of
Buyer. This Agreement has been duly authorized, executed and delivered by Buyer
and is the legal, valid and binding agreement of Buyer enforceable in accordance
with its terms, and each of the Ancillary Agreements has been duly authorized by
Buyer and upon execution and delivery by Buyer will be a legal, valid and
binding obligation of Buyer enforceable in accordance with its terms.
4.3 NO LITIGATION. There is no action, suit or proceeding
pending or, to the knowledge of Buyer, threatened which questions the legality
or propriety of the transactions contemplated by this Agreement.
4.4 NO FINDER. Neither Buyer nor any Person acting on its
behalf has paid or become obligated to pay any fee or commission to any broker,
finder or intermediary for or on account of the transactions contemplated by
this Agreement.
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4.5 DISCLOSURE. None of the representations or warranties of
Buyer contained herein, and none of the other information or documents furnished
to Company by Buyer or its representatives pursuant to the terms of this
Agreement, is false or misleading in any material respect or omits to state a
fact herein or therein necessary to make the statements herein or therein not
misleading in any material respect.
4.6 INVESTMENT REPRESENTATION. The Convertible Notes and
Warrants are being acquired by Buyer for its own account for investment, and not
with a view to the sale or distribution of any part thereof without registration
under the Securities Act or pursuant to an applicable exemption therefrom.
ARTICLE 5.
CONVERSION OF THE CONVERTIBLE NOTES
5.1 CONVERSION PRIVILEGE. If any portion of the Principal
Amount of a Convertible Note and accrued but unpaid interest thereon remains
unpaid for more than fifteen (15) days after such amount becomes due and payable
(whether upon the maturity thereof , by acceleration or otherwise), Buyer shall
have the right, at Buyer's option, to convert, in accordance with the terms of
the Convertible Notes and this Article 5, all or any part of the Principal
Amount of such Convertible Note and accrued but unpaid interest thereon into
shares of Common Stock.
5.2 CONVERSION PROCEDURE; CONVERSION PRICE; FRACTIONAL SHARES.
(a) Each Convertible Note shall be convertible at the
principal executive office of Company, into fully paid and
nonassessable shares (calculated to the nearest 1/100th of a share) of
Common Stock. The Convertible Notes will be converted into shares of
Common Stock at the Conversion Price therefor; provided that until any
shareholder approval required by Section 6.5 is obtained, no more than
1,500,000 shares of Common Stock may be issued upon conversion of
Convertible Notes. Company may, but shall not be required to, in
connection with any conversion of Convertible Notes, issue a fraction
of a share of Common Stock and, if Company shall determine not to issue
any such fraction, Company shall make a cash payment (calculated to the
nearest cent) equal to such fraction multiplied by the Conversion
Price.
(b) Before any Holder of a Convertible Note shall be
entitled to convert such Convertible Note into Common Stock, such
Holder shall surrender such Convertible Note duly endorsed or assigned
to Company or in blank, at Company's principal executive office,
accompanied by written notice of conversion stating that the Holder
elects to convert such Convertible Note or, if less than the entire
Principal Amount thereof and accrued but unpaid interest thereon is to
be converted, the portion thereof to be converted, and shall state in
writing therein the Principal Amount of
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Convertible Notes and accrued but unpaid interest thereon to be
converted and the name or names (with addresses) in which Holder wishes
the certificate or certificates for Common Stock to be issued;
provided, however, that no Convertible Note or portion thereof shall be
accepted for conversion unless the Principal Amount of such Convertible
Note and accrued but unpaid interest thereon or such portion, when
added to the Principal Amount of all other Convertible Notes and
accrued but unpaid interest thereon or portions thereof then being
surrendered by the Holder thereof for conversion, exceeds the then
effective Conversion Price with respect thereto. If more than one
Convertible Note shall be surrendered for conversion at one time by the
same Holder, the number of shares of Common Stock which shall be
deliverable upon conversion shall be computed on the basis of the
aggregate Principal Amount of the Convertible Notes (or specified
portions thereof to the extent permitted thereby) so surrendered.
Subject to the next succeeding sentence, Company will, as soon as
practicable thereafter, issue and deliver at such office to such
Holder, or to such Holder's nominee or nominees, certificates for the
number of shares of Common Stock to which Holder shall be entitled as
aforesaid, together, subject to the last sentence of Section 5.2(a)
above, with cash in lieu of any fraction of a share to which Holder
would otherwise be entitled, should Company elect not to issue
fractional shares. Company shall not be required to deliver
certificates for shares of Common Stock while the stock transfer books
for such stock are duly closed for any purpose, but certificates for
shares of Common Stock shall be issued and delivered as soon as
practicable after the opening of such books. A Convertible Note shall
be deemed to have been converted as of the close of business on the
date of the surrender of such Convertible Note for conversion as
provided above and at such time the rights of the Holder of such
Convertible Note as Holder shall cease; the Person or Persons entitled
to receive the Common Stock issuable upon such conversion shall be
treated for all purposes as the Holder or Holders of record of such
Common Stock immediately prior to the close of business on such date.
In case any Convertible Note shall be surrendered for partial
conversion, Company shall execute and deliver to or upon the written
order of the Holder of the Convertible Note so surrendered, without
charge to such Holder (subject to the provisions of Section 5.8) a new
Convertible Note or Convertible Notes in authorized denominations in an
aggregate Principal Amount equal to the unconverted portion of the
surrendered Convertible Note.
5.3 ADJUSTMENT OF CONVERSION PRICE FOR COMMON STOCK. The
Conversion Price with respect to any Convertible Note shall be adjusted from
time to time as follows:
(a) In case Company shall, at any time or from time
to time while any of such Convertible Notes are outstanding, (i) pay a
dividend in shares of its Common Stock to holders of Common Stock, (ii)
combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock, (iii) subdivide its outstanding shares of
Common Stock into a greater number of shares of Common Stock or (iv)
make a distribution in shares of Common Stock to holders of Common
Stock, then the Conversion Price in effect immediately before such
action shall be adjusted so that the
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Holders of such Convertible Notes, upon conversion thereof into Common
Stock immediately following such event, shall be entitled to receive
the kind and amount of shares of capital stock of Company which they
would have owned or been entitled to receive upon or by reason of such
event if such Convertible Notes had been converted immediately before
the record date (or, if no record date, the effective date) for such
event. An adjustment made pursuant to this Section 5.3(a) shall become
effective retroactively immediately after the record date in the case
of a dividend or distribution and shall become effective retroactively
immediately after the effective date in the case of a subdivision or
combination. For the purposes of this Section 5.3(a), each Holder of
Convertible Notes shall be deemed to have failed to exercise any right
to elect the kind or amount of securities receivable upon the payment
of any such dividend, subdivision, combination or distribution
(provided that if the kind or amount of securities receivable upon such
dividend, subdivision, combination or distribution is not the same for
each nonelecting share, then the kind and amount of securities or other
property receivable upon such dividend, subdivision, combination or
distribution for each nonelecting share shall be deemed to be the kind
and amount so receivable per share by a plurality of the nonelecting
shares).
(b) In case Company shall, at any time or from time
to time while any of such Convertible Notes are outstanding, issue
rights or warrants to all holders of shares of its Common Stock
entitling them (for a period expiring within 45 days after the record
date for such issuance) to subscribe for or purchase shares of Common
Stock (or securities convertible into shares of Common Stock) at a
price per share less than the Current Market Price of the Common Stock
at such record date (treating the price per share of the securities
convertible into Common Stock as equal to (x) the sum of (i) the price
for a unit of the security convertible into Common Stock and (ii) any
additional consideration initially payable upon the conversion of such
security into Common Stock divided by (y) the number of shares of
Common Stock initially underlying such convertible security), the
Conversion Price with respect to such Convertible Notes shall be
adjusted so that it shall equal the price determined by dividing the
Conversion Price in effect immediately prior to the date of issuance of
such rights or warrants by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding on the date of
issuance of such rights or warrants plus the number of additional
shares of Common Stock offered for subscription or purchase (or into
which the convertible securities so offered are initially convertible),
and the denominator of which shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights or warrants
plus the number of shares or securities which the aggregate offering
price of the total number of shares or securities so offered for
subscription or purchase (or the aggregate purchase price of the
convertible securities so offered plus the aggregate amount of any
additional consideration initially payable upon conversion of such
securities into Common Stock) would purchase at such Current Market
Price of the Common Stock. Such adjustment shall become effective
retroactively immediately after
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the record date for the determination of stockholders entitled to
receive such rights or warrants.
(c) In case Company shall, at any time or from time
to time while any of such Convertible Notes are outstanding, distribute
to all holders of shares of its Common Stock (including any such
distribution made in connection with a consolidation or merger in which
Company is the continuing corporation and the Common Stock is not
changed or exchanged) cash, evidences of its Indebtedness, securities
or assets (excluding (i) regular periodic cash dividends in amounts, if
any, determined from time to time by the board of directors, (ii)
dividends payable in shares of Common Stock for which adjustment is
made under Section 5.3(a) or (iii) rights or warrants to subscribe for
or purchase securities of Company (excluding those referred to in
Section 5.3(b))), then in each such case the Conversion Price with
respect to such Convertible Notes shall be adjusted so that it shall
equal the price determined by dividing the Conversion Price in effect
immediately prior to the date of such distribution by a fraction, the
numerator of which shall be the Current Market Price of the Common
Stock on the record date referred to below, and the denominator of
which shall be such Current Market Price of the Common Stock less the
then fair market value (as determined by the board of directors of
Company, whose determination shall be conclusive) of the portion of the
cash or assets or evidences of Indebtedness or securities so
distributed or of such subscription rights or warrants applicable to
one share of Common Stock (provided that such denominator shall never
be less than 1.0); provided, however, that no adjustment shall be made
with respect to any distribution of rights to purchase securities of
Company if a Holder of Convertible Notes would otherwise be entitled to
receive such rights upon conversion at any time of such Convertible
Notes into Common Stock unless such rights are subsequently redeemed by
Company, in which case such redemption shall be treated for purposes of
this Section 5.3(c) as a dividend on the Common Stock. Such adjustment
shall become effective retroactively immediately after the record date
for the determination of stockholders entitled to receive such
distribution; and in the event that such distribution is not so made,
the Conversion Price shall again be adjusted to the Conversion Price
which would then be in effect if such record date had not been fixed.
(d) In any case in which this Section 5.3 shall
require that any adjustment be made effective as of or retroactively
immediately following a record date, Company may elect to defer (but
only for five (5) trading days following the filing of the statement
referred to in Section 5.5) issuing to the Holder of any Convertible
Notes converted after such record date the shares of Common Stock and
other capital stock of Company issuable upon such conversion over and
above the shares of Common Stock and other capital stock of Company
issuable upon such conversion on the basis of the Conversion Price
prior to adjustment; provided, however, that Company shall deliver to
such Holder a due bill or other appropriate instrument evidencing such
Holder's right to receive such additional shares upon the occurrence of
the event requiring such adjustment.
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(e) All calculations under this Section 5.3 shall be
made to the nearest cent or one-hundredth of a share or security, with
one-half cent and 0.005 of a share, respectively, being rounded upward.
Notwithstanding any other provision of this Section 5.3, Company shall
not be required to make any adjustment of the Conversion Price unless
such adjustment would require an increase or decrease of at least 1% of
such price. Any lesser adjustment shall be carried forward and shall be
made at the time of and together with the next subsequent adjustment
which, together with any adjustment or adjustments so carried forward,
shall amount to an increase or decrease of at least 1% in such price.
Any adjustments under this Section 5.3 shall be made successively
whenever an event requiring such an adjustment occurs.
(f) In the event that at any time, as a result of an
adjustment made pursuant to this Section 5.3, the Holder of any
Convertible Note thereafter surrendered for conversion shall become
entitled to receive any shares of capital stock of Company other than
shares of Common Stock into which the Convertible Notes originally were
convertible, the Conversion Price of such other shares so receivable
upon conversion of any such Convertible Note shall be subject to
adjustment from time to tine in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Common
Stock contained in Sections 5.3(a) through 5.3(e) hereof, and the
provision of Sections 5.1 through 5.8 with respect to the Common Stock
shall apply on like or similar terms to any such other shares and the
determination of the board of directors as to any such adjustment shall
be conclusive.
(g) No adjustment shall be made pursuant to this
Section 5.3 (i) if the effect thereof would be to reduce the Conversion
Price below the par value (if any) of the Common Stock or (ii) subject
to Section 5.3(d) hereof, with respect to any Convertible Note that is
converted prior to the time such adjustment otherwise would be made.
5.4 CONSOLIDATION, SALE OF ASSETS OR MERGER OF COMPANY. In
case of either (a) any consolidation or merger to which Company is a party,
other than a merger or consolidation in which Company is the surviving or
continuing corporation and which does not result in a reclassification of,
cancellation of or change (other than a change in par value or from par value to
no par value or from no par value to par value, as a result of a subdivision or
combination) in, outstanding shares of Common Stock or (b) any sale or
conveyance of all or substantially all of the properties and assets of Company
to another Person, then each Convertible Note then outstanding shall be
convertible from and after such merger, consolidation, sale or conveyance of
property and assets into the kind and amount of shares of stock or other
securities and property (including cash) receivable upon such consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
into which such Convertible Notes would have been converted immediately prior to
such consolidation, merger, sale or conveyance, subject to adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Article 5 (and assuming such holder of
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Common Stock failed to exercise his rights of election, if any, as to the kind
or amount of securities, cash or other property (including cash) receivable upon
such consolidation, merger, sale or conveyance (provided that, if the kind or
amount of securities, cash or other property (including cash) receivable upon
such consolidation, merger, sale or conveyance is not the same for each
nonelecting share, then the kind and amount of securities, cash or other
property (including cash) receivable upon such consolidation, merger, sale or
conveyance for each nonelecting share shall be deemed to be the kind and amount
so receivable per share by a plurality of the nonelecting shares or
securities)). Company shall not enter into any of the transactions referred to
in Sections 5.4(a) or 5.4(b) unless effective provision shall be made so as to
give effect to the provisions set forth in this Section 5.4. The provisions of
this Section 5.4 shall apply similarly to successive consolidations, mergers,
sales or conveyances.
5.5 NOTICE OF ADJUSTMENT OF CONVERSION PRICE. Whenever an
adjustment in the Conversion Price with respect to Convertible Notes is
required, Company shall compute the adjusted Conversion Price in accordance with
Section 5.4 and forthwith deliver to the Holder a certificate of the chief
financial officer of Company, stating the adjusted Conversion Price determined
as provided herein and setting forth in reasonable detail such facts as shall be
necessary to show the reason for and the manner of computing such adjustment,
such certificate to be conclusive evidence that the adjustment is correct.
5.6 NOTICE IN CERTAIN EVENTS. In case:
(a) Company shall declare a dividend (or any other
distribution) on its Common Stock payable otherwise than exclusively in
cash;
(b) Company shall authorize the granting to the
holders of its Common Stock of rights, options or warrants to subscribe
for or purchase any shares of capital stock of any class or of any
other rights (other than grants to employees, officers or directors of
Company pursuant to plans approved by the Board of Directors of
Company);
(c) of any reclassification of the capital stock of
Company (other than a subdivision or combination of its outstanding
Common Stock), or of any consolidation or merger to which Company is a
party and for which approval of any stockholders of Company is
required, or of the sale or transfer of all or substantially all of the
assets or properties of Company;
(d) of the voluntary or involuntary dissolution,
liquidation or winding up of Company;
(e) Company or any Subsidiary shall commence a tender
offer for all or a portion of Company's outstanding Common Stock (or
shall amend any such tender offer);
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(f) of a consolidation or merger to which Company is
a party and for which approval of any stockholders of Company is
required, or of the sale or conveyance to another Person or entity or
group of Persons or entities acting in concert as a partnership,
limited partnership, syndicate or other group (within the meaning of
Rule 13d-3 under the Exchange Act) of all or substantially all of the
property and assets of Company; or
(g) of any action triggering an adjustment of the
Conversion Price pursuant to this Article 5;
then, in each case, Company shall cause to be mailed, first class postage
prepaid, to the Holders of record of applicable Convertible Notes, at least
fifteen (15) days prior to the applicable date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of any
dividend distribution or grant of rights, options or warrants triggering an
adjustment to the Conversion Price pursuant to this Article 5, or, if a record
is not to be taken, the date as of which the holders of record of Common Stock
entitled to such dividend distribution, rights, options or warrants are to be
determined, or (y) the date on which any reclassification, consolidation,
merger, sale, conveyance, dissolution, liquidation, tender offer or winding up
triggering an adjustment to the Conversion Price pursuant to this Article 5 is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their Common
Stock for securities, tender offer or other property deliverable upon such
reclassification, consolidation, merger, sale, conveyance, dissolution,
liquidation, cash or winding up.
Failure to give such notice or any defect therein shall not
affect the legality or validity of the proceedings described in this Section
5.6.
5.7 COMPANY TO RESERVE STOCK. Company shall at all times
reserve and keep available, free from preemptive rights, out of its authorized
but unissued shares of Common Stock, for the purpose of effecting the conversion
of the Convertible Notes, such number of its duly authorized shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
applicable outstanding Convertible Notes into such Common Stock at any time
(assuming that, at the time of the computation of such number of shares or
Convertible Notes, all such Convertible Notes would be held by a single Holder);
provided, however, that nothing contained herein shall preclude Company from
satisfying its obligations in respect of the conversion of the Convertible Notes
by delivery of purchased shares of Common Stock which are held in the treasury
of Company. Company shall from time to time, in accordance with the laws of the
State of Minnesota, use its best efforts to cause the authorized amount of the
Common Stock to be increased if the aggregate of the authorized amount of the
Common Stock remaining unissued and the issued shares of such Common Stock in
its treasury (other than any such shares reserved for issuance in any other
connection) shall not be sufficient to permit the conversion of all Convertible
Notes.
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5.8 TAXES ON CONVERSION. Company shall pay any and all
documentary, stamp or similar issue or transfer taxes that may be payable in
respect of the issue or delivery of shares of Common Stock on conversion of
Convertible Notes pursuant hereto. Company shall not, however, be required to
pay any such tax which may be payable in respect of any transfer involved in the
issue or delivery of shares of Common Stock or the portion, if any, of the
Convertible Notes which are not so converted in a name other than that in which
the Convertible Notes so converted were registered, and no such issue or
delivery shall be made unless and until the Person requesting such issue has
paid to Company the amount of such tax or has established to the satisfaction of
Company that such tax has been paid.
5.9 CORPORATE ACTION REGARDING PAR VALUE OF COMMON STOCK.
Before taking any action which would cause an adjustment reducing the applicable
Conversion Price below the then par value (if any) of the shares of Common Stock
deliverable upon conversion of the Convertible Notes, Company will take any
corporate action which may, in the opinion of its counsel, be necessary in order
that Company may validly and legally issue fully paid and nonassessable shares
of Common Stock at such adjusted Conversion Price.
ARTICLE 60
ADDITIONAL AGREEMENTS
6.1 RESERVATION OF COMMON STOCK. From the date hereof until
the Termination Date, Company shall reserve and shall refrain from issuing that
number of shares of its Common Stock that are to be delivered upon conversion of
the Convertible Notes and exercise of Warrants.
6.2 COMPLIANCE WITH LAWS. Company shall comply with all
federal, state, local and foreign laws, rules and regulations applicable to it
and to its property, assets and operations, including securities laws, rules and
regulations, and any reports required to be filed thereunder, other than
noncompliance which in the aggregate would not reasonably be expected to have a
Material Adverse Effect.
6.3 FURTHER ASSURANCES. Each of the parties hereto shall
execute all such further instruments and documents and take all such further
action as any other party hereto may reasonably require or as may otherwise be
necessary in order to effectuate the terms and purposes of this Agreement and
the transactions contemplated hereby.
6.4 WARRANTS. If the Principal Amount of any Convertible Note
and accrued but unpaid interest thereon is not repaid on or prior to the
Maturity Date, Company shall deliver to Buyer a Warrant (exercisable up to
September 30, 2004) to purchase an aggregate of 250,000 shares of Common Stock
(as such number of shares may be adjusted, in substantially the manner
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set forth in the Warrant, for any reclassification, merger, subdivision,
combination, dividend, offering, distribution or other issuance of Common
Stock), in consideration of the extension of the maturity of such Convertible
Note as set forth in Section 2.1 hereof.
6.5 SHAREHOLDER APPROVAL. Company shall use its best efforts
to obtain approval from its shareholders for the issuance of all Note Shares
which are or may become issuable hereunder or under the Convertible Notes, to
the extent such approval is necessary to permit the admission of the Note Shares
for quotation on the Nasdaq National Market. The Company shall seek approval
from the shareholders at its next regularly scheduled shareholder meeting and in
any event on or before December 31, 1999. If such shareholder approval is not
obtained on or before the date (the "Approval Deadline") which is the earlier of
December 31, 1999 and the date on which any of the Convertible Notes becomes
convertible into Common Stock, then on and after the Approval Deadline (a) the
rate of interest applicable to each Convertible Note shall be 18% and (b) two
additional directors, each designated by Holders holding at least 50% of the
then aggregate Principal Amount, shall be added to the Board of Directors of the
Company.
ARTICLE 70
PREPAYMENT OF THE CONVERTIBLE NOTES; EVENTS OF DEFAULT
7.1 OPTIONAL PREPAYMENT BY COMPANY. Company may at any time on
at least five (5) days' prior written notice to Buyer voluntarily prepay all or
part of any or all Convertible Notes. Each notice of partial prepayment shall
designate the Convertible Note to which such prepayment is to be applied.
7.2 MANDATORY PREPAYMENT BY COMPANY. Within two (2) business
days after Company's receipt of any Excess Proceeds of Issuance of Stock or
Indebtedness, Company shall make or cause to be made a mandatory prepayment of
all Convertible Notes, pro rata in proportion to the Principal Amount of each
Convertible Note, in an amount equal to one hundred percent (100%) of such
Excess Proceeds of Issuance of Stock or Indebtedness.
7.3 EVENTS OF DEFAULT. The occurrence of any one or more of
the following events (regardless of the reason therefor) shall constitute an
"Event of Default" hereunder:
(a) Company (i) fails to make any payment of
principal of, or interest on, or fees owing in respect of, any of the
Convertible Notes when due and payable, or (ii) fails to pay or
reimburse any Holder for any expense reimbursable hereunder or under
any other Ancillary Agreement following Buyer's demand for such
reimbursement or payment of expenses.
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(b) Company shall fail or neglect to perform, keep or
observe any of the covenants to be performed by Company under this
Agreement or any of the Ancillary Agreements, unless such failure or
neglect is cured within five (5) days of Buyer's giving notice to
Company.
(c) A default or breach shall occur under any other
agreement, document or instrument to which Company is a party which is
not cured within any applicable grace period, and such default or
breach (i) involves the failure to make any payment when due in respect
of any Indebtedness (other than Indebtedness with respect to the
Convertible Notes) the outstanding principal amount of which exceeds
$2,000,000 in the aggregate, or (ii) causes, or permits any holder of
such Indebtedness or a trustee to cause, any such Indebtedness to
become due prior to its stated maturity, regardless of whether such
default is waived, or such right is exercised, by such holder or
trustee.
(d) Any representation or warranty herein or in any
Ancillary Agreement is untrue or incorrect in any material respect as
of the date when made or deemed made.
(e) Any Change of Control shall occur.
(f) An involuntary case shall be commenced against
Company and the petition shall not be dismissed, stayed, bonded or
discharged within sixty (60) days after commencement of the case; or a
court having jurisdiction in the premises shall enter a decree or order
for relief in respect of Company in an involuntary case, under any
applicable bankruptcy, insolvency or other similar law now or
hereinafter in effect; or any other similar relief shall be granted
under any applicable Requirements of Law; or the board of directors of
Company (or any committee thereof) adopts any resolution or otherwise
authorizes any action to approve any of the foregoing.
(g) A decree or order of a court having jurisdiction
in the premises for the appointment of a receiver, liquidator,
sequestrator, trustee, custodian or other officer having similar powers
over Company or over all or a substantial part of the assets or
properties of Company shall be entered; or an interim receiver, trustee
or other custodian of Company or of all or a substantial part of the
assets or properties of Company shall be appointed or a warrant of
attachment, execution or similar process against any substantial part
of the assets or properties of Company shall be issued and any such
event shall not be stayed, dismissed, bonded or discharged within sixty
(60) days after entry, appointment or issuance; or the board of
directors of Company (or any committee thereof) adopts any resolution
or otherwise authorizes any action to approve any of the foregoing.
(h) Company shall commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or shall consent to
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the entry of an order for relief in an involuntary case, or to the
conversion of an involuntary case to a voluntary case, under any such
law, or shall consent to the appointment of or taking possession by a
receiver, trustee or other custodian for all or a substantial part of
the assets or properties of Company; or Company shall make any
assignment for the benefit of creditors or shall be unable or fail, or
admit in writing its inability, to pay its debts as such debts become
due.
(i) Any money judgment (other than a money judgment
covered by insurance as to which the insurance company has acknowledged
coverage), writ or warrant of attachment, or similar process against
Company or any of its assets or properties involving in any case an
amount in excess of $2,000,000 is entered and shall remain
undischarged, unvacated, unbonded or unstayed for a period of sixty
(60) days or in any event later than five (5) days prior to the date of
any proposed sale thereunder.
(j) Any order, judgment or decree shall be entered
against Company decreeing its involuntary dissolution or split up and
such order shall remain undischarged and unstayed for a period in
excess of sixty (60) days; or Company shall otherwise dissolve or cease
to exist except as specifically permitted by this Agreement.
An Event of Default shall be deemed "continuing" with respect
to any Convertible Note until cured or waived in writing by the Holder thereof.
7.4 REMEDIES. If any Event of Default shall have occurred and
be continuing, Buyer may, (a) upon written notice to Company, declare all or any
portion of the Convertible Notes to be forthwith due and payable, without
presentment, demand, protest or further notice of any kind, all of which are
expressly waived by Company; (b) terminate any obligation it may have to
purchase Convertible Notes; and/or (c) exercise any other rights and remedies
provided to Buyer under this Agreement or any of the Ancillary Agreements and/or
at law or equity.
7.5 WAIVERS BY COMPANY. Except as otherwise provided for in
this Agreement or by applicable law, Company waives presentment, demand and
protest and notice of presentment, dishonor, notice of intent to accelerate,
notice of acceleration, protest, default, nonpayment, maturity, release,
compromise, settlement, extension or renewal of all commercial paper, contract
rights, documents and instruments at any time held by any Holder on which
Company may in any way be liable, and hereby ratifies and confirms whatever
Buyer may do in this regard.
ARTICLE 80
INDEMNIFICATION
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8.1 INDEMNIFICATION BY COMPANY. Company agrees to indemnify
and hold harmless each Buyer Group Member from and against (a) any and all
Losses and Expenses incurred by such Buyer Group Member in connection with or
arising from (i) the breach of (A) any warranty made by Company herein, pursuant
to any Ancillary Agreement or pursuant to any certificate of Company referred to
herein or (B) any covenant made by Company herein or in any Ancillary Agreement,
or (ii) the failure of Company to comply with, perform or observe any other
term, provision or condition contained in this Agreement or in any Ancillary
Agreement and (b) any reasonable expenses incurred in connection with
investigating, defending or asserting any claim, action, suit or proceeding
incident to any matter indemnified against hereunder, including, without
limitation, court filing fees, court costs, arbitration fees or costs, witness
fees, and reasonable fees and disbursements of legal counsel, investigators,
expert witnesses, accountants and other professionals in connection therewith.
8.2 INDEMNIFICATION BY BUYER. Buyer agrees to indemnify and
hold harmless Company from and against (a) any and all Losses and Expenses
incurred by Company in connection with or arising from (i) the breach of (A) any
warranty made by Buyer herein or pursuant to any certificate of Buyer referred
to herein or (B) any covenant made by Buyer herein, or (ii) the failure of Buyer
(or any Buyer Group Member) to comply with, perform or observe any other term,
provision or condition contained in this Agreement or in any Ancillary Agreement
and (b) any reasonable expenses incurred in connection with investigating,
defending or asserting any claim, action, suit or proceeding incident to any
matter indemnified against hereunder, including, without limitation, court
filing fees, court costs, arbitration fees or costs, witness fees, and
reasonable fees and disbursements of legal counsel, investigators, expert
witnesses, accountants and other professionals in connection therewith.
8.3 REMEDIES. The remedies of the parties provided for in this
Article 8 shall be cumulative and shall not preclude the assertion by any party
of any other rights such party may have under this Agreement, any Ancillary
Agreement, applicable law or otherwise.
ARTICLE 90
TERMINATION
9.1 TERMINATION. Anything contained in this Agreement to the
contrary notwithstanding, this Agreement may be terminated at any time prior to
the Termination Date:
(a) by the mutual consent of Buyer and Company;
(b) by Buyer in the event of any material breach by Company of
any of its agreements, representations or warranties contained herein
and the failure of Company to cure such breach within seven days after
receipt of notice from Buyer requesting such breach to be cured; or
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(c) by Company in the event of any material breach by Buyer of
any of its agreements, representations or warranties contained herein
and the failure of Buyer to cure such breach within seven days after
receipt of notice from Company requesting such breach to be cured.
9.2 NOTICE OF TERMINATION. Any party desiring to terminate
this Agreement pursuant to Section 9.1 shall give notice of such termination to
the other party to this Agreement.
9.3 EFFECT OF TERMINATION. In the event that this Agreement
shall be terminated pursuant to this Article 9, all further obligations of the
parties under this Agreement (other than under Articles 5, 6, 7 and 8) shall be
terminated without further liability of any party to the other, provided that
nothing herein shall relieve any party from liability for its willful breach of
this Agreement.
ARTICLE 100
GENERAL PROVISIONS
10.1 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the
Exhibits and Schedules referred to herein and the documents delivered pursuant
hereto contain the entire understanding of the parties hereto with regard to the
subject matter contained herein or therein, and supersede all prior agreements,
understandings or letters of intent between or among any of the parties hereto.
This Agreement shall not be amended, modified or supplemented except by a
written instrument signed by an authorized representative of each of the parties
hereto.
10.2 WAIVERS. Any term or provision of this Agreement may be
waived, or the time for its performance may be extended, by each party entitled
to the benefit thereof. Any such waiver shall be validly and sufficiently given
for the purposes of this Agreement if, as to any party, it is in writing signed
by an authorized representative of such party. No waiver of any terms or
conditions of this Agreement shall operate as a waiver of any other breach of
such terms and conditions or any other term or condition, nor shall any failure
or delay on the part of the parties or any of them in exercising any right,
power or privilege hereunder, nor any course of dealing between the parties or
any of them operate as a waiver of any such right, power or privilege nor shall
any single or partial exercise of any such right, power or privilege preclude
the simultaneous or later exercise of any other right, power or privilege. The
rights and remedies herein expressly provided are cumulative and are not
exclusive of any rights or remedies which the parties or any of them would
otherwise have. No notice to or demand on Company or any other party hereto
shall in any case entitle such party to any other or further notice or demand in
similar or other circumstances or constitute a waiver of the rights of the other
parties or any of them to take any other or further action in any circumstances
without notice or demand.
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10.3 SUCCESSORS AND ASSIGNS.
(a) The rights of Company under this Agreement shall
not be assignable except as provided herein. The rights of Buyer
hereunder may be assigned at any time, without the consent of Company,
conditioned on the assignee's assumption in writing of all of Buyer's
obligations hereunder and the delivery by such assignee of a
certificate containing representations and warranties similar to those
made by Buyer herein.
(b) This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their successors and permitted
assigns. The successors and permitted assigns hereunder shall include
without limitation, in the case of Buyer, any permitted assignee as
well as the successors in interest to such permitted assignee (whether
by merger, liquidation (including successive mergers or liquidations)
or otherwise). Nothing herein expressed or implied is intended to
confer upon any Person, other than the parties hereto or their
respective permitted assigns, successors, heirs and legal
representatives, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
10.4 NOTICES. Unless otherwise specifically provided herein,
all communications under this Agreement shall be in writing and shall be deemed
to have been duly given (i) on the date of service if served personally on the
party to whom notice is to be given, (ii) on the day of transmission if sent by
facsimile transmission to the number given below, and telephonic confirmation of
receipt is obtained promptly after completion of transmission, (iii) on the day
after delivery to Federal Express or similar overnight courier, or (iv) on the
fifth day after mailing, if mailed to the party to whom notice is to be given,
by first class mail, registered or certified, postage prepaid, and properly
addressed, return receipt requested, to each such Holder at its address as shown
on the books of Company or to Company at the address indicated therefor; and in
such case, shall be addressed as follows:
If to Buyer, to:
Pioneer Venture Fund, L.L.C.
2000 Pasadena Avenue
Los Angeles, CA 90031
Fax: (323) 227-1437
Attention: Benjamin Nazarian
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with a copy to:
Sidley & Austin
555 West Fifth Street, 40th Floor
Los Angeles, CA 90013
Fax: (213) 896-6600
Attention: Moshe J. Kupietzky, Esq.
If to Company, to:
The TesseracT Group, Inc.
3800 West 80th Street, Suite 1400
Minneapolis, MN 55431
Fax: (612) 837-8730
Attention: John T. Golle
with a copy to:
Faegre & Benson
2200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402-3901
Fax: (612) 336-3026
Attention: Steven C. Kennedy, Esq.
or to such other address as such party may indicate by a notice delivered to the
other party hereto.
10.5 EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts, each of which shall be an original, and all of
which shall together constitute one and the same instrument. All signatures need
not be on the same counterpart.
10.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
10.7 SPECIFIC PERFORMANCE; INJUNCTION. Each of the parties
hereto acknowledges that in the event of a breach by any of them of any material
provision of this Agreement, the aggrieved party may be without an adequate
remedy at law. Each of the parties therefore agrees that in the event of such a
breach hereof the aggrieved party may elect to institute and prosecute
proceedings in any court of competent jurisdiction to enforce specific
performance or to enjoin the continuing breach hereof. By seeking or obtaining
any such relief, the aggrieved party shall not be precluded from seeking or
obtaining any other relief to which it may be entitled.
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10.8 SEVERABILITY. In the event that any portion of this
Agreement shall be held to be invalid or unenforceable to any extent, such
portion shall be enforced to the fullest lawful extent and the remaining parts
hereof shall nevertheless continue to be valid and enforceable as though the
invalid portions were not a part hereof. If any time period set forth herein is
held by a court of competent jurisdiction to be unenforceable, a different time
period that is determined by the court to be more reasonable shall replace the
unenforceable time period.
10.9 SURVIVAL OF OBLIGATIONS. All representations, warranties,
covenants, agreements and obligations contained in this Agreement shall survive
the consummation of the transactions contemplated by this Agreement.
[Signature pages follow.]
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed the day and year first above written.
BUYER: PIONEER VENTURE FUND, L.L.C.,
A DELAWARE LIMITED LIABILITY COMPANY
By: ___________________________
Name:
Title:
COMPANY: THE TESSERACT GROUP, INC.,
A MINNESOTA CORPORATION
By: ___________________________
John T. Golle
Chief Executive Officer
S-1
<PAGE> 1
EXHIBIT 10.37
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY NOT BE OFFERED, SOLD,
TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE NOTE UNDER SUCH ACT AND UNDER ANY APPLICABLE
STATE SECURITIES LAWS, OR AN EXEMPTION FROM SUCH LAWS PURSUANT TO WHICH SUCH
REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER.
12% CONVERTIBLE NOTE
DUE SEPTEMBER 30, 1999
$798,822.65 MARCH 31, 1999
FOR VALUE RECEIVED, THE TESSERACT GROUP, INC., a Minnesota
corporation ("Company"), promises to pay to PIONEER VENTURE FUND, L.L.C., a
Delaware limited liability company ("Holder"), the principal sum of Seven
Hundred Ninety Eight Thousand Eight Hundred Twenty Two Dollars and Sixty Five
Cents ($798,822.65), (the "Principal Amount"), together with interest thereon as
hereinafter set forth.
This Note ("Note") is issued pursuant to that certain
Securities Purchase Agreement dated as of March 31, 1999, by and among Company
and Holder (as amended, modified or supplemented from time to time in accordance
with the terms thereof, the "Purchase Agreement") and is one of a possible
series of Notes of like tenor, bearing different dates of issue, which in the
aggregate total not more than $5,000,000 in principal amount. All of the
aforesaid Notes are sometimes collectively referred to as the "Convertible
Notes" or the "Notes." All capitalized terms not specifically defined herein
shall have the meanings set forth in the Purchase Agreement. This Note is
subject to, and entitled to, all provisions and benefits of the Purchase
Agreement, to which reference is hereby made for a more complete statement of
the terms and conditions under which the purchase, sale and conversion of the
Convertible Notes are to be made.
This Note is given in substitution for and replacement of the
12% Note Due April 2, 1999 issued by Company in favor of Holder (the "Prior
Note"), it being acknowledged and agreed that (after giving effect to payment by
Company of the fee described in Section 2.3(b)(v) of the Purchase Agreement) the
Indebtedness evidenced by this Note constitutes the same Indebtedness evidenced
by the Prior Note.
1. INTEREST. Interest on the outstanding Principal Amount shall accrue
at the rate of twelve percent (12%) per annum from the date hereof until the
Principal Amount is paid in full or the Holder's Conversion, whichever first
occurs; provided that the rate of interest shall increase
<PAGE> 2
to eighteen (18%) per annum on the Approval Deadline under the circumstances
described in Section 6.5 of the Purchase Agreement. Interest shall be paid in
one installment at the maturity of this Note, as such maturity may be extended
pursuant to Section 2 or accelerated pursuant to the Purchase Agreement or
Section 4 hereof. Interest shall be computed on the basis of actual days elapsed
based on a 365-day year.
Notwithstanding the foregoing, in no event shall interest
exceed the maximum rate permitted under any applicable law or regulation, and if
any provision of this Note is in contravention of any such law or regulation,
such provision shall be deemed amended to provide for interest at said maximum
rate and any excess amount shall either be applied, at Holder's option, to the
outstanding Principal Amount of this Note as Holder shall determine, or be
refunded by Holder to Company.
2. PAYMENT OF PRINCIPAL.
2.1 The outstanding Principal Amount, together with accrued
and unpaid interest thereon, shall initially be due and payable on
September 30, 1999 (the "Maturity Date").
2.2 If the Principal Amount is not repaid on or prior to the
Maturity Date, the date for repayment of the Principal Amount, together
with accrued and unpaid interest thereon, shall be automatically
extended to March 31, 2000 (the "Extended Maturity Date") upon receipt
by Holder of additional warrants to purchase Common Stock of Company,
as more fully set forth in the Purchase Agreement.
2.3 Such payment is subject to acceleration and/or mandatory
prepayments as provided in the Purchase Agreement. Upon the occurrence
of an Event of Default (as defined and set forth in Section 4 hereof)
the whole sum of principal and interest then due and owing hereunder
may be declared by the Holder to be immediately due and payable. All
payments received hereunder shall be applied first to the payment or
reimbursement to Holder of its costs and expenses as provided herein,
second to accrued interest, and third to the repayment of the
outstanding Principal Amount.
2.4 Payments of principal and interest shall be made to Holder
at its offices at 2000 Pasadena Avenue, Los Angeles, California 90031,
or at such other address as Holder may give Company in writing.
Payments shall be made in United States dollars in immediately
available funds.
2.5 All payments to Holder shall be made free and clear of any
restrictions or conditions and free and clear of and without deduction
for any taxes or withholdings of any nature, present or future. If any
deduction for tax is required by law, then Company shall pay such
additional amounts, in such manner and at such time as will result in
receipt by Holder of such payment as if no deduction of tax had been
required.
- 2 -
<PAGE> 3
2.6 If any payment date is not a Business Day, payment shall
be made not later than the next succeeding Business Day. However, if
the next succeeding Business Day falls in the next calendar month,
Payment shall be made on the last preceding Business Day. Business Day
means days that banks in New York City are required to be open for the
transaction of business.
2.7 This Note may be prepaid by Company, in whole or in part,
at any time prior to the Maturity Date or (if applicable), the Extended
Maturity Date without premium or penalty.
3. CONVERSION. From and after the fifteenth (15th) day after the date
on which the Principal Amount of this Note has become due and payable in full
(whether such maturity is pursuant to any provision of this Note or the Purchase
Agreement or is the result of acceleration, by operation of law or otherwise),
and for so long as any portion of this Note shall remain unpaid, Holder shall
have the right at any time, and from time to time, to convert all or any portion
of the outstanding Principal Amount of the Note and accrued interest into shares
of Common Stock at the Conversion Price in effect at the time of Conversion in
accordance with the terms of the Purchase Agreement; provided that until any
shareholder approval required by Section 6.5 of the Purchase Agreement is
obtained, no more than an aggregate of 1,500,000 shares of Common Stock may be
issued upon conversion of Convertible Notes. If less than the entire Principal
Amount is converted at any time, Company shall cancel the Convertible Note so
tendered, and shall reissue, as of the original date of issue, a Note of like
tenor with the Note tendered, in the name of tendering Holder, and having a
Principal Amount equal to the remaining Principal Amount of the Note. Company
shall issue a certificate within fifteen (15) days of receipt of Holder's
request for Conversion evidencing the shares of Common Stock acquired by Holder
as a result of the exercise of this Conversion right. Such shares, when issued,
will be fully paid and non-assessable and shall be deemed issued for all
purposes as of the effective date of Conversion. Company shall pay any and all
stock issuance or transfer taxes due as a consequence of the issuance of the
shares of Common Stock.
4. EVENTS OF DEFAULT. If the outstanding Principal Amount, together
with accrued and unpaid interest thereon, is not repaid on or prior to the
Maturity Date, then the maturity of this Note will be extended as set forth in
Section 2.2 hereof, upon receipt by Holder of warrants to purchase Common Stock
of Company, as more fully set forth in the Purchase Agreement. If the
outstanding Principal Amount, together with accrued and unpaid interest thereon,
is not repaid (1) on or prior to the Extended Maturity Date or (2) upon the
occurrence and during the continuance of any Event of Default (as determined in
the Purchase Agreement), then Holder shall have the right, in its sole
discretion, to declare the Principal Amount to be immediately due and payable.
5. GOVERNING LAW. This Note shall be governed by the laws of the State
of California. To the full extent provided by law, Company and Holder waive
right to trial by jury in any action between the parties.
- 3 -
<PAGE> 4
6. COLLECTION COSTS Company promises to pay all costs and expenses,
including reasonable attorneys fees and disbursements incurred by Holder in the
collection and enforcement of this Note.
7. WAIVERS OF NOTICE. Company hereby consents to renewals and
extensions of time at or after the Maturity Date, and hereby waives diligence,
presentment, protest, demand and notice of every kind and, to the full extent
permitted by law, the right to plead any statute of limitations as a defense to
any demand hereunder.
8. ASSIGNABILITY. This Note may be assigned by Holder in accordance
with applicable law, including federal and state securities laws.
9. SEVERABILITY. In the event that any of the provisions of this Note
shall be held void or unenforceable, such provision shall be deemed severable
and the other terms and conditions of this Note not found void or unenforceable
shall remain in full force and effect.
10. BINDING EFFECT. This Note shall be binding upon and inure to the
benefit of the successors and permitted assigns of the parties hereto.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
the day and year first above written.
THE TESSERACT GROUP, INC.
By:
John T. Golle
Chief Executive Officer
- 4 -
<PAGE> 1
EXHIBIT 10.38
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY NOT BE OFFERED, SOLD,
TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE NOTE UNDER SUCH ACT AND UNDER ANY APPLICABLE
STATE SECURITIES LAWS, OR AN EXEMPTION FROM SUCH LAWS PURSUANT TO WHICH SUCH
REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER.
12% CONVERTIBLE NOTE
DUE SEPTEMBER 30, 1999
$1,500,000.00 APRIL 16, 1999
FOR VALUE RECEIVED, THE TESSERACT GROUP, INC., a Minnesota
corporation ("Company"), promises to pay to PIONEER VENTURE FUND, L.L.C., a
Delaware limited liability company ("Holder"), the principal sum of One Million
Five Hundred Thousand Dollars ($1,500,000.00), (the "Principal Amount"),
together with interest thereon as hereinafter set forth.
This Note ("Note") is issued pursuant to that certain
Securities Purchase Agreement dated as of March 31, 1999, by and among Company
and Holder (as amended, modified or supplemented from time to time in accordance
with the terms thereof, the "Purchase Agreement") and is one of a possible
series of Notes of like tenor, bearing different dates of issue, which in the
aggregate total not more than $5,000,000 in principal amount. All of the
aforesaid Notes are sometimes collectively referred to as the "Convertible
Notes" or the "Notes." All capitalized terms not specifically defined herein
shall have the meanings set forth in the Purchase Agreement. This Note is
subject to, and entitled to, all provisions and benefits of the Purchase
Agreement, to which reference is hereby made for a more complete statement of
the terms and conditions under which the purchase, sale and conversion of the
Convertible Notes are to be made.
1. INTEREST. Interest on the outstanding Principal Amount shall accrue
at the rate of twelve percent (12%) per annum from the date hereof until the
Principal Amount is paid in full or the Holder's Conversion, whichever first
occurs; provided that the rate of interest shall increase to eighteen (18%) per
annum on the Approval Deadline under the circumstances described in Section 6.5
of the Purchase Agreement. Interest shall be paid in one installment at the
maturity of this Note, as such maturity may be extended pursuant to Section 2 or
accelerated pursuant to the Purchase Agreement or Section 4 hereof. Interest
shall be computed on the basis of actual days elapsed based on a 365-day year.
<PAGE> 2
Notwithstanding the foregoing, in no event shall interest
exceed the maximum rate permitted under any applicable law or regulation, and if
any provision of this Note is in contravention of any such law or regulation,
such provision shall be deemed amended to provide for interest at said maximum
rate and any excess amount shall either be applied, at Holder's option, to the
outstanding Principal Amount of this Note as Holder shall determine, or be
refunded by Holder to Company.
2. PAYMENT OF PRINCIPAL.
2.1 The outstanding Principal Amount, together with accrued
and unpaid interest thereon, shall initially be due and payable on
September 30, 1999 (the "Maturity Date").
2.2 If the Principal Amount is not repaid on or prior to the
Maturity Date, the date for repayment of the Principal Amount, together
with accrued and unpaid interest thereon, shall be automatically
extended to March 31, 2000 (the "Extended Maturity Date") upon receipt
by Holder of additional warrants to purchase Common Stock of Company,
as more fully set forth in the Purchase Agreement.
2.3 Such payment is subject to acceleration and/or mandatory
prepayments as provided in the Purchase Agreement. Upon the occurrence
of an Event of Default (as defined and set forth in Section 4 hereof)
the whole sum of principal and interest then due and owing hereunder
may be declared by the Holder to be immediately due and payable. All
payments received hereunder shall be applied first to the payment or
reimbursement to Holder of its costs and expenses as provided herein,
second to accrued interest, and third to the repayment of the
outstanding Principal Amount.
2.4 Payments of principal and interest shall be made to Holder
at its offices at 2000 Pasadena Avenue, Los Angeles, California 90031,
or at such other address as Holder may give Company in writing.
Payments shall be made in United States dollars in immediately
available funds.
2.5 All payments to Holder shall be made free and clear of any
restrictions or conditions and free and clear of and without deduction
for any taxes or withholdings of any nature, present or future. If any
deduction for tax is required by law, then Company shall pay such
additional amounts, in such manner and at such time as will result in
receipt by Holder of such payment as if no deduction of tax had been
required.
2.6 If any payment date is not a Business Day, payment shall
be made not later than the next succeeding Business Day. However, if
the next succeeding Business Day falls in the next calendar month,
Payment shall be made on the last preceding Business Day. Business Day
means days that banks in New York City are required to be open for the
transaction of business.
- 2 -
<PAGE> 3
2.7 This Note may be prepaid by Company, in whole or in part,
at any time prior to the Maturity Date or (if applicable), the Extended
Maturity Date without premium or penalty.
3. CONVERSION. From and after the fifteenth (15th) day after the date
on which the Principal Amount of this Note has become due and payable in full
(whether such maturity is pursuant to any provision of this Note or the Purchase
Agreement or is the result of acceleration, by operation of law or otherwise),
and for so long as any portion of this Note shall remain unpaid, Holder shall
have the right at any time, and from time to time, to convert all or any portion
of the outstanding Principal Amount of the Note and accrued interest into shares
of Common Stock at the Conversion Price in effect at the time of Conversion in
accordance with the terms of the Purchase Agreement; provided that until any
shareholder approval required by Section 6.5 of the Purchase Agreement is
obtained, no more than an aggregate of 1,500,000 shares of Common Stock may be
issued upon conversion of Convertible Notes. If less than the entire Principal
Amount is converted at any time, Company shall cancel the Convertible Note so
tendered, and shall reissue, as of the original date of issue, a Note of like
tenor with the Note tendered, in the name of tendering Holder, and having a
Principal Amount equal to the remaining Principal Amount of the Note. Company
shall issue a certificate within fifteen (15) days of receipt of Holder's
request for Conversion evidencing the shares of Common Stock acquired by Holder
as a result of the exercise of this Conversion right. Such shares, when issued,
will be fully paid and non-assessable and shall be deemed issued for all
purposes as of the effective date of Conversion. Company shall pay any and all
stock issuance or transfer taxes due as a consequence of the issuance of the
shares of Common Stock.
4. EVENTS OF DEFAULT. If the outstanding Principal Amount, together
with accrued and unpaid interest thereon, is not repaid on or prior to the
Maturity Date, then the maturity of this Note will be extended as set forth in
Section 2.2 hereof, upon receipt by Holder of warrants to purchase Common Stock
of Company, as more fully set forth in the Purchase Agreement. If the
outstanding Principal Amount, together with accrued and unpaid interest thereon,
is not repaid (1) on or prior to the Extended Maturity Date or (2) upon the
occurrence and during the continuance of any Event of Default (as determined in
the Purchase Agreement), then Holder shall have the right, in its sole
discretion, to declare the Principal Amount to be immediately due and payable.
5. GOVERNING LAW. This Note shall be governed by the laws of the State
of California. To the full extent provided by law, Company and Holder waive
right to trial by jury in any action between the parties.
6. COLLECTION COSTS Company promises to pay all costs and expenses,
including reasonable attorneys fees and disbursements incurred by Holder in the
collection and enforcement of this Note.
7. WAIVERS OF NOTICE. Company hereby consents to renewals and
extensions of time at or after the Maturity Date, and hereby waives diligence,
presentment, protest, demand and
- 3 -
<PAGE> 4
notice of every kind and, to the full extent permitted by law, the right to
plead any statute of limitations as a defense to any demand hereunder.
8. ASSIGNABILITY. This Note may be assigned by Holder in accordance
with applicable law, including federal and state securities laws.
9. SEVERABILITY. In the event that any of the provisions of this Note
shall be held void or unenforceable, such provision shall be deemed severable
and the other terms and conditions of this Note not found void or unenforceable
shall remain in full force and effect.
10. BINDING EFFECT. This Note shall be binding upon and inure to the
benefit of the successors and permitted assigns of the parties hereto.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
the day and year first above written.
THE TESSERACT GROUP, INC.
By:
John T. Golle
Chief Executive Officer
- 4 -
<PAGE> 1
EXHIBIT 10.39
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY NOT BE OFFERED, SOLD,
TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE NOTE UNDER SUCH ACT AND UNDER ANY APPLICABLE
STATE SECURITIES LAWS, OR AN EXEMPTION FROM SUCH LAWS PURSUANT TO WHICH SUCH
REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER.
12% CONVERTIBLE NOTE
DUE SEPTEMBER 30, 1999
$1,000,000.00 MAY 17, 1999
FOR VALUE RECEIVED, THE TESSERACT GROUP, INC., a Minnesota
corporation ("Company"), promises to pay to PIONEER VENTURE FUND, L.L.C., a
Delaware limited liability company ("Holder"), the principal sum of One Million
Dollars ($1,000,000.00), (the "Principal Amount"), together with interest
thereon as hereinafter set forth.
This Note ("Note") is issued pursuant to that certain
Securities Purchase Agreement dated as of March 31, 1999, by and among Company
and Holder (as amended, modified or supplemented from time to time in accordance
with the terms thereof, the "Purchase Agreement") and is one of a possible
series of Notes of like tenor, bearing different dates of issue, which in the
aggregate total not more than $5,000,000 in principal amount. Prior to the date
hereof, Company issued to Holder a Note dated April 2, 1999 in the original
principal amount of $798,822.65 and a Note dated April 16, 1999 in the original
principal amount of $1,500,000. All of the aforesaid Notes are sometimes
collectively referred to as the "Convertible Notes" or the "Notes." All
capitalized terms not specifically defined herein shall have the meanings set
forth in the Purchase Agreement. This Note and the Notes previously issued are
subject to, and entitled to, all provisions and benefits of the Purchase
Agreement, to which reference is hereby made for a more complete statement of
the terms and conditions under which the purchase, sale and conversion of the
Convertible Notes are to be made.
1. INTEREST. Interest on the outstanding Principal Amount shall accrue
at the rate of twelve percent (12%) per annum from the date hereof until the
Principal Amount is paid in full or the Holder's Conversion, whichever first
occurs; provided that the rate of interest shall increase to eighteen (18%) per
annum on the Approval Deadline under the circumstances described in Section 6.5
of the Purchase Agreement. Interest shall be paid in one installment at the
maturity of this Note, as such maturity may be extended pursuant to Section 2 or
accelerated pursuant to the Purchase
<PAGE> 2
Agreement or Section 4 hereof. Interest shall be computed on the basis of actual
days elapsed based on a 365-day year.
Notwithstanding the foregoing, in no event shall interest
exceed the maximum rate permitted under any applicable law or regulation, and if
any provision of this Note is in contravention of any such law or regulation,
such provision shall be deemed amended to provide for interest at said maximum
rate and any excess amount shall either be applied, at Holder's option, to the
outstanding Principal Amount of this Note as Holder shall determine, or be
refunded by Holder to Company.
2. PAYMENT OF PRINCIPAL.
2.1 The outstanding Principal Amount, together with accrued
and unpaid interest thereon, shall initially be due and payable on
September 30, 1999 (the "Maturity Date").
2.2 If the Principal Amount is not repaid on or prior to the
Maturity Date, the date for repayment of the Principal Amount, together
with accrued and unpaid interest thereon, shall be automatically
extended to March 31, 2000 (the "Extended Maturity Date") upon receipt
by Holder of additional warrants to purchase Common Stock of Company,
as more fully set forth in the Purchase Agreement.
2.3 Such payment is subject to acceleration and/or mandatory
prepayments as provided in the Purchase Agreement. Upon the occurrence
of an Event of Default (as defined and set forth in Section 4 hereof)
the whole sum of principal and interest then due and owing hereunder
may be declared by the Holder to be immediately due and payable. All
payments received hereunder shall be applied first to the payment or
reimbursement to Holder of its costs and expenses as provided herein,
second to accrued interest, and third to the repayment of the
outstanding Principal Amount.
2.4 Payments of principal and interest shall be made to Holder
at its offices at 2000 Pasadena Avenue, Los Angeles, California 90031,
or at such other address as Holder may give Company in writing.
Payments shall be made in United States dollars in immediately
available funds.
2.5 All payments to Holder shall be made free and clear of any
restrictions or conditions and free and clear of and without deduction
for any taxes or withholdings of any nature, present or future. If any
deduction for tax is required by law, then Company shall pay such
additional amounts, in such manner and at such time as will result in
receipt by Holder of such payment as if no deduction of tax had been
required.
2.6 If any payment date is not a Business Day, payment shall
be made not later than the next succeeding Business Day. However, if
the next succeeding Business Day falls in the next calendar month,
Payment shall be made on the last preceding Business Day.
- 2 -
<PAGE> 3
Business Day means days that banks in New York City are required to be
open for the transaction of business.
2.7 This Note may be prepaid by Company, in whole or in part,
at any time prior to the Maturity Date or (if applicable), the Extended
Maturity Date without premium or penalty.
3. CONVERSION. From and after the fifteenth (15th) day after the date
on which the Principal Amount of this Note has become due and payable in full
(whether such maturity is pursuant to any provision of this Note or the Purchase
Agreement or is the result of acceleration, by operation of law or otherwise),
and for so long as any portion of this Note shall remain unpaid, Holder shall
have the right at any time, and from time to time, to convert all or any portion
of the outstanding Principal Amount of the Note and accrued interest into shares
of Common Stock at the Conversion Price in effect at the time of Conversion in
accordance with the terms of the Purchase Agreement; provided that until any
shareholder approval required by Section 6.5 of the Purchase Agreement is
obtained, no more than an aggregate of 1,500,000 shares of Common Stock may be
issued upon conversion of Convertible Notes. If less than the entire Principal
Amount is converted at any time, Company shall cancel the Convertible Note so
tendered, and shall reissue, as of the original date of issue, a Note of like
tenor with the Note tendered, in the name of tendering Holder, and having a
Principal Amount equal to the remaining Principal Amount of the Note. Company
shall issue a certificate within fifteen (15) days of receipt of Holder's
request for Conversion evidencing the shares of Common Stock acquired by Holder
as a result of the exercise of this Conversion right. Such shares, when issued,
will be fully paid and non-assessable and shall be deemed issued for all
purposes as of the effective date of Conversion. Company shall pay any and all
stock issuance or transfer taxes due as a consequence of the issuance of the
shares of Common Stock.
4. EVENTS OF DEFAULT. If the outstanding Principal Amount, together
with accrued and unpaid interest thereon, is not repaid on or prior to the
Maturity Date, then the maturity of this Note will be extended as set forth in
Section 2.2 hereof, upon receipt by Holder of warrants to purchase Common Stock
of Company, as more fully set forth in the Purchase Agreement. If the
outstanding Principal Amount, together with accrued and unpaid interest thereon,
is not repaid (1) on or prior to the Extended Maturity Date or (2) upon the
occurrence and during the continuance of any Event of Default (as determined in
the Purchase Agreement), then Holder shall have the right, in its sole
discretion, to declare the Principal Amount to be immediately due and payable.
5. GOVERNING LAW. This Note shall be governed by the laws of the State
of California. To the full extent provided by law, Company and Holder waive
right to trial by jury in any action between the parties.
6. COLLECTION COSTS Company promises to pay all costs and expenses,
including reasonable attorneys fees and disbursements incurred by Holder in the
collection and enforcement of this Note.
- 3 -
<PAGE> 4
7. WAIVERS OF NOTICE. Company hereby consents to renewals and
extensions of time at or after the Maturity Date, and hereby waives diligence,
presentment, protest, demand and notice of every kind and, to the full extent
permitted by law, the right to plead any statute of limitations as a defense to
any demand hereunder.
8. ASSIGNABILITY. This Note may be assigned by Holder in accordance
with applicable law, including federal and state securities laws.
9. SEVERABILITY. In the event that any of the provisions of this Note
shall be held void or unenforceable, such provision shall be deemed severable
and the other terms and conditions of this Note not found void or unenforceable
shall remain in full force and effect.
10. BINDING EFFECT. This Note shall be binding upon and inure to the
benefit of the successors and permitted assigns of the parties hereto.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
the day and year first above written.
THE TESSERACT GROUP, INC.
By:
John T. Golle
Chief Executive Officer
- 4 -
<PAGE> 1
EXHIBIT 10.40
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY NOT BE OFFERED, SOLD,
TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE NOTE UNDER SUCH ACT AND UNDER ANY APPLICABLE
STATE SECURITIES LAWS, OR AN EXEMPTION FROM SUCH LAWS PURSUANT TO WHICH SUCH
REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER.
12% CONVERTIBLE NOTE
DUE SEPTEMBER 30, 1999
NOTE NO. 4
$1,700,000 JUNE 9, 1999
FOR VALUE RECEIVED, THE TESSERACT GROUP, INC., a Minnesota
corporation ("Company"), promises to pay to PIONEER VENTURE FUND, L.L.C., a
Delaware limited liability company ("Holder"), the principal sum of $1,700,000,
(the "Principal Amount"), together with interest thereon as hereinafter set
forth.
This Note ("Note") is issued pursuant to that certain
Securities Purchase Agreement dated as of March 31, 1999, by and among Company
and Holder (as amended, modified or supplemented from time to time in accordance
with the terms thereof, the "Purchase Agreement") and is one of a possible
series of Notes of like tenor, bearing different dates of issue, which in the
aggregate total not more than $5,000,000 in principal amount. All of the
aforesaid Notes are sometimes collectively referred to as the "Convertible
Notes" or the "Notes." All capitalized terms not specifically defined herein
shall have the meanings set forth in the Purchase Agreement. This Note is
subject to, and entitled to, all provisions and benefits of the Purchase
Agreement, to which reference is hereby made for a more complete statement of
the terms and conditions under which the purchase, sale and conversion of the
Convertible Notes are to be made.
1. INTEREST. Interest on the outstanding Principal Amount shall accrue
at the rate of twelve percent (12%) per annum from the date hereof until the
Principal Amount is paid in full or the Holder's Conversion, whichever first
occurs; provided that the rate of interest shall increase to eighteen (18%) per
annum on the Approval Deadline under the circumstances described in Section 6.5
of the Purchase Agreement. Interest shall be paid in one installment at the
maturity of this Note, as such maturity may be extended pursuant to Section 2 or
accelerated pursuant to the Purchase Agreement or Section 4 hereof. Interest
shall be computed on the basis of actual days elapsed based on a 365-day year.
<PAGE> 2
Notwithstanding the foregoing, in no event shall interest
exceed the maximum rate permitted under any applicable law or regulation, and if
any provision of this Note is in contravention of any such law or regulation,
such provision shall be deemed amended to provide for interest at said maximum
rate and any excess amount shall either be applied, at Holder's option, to the
outstanding Principal Amount of this Note as Holder shall determine, or be
refunded by Holder to Company.
2. PAYMENT OF PRINCIPAL.
2.1 The outstanding Principal Amount, together with accrued
and unpaid interest thereon, shall initially be due and payable on
September 30, 1999 (the "Maturity Date").
2.2 If the Principal Amount is not repaid on or prior to the
Maturity Date, the date for repayment of the Principal Amount, together
with accrued and unpaid interest thereon, shall be automatically
extended to March 31, 2000 (the "Extended Maturity Date") upon receipt
by Holder of additional warrants to purchase Common Stock of Company,
as more fully set forth in the Purchase Agreement.
2.3 Such payment is subject to acceleration and/or mandatory
prepayments as provided in the Purchase Agreement. Upon the occurrence
of an Event of Default (as defined and set forth in Section 4 hereof)
the whole sum of principal and interest then due and owing hereunder
may be declared by the Holder to be immediately due and payable. All
payments received hereunder shall be applied first to the payment or
reimbursement to Holder of its costs and expenses as provided herein,
second to accrued interest, and third to the repayment of the
outstanding Principal Amount.
2.4 Payments of principal and interest shall be made to Holder
at its offices at 2000 Pasadena Avenue, Los Angeles, California 90031,
or at such other address as Holder may give Company in writing.
Payments shall be made in United States dollars in immediately
available funds.
2.5 All payments to Holder shall be made free and clear of any
restrictions or conditions and free and clear of and without deduction
for any taxes or withholdings of any nature, present or future. If any
deduction for tax is required by law, then Company shall pay such
additional amounts, in such manner and at such time as will result in
receipt by Holder of such payment as if no deduction of tax had been
required.
2.6 If any payment date is not a Business Day, payment shall
be made not later than the next succeeding Business Day. However, if
the next succeeding Business Day falls in the next calendar month,
Payment shall be made on the last preceding Business Day. Business Day
means days that banks in New York City are required to be open for the
transaction of business.
- 2 -
<PAGE> 3
2.7 This Note may be prepaid by Company, in whole or in part,
at any time prior to the Maturity Date or (if applicable), the Extended
Maturity Date without premium or penalty.
3. CONVERSION. From and after the fifteenth (15th) day after the date
on which the Principal Amount of this Note has become due and payable in full
(whether such maturity is pursuant to any provision of this Note or the Purchase
Agreement or is the result of acceleration, by operation of law or otherwise),
and for so long as any portion of this Note shall remain unpaid, Holder shall
have the right at any time, and from time to time, to convert all or any portion
of the outstanding Principal Amount of the Note and accrued interest into shares
of Common Stock at the Conversion Price in effect at the time of Conversion in
accordance with the terms of the Purchase Agreement; provided that until any
shareholder approval required by Section 6.5 of the Purchase Agreement is
obtained, no more than an aggregate of 1,500,000 shares of Common Stock may be
issued upon conversion of Convertible Notes. If less than the entire Principal
Amount is converted at any time, Company shall cancel the Convertible Note so
tendered, and shall reissue, as of the original date of issue, a Note of like
tenor with the Note tendered, in the name of tendering Holder, and having a
Principal Amount equal to the remaining Principal Amount of the Note. Company
shall issue a certificate within fifteen (15) days of receipt of Holder's
request for Conversion evidencing the shares of Common Stock acquired by Holder
as a result of the exercise of this Conversion right. Such shares, when issued,
will be fully paid and non-assessable and shall be deemed issued for all
purposes as of the effective date of Conversion. Company shall pay any and all
stock issuance or transfer taxes due as a consequence of the issuance of the
shares of Common Stock.
4. EVENTS OF DEFAULT. If the outstanding Principal Amount, together
with accrued and unpaid interest thereon, is not repaid on or prior to the
Maturity Date, then the maturity of this Note will be extended as set forth in
Section 2.2 hereof, upon receipt by Holder of warrants to purchase Common Stock
of Company, as more fully set forth in the Purchase Agreement. If the
outstanding Principal Amount, together with accrued and unpaid interest thereon,
is not repaid (1) on or prior to the Extended Maturity Date or (2) upon the
occurrence and during the continuance of any Event of Default (as determined in
the Purchase Agreement), then Holder shall have the right, in its sole
discretion, to declare the Principal Amount to be immediately due and payable.
5. GOVERNING LAW. This Note shall be governed by the laws of the State
of California. To the full extent provided by law, Company and Holder waive
right to trial by jury in any action between the parties.
6. COLLECTION COSTS Company promises to pay all costs and expenses,
including reasonable attorneys fees and disbursements incurred by Holder in the
collection and enforcement of this Note.
7. WAIVERS OF NOTICE. Company hereby consents to renewals and
extensions of time at or after the Maturity Date, and hereby waives diligence,
presentment, protest, demand and
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<PAGE> 4
notice of every kind and, to the full extent permitted by law, the right to
plead any statute of limitations as a defense to any demand hereunder.
8. ASSIGNABILITY. This Note may be assigned by Holder in accordance
with applicable law, including federal and state securities laws.
9. SEVERABILITY. In the event that any of the provisions of this Note
shall be held void or unenforceable, such provision shall be deemed severable
and the other terms and conditions of this Note not found void or unenforceable
shall remain in full force and effect.
10. BINDING EFFECT. This Note shall be binding upon and inure to the
benefit of the successors and permitted assigns of the parties hereto.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
the day and year first above written.
THE TESSERACT GROUP, INC.
By:
John T. Golle
Chief Executive Officer
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