<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Tesseract Group, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
THE TESSERACT GROUP, INC.
9977 NORTH 90TH STREET, SUITE 180
SCOTTSDALE, ARIZONA 85258
October 18, 1999
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of the
TesseracT Group, Inc. which will be held in the Fletcher Heights Charter School
located at 7877 W. Hillcrest Boulevard, Peoria, Arizona, at 3:30 p.m.
Mountain Standard Time, on Thursday, November 18, 1999.
The Secretary's Notice of Annual Meeting and the Proxy Statement which follow
describe the matters to come before the meeting. In addition to the specific
matters to be acted upon, there will be a report on the progress of the Company
and an opportunity for questions of general interest to shareholders.
It is important that your shares be represented at the meeting. Whether or not
you plan to attend in person, please vote, sign, date, and promptly return the
enclosed proxy in the envelope provided.
Sincerely,
/s/ John T. Golle
John T. Golle
Chairman of the Board and Chief Executive Officer
<PAGE>
THE TESSERACT GROUP, INC.
9977 NORTH 90TH STREET, SUITE 180
SCOTTSDALE, ARIZONA 85258
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON
THURSDAY, NOVEMBER 18, 1999
The Annual Meeting of Shareholders of the TesseracT Group, Inc.,(the "Company")
will be held in the Fletcher Heights Charter School located at 7877 W. Hillcrest
Boulevard, Peoria, Arizona, at 3:30 p.m. Mountain Standard Time, on Thursday,
November 18, 1999, for the following purposes:
1. To elect two directors for terms of three years.
2. To act upon a proposal to approve the future issuance of shares of common
stock pursuant to the terms of the Securities Purchase Agreement between
the Company and Pioneer Venture Fund, L.L.C. dated March 31, 1999, as
amended.
3. To act upon a proposal to ratify the appointment of
PricewaterhouseCoopers LLP by the Board of Directors to act as
independent auditors of the Company for the fiscal year ending June 30,
2000.
4. To transact such other business as may properly be brought before the
meeting.
The Board of Directors has fixed September 30, 1999, as the record date for the
meeting, and only shareholders of record at the close of business on that date
are entitled to receive notice of and vote at the meeting.
YOUR PROXY IS IMPORTANT TO ENSURE A QUORUM AT THE MEETING. EVEN IF YOU OWN ONLY
A FEW SHARES, AND WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE
VOTE, SIGN, DATE, AND MAIL THE ENCLOSED PROXY IN THE ACCOMPANYING POSTAGE-PAID
REPLY ENVELOPE. THE PROXY MAY BE REVOKED BY YOU AT ANY TIME PRIOR TO BEING
EXERCISED, AND RETURNING YOUR PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON
IF YOU ATTEND THE MEETING AND REVOKE THE PROXY.
By Order of the Board of Directors,
/s/ Gale R. Mellum
Gale R. Mellum
Secretary
Minneapolis, Minnesota
October 18, 1999
<PAGE>
THE TESSERACT GROUP, INC.
9977 N. 90TH STREET, SUITE 180
SCOTTSDALE, ARIZONA 85258
PROXY STATEMENT
INFORMATION CONCERNING THE SOLICITATION
The enclosed proxy is being solicited by the Board of Directors of The TesseracT
Group, Inc., a Minnesota corporation (the "Company"), for use at the Annual
Meeting of Shareholders (the "Meeting"), to be held on November 18, 1999, and at
any adjournments thereof. Proxies in the accompanying form which are properly
executed and returned and not revoked will be voted in the manner specified. A
shareholder executing a proxy retains the right to revoke it at any time before
it is exercised by notice in writing to the Secretary of the Company of
termination of the proxy's authority or a properly signed and duly returned
proxy bearing a later date.
The Company will pay the cost of soliciting proxies in the accompanying form. In
addition to solicitation by the use of the mails, certain directors, officers,
and employees of the Company may solicit proxies by telephone, telegram, or
personal contact without additional compensation being paid to them for such
solicitation. The Company has requested brokerage firms, custodians, nominees,
and other record holders to forward soliciting materials to the beneficial
owners of stock of the Company and will reimburse such persons for their
reasonable out-of-pocket expenses in so forwarding such materials.
The address of the principal executive office of the Company is 9977 N. 90th
Street, Suite 180, Scottsdale, Arizona 85258, and the Company's telephone number
is (480) 767-2300. The mailing of this Proxy Statement and form of proxy to
shareholders will commence on or about October 18, 1999.
OUTSTANDING VOTING SECURITIES
Only shareholders of record at the close of business on September 30, 1999, are
entitled to vote at the Meeting. On that day, there were issued and outstanding
9,580,331 shares of common stock, the only authorized and issued voting security
of the Company. Each shareholder is entitled to one vote for each share held.
VOTE REQUIREMENT
The affirmative vote of the holders of a majority of the outstanding shares of
common stock present and entitled to vote on each matter to be acted upon at the
Meeting is required for the approval of such matter. A shareholder voting
through a proxy who abstains with respect to any matter is considered to be
present and entitled to vote on such matter at the Meeting, and is in effect a
negative vote, but a shareholder (including a broker) who does not give
authority to a proxy to vote, or withholds authority to vote, on any matter
shall not be considered present and entitled to vote on such matter.
1
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of common stock as of September 15, 1999 (unless otherwise noted
below) by (i) each person or entity known by the Company to own beneficially
more than 5% of the outstanding common stock, (ii) each director, (iii) each
executive officer named in the Summary Compensation Table on page 8 of this
Proxy Statement, and (iv) all directors and executive officers of the Company as
a group. Except as otherwise noted below, the listed beneficial owner has sole
voting and investment power with respect to such shares and the address of the
listed beneficial owner is that of the Company.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent of Common
Of Beneficial Owner Of Beneficial Ownership Stock Outstanding
- ----------------------- ----------------------- ----------------------
<S> <C> <C>
Harold Nelkin (1) 1,404,367 14.6%
Benjamin Nazarian (2) 1,314,000 13.1%
John T. Golle (3) 441,906 4.5%
Gale R. Mellum (4) 282,372 2.9%
Robert I. Karon (5) 275,317 2.9%
Martha Taylor Thomas (6) 21,000 *
Todd K. Severson (7) 10,000 *
Dr. Lucian P. Spataro (8) 12,700 *
All directors and executive officers as a
group (9 persons)
(1) (2) (3) (4) (5) (6) (7) (8) 3,733,562 35.7%
</TABLE>
- ----------------------------------
* Represents beneficial ownership of not more than 1% of the outstanding
common stock.
(1) Includes 5,400 shares owned by Mr. Nelkin's immediate family, of which
shares Mr. Nelkin disclaims beneficial ownership. Includes 76,000 shares
which were purchased for clients of Nelkin Capital Management, Inc., an
unregistered investment adviser of which Mr. Nelkin is the owner and also
shares with his clients the power to vote or direct the vote of such
shares and to dispose or direct the disposition of such shares. Includes
11,677 shares issuable pursuant to options exercisable within 60 days
September 15, 1999.
(2) Includes 461,500 shares owned by Pioneer Venture Fund, L.L.C., a private
investment group of which Mr. Nazarian is a managing member. Includes
357,500 shares owned by Union Communication Company, a private investment
group of which Mr. Nazarian is Head of Investments. Includes 415,000
shares issuable pursuant to options and warrants exercisable within 60
days of September 15, 1999.
(3) Includes 1,280 shares held by a member of Mr. Golle's immediate family,
of which shares Mr. Golle disclaims beneficial ownership. Includes
275,000 shares issuable pursuant to options exercisable within 60 days of
September 15, 1999. Does not include 55,285 shares held in five trusts of
which Mr. Karon is trustee and the beneficiaries of which are members of
Mr. Golle's immediate family, and 18,310 shares held by the Golle Family
Foundation, a charitable organization.
(4) Includes 72,222 shares owned by a member of Mr. Mellum's immediate
family, of which shares Mr. Mellum disclaims beneficial ownership.
Includes 8,000 shares held by two trusts of which Mr. Mellum is trustee
and the beneficiaries of which are members of Mr. Mellum's immediate
family.
2
<PAGE>
Includes 70,000 shares issuable pursuant to options exercisable
within 60 days of September 15, 1999.
(5) Includes 55,285 shares held by five trusts of which Mr. Karon is trustee
and the beneficiaries of which are members of Mr. Golle's immediate
family. Includes 70,000 shares issuable pursuant to options exercisable
within 60 days of September 15, 1999.
(6) Includes 20,000 shares issuable pursuant to options exercisable within 60
days of September 15, 1999.
(7) Includes 10,000 shares issuable pursuant to options exercisable within 60
days of September 15, 1999.
(8) Includes 10,000 shares issuable pursuant to options exercisable within 60
days of September 15, 1999.
PROPOSAL NUMBER ONE
ELECTION OF DIRECTORS
Pursuant to the Restated Articles of Incorporation of the Company, directors are
elected for staggered terms of three years, with approximately one-third of the
directors to be elected each year.
The shareholders will be asked to elect two Class III directors at the Meeting
for a term of three years expiring in 2002. Benjamin Nazarian, one of the
nominees is a current director of the Company and has previously been elected by
the shareholders. Harold Nelkin, the other nominee, was unanimously elected on
November 3, 1998, by the Board of Directors to fill a vacancy on the Board. Each
nominee has indicated a willingness to serve as a director, but in case any
nominee is not a candidate for any reason, the proxies named in the accompanying
form of proxy may vote for a substitute nominee in their discretion.
Following is information regarding the nominees.
CLASS III (THREE-YEAR TERM EXPIRING IN 1999)
- ---------------------------------------------
BENJAMIN NAZARIAN, age 27, director since July 1998.
Since September 1996, Mr. Nazarian has been a managing member of the
Pioneer Venture Fund, a private investment group. Since 1993,
Mr. Nazarian has held the position of Head of Investments for Union
Communications Company, a private investment group.
HAROLD NELKIN, age 72, director since November 1998.
Mr. Nelkin joined the firm of Neuberger & Berman as a securities analyst
in 1962 and was admitted to partnership in 1964. In 1987, Mr. Nelkin
founded Nelkin Capital Management, Inc. and continues to be its owner
and portfolio manager.
Following is information regarding each director whose term of office will
continue after the Meeting.
CLASS II (THREE-YEAR TERM EXPIRING IN 2001)
- -------------------------------------------
ROBERT I. KARON, age 53, director since April 1987.
Mr. Karon has been a member of the accounting firm of Schweitzer, Karon,
& Bremer, LLC, and its related companies since 1975.
GALE R. MELLUM, age 57, director since April 1987.
Mr. Mellum has been a member of the law firm of Faegre & Benson since
1968, which has acted as general counsel to the Company since its
inception. In addition, Mr. Mellum was named Secretary of the Company
in February 1998.
3
<PAGE>
CLASS I (THREE-YEAR TERM EXPIRING IN 2000)
- -------------------------------------------
JOHN T. GOLLE, age 55, director since July 1986.
Mr. Golle founded the Company and has been Chairman of the Board and
Chief Executive Officer since its inception.
MARTHA TAYLOR THOMAS, age 51, director since December 1997.
Ms. Taylor Thomas is an education consultant and licensed attorney.
Prior to this position, Ms. Taylor Thomas held various positions at
Grand Canyon University from October 1987 to December 1996, where she
served most recently as Provost and Chief Operating Officer. Ms. Taylor
Thomas is a director of St. Luke's Health System, a wholly-owned
subsidiary of Tenet Healthcare Corp., and Nortrust of Arizona
Corporation, a wholly-owned subsidiary of Northern Trust Corporation.
None of the nominees is related to any other director or to any other executive
officer of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
The Board of Directors met or adopted resolutions by written action sixteen
times during the last fiscal year. Committees of the Board of Directors include
the Compensation Committee, Option Committee and Audit Committee.
The Board of Directors does not have a nominating committee.
The following describes the functions performed by each of the committees:
COMPENSATION COMMITTEE
- -----------------------
The Compensation Committee, consisting of Messrs. Mellum, Nazarian and Ms.
Taylor Thomas, reviews and acts upon management recommendations concerning
employee compensation, including bonuses. The Compensation Committee met one
time during fiscal 1999.
OPTION COMMITTEE
- -----------------
The Option Committee, consisting of Messrs. Nelkin and Nazarian and Ms. Taylor
Thomas, reviews and acts upon management recommendations concerning the granting
of stock options. In addition, the committee administers The TesseracT Group,
Inc. 1988 Stock Option Plan (the "1988 Plan") and The TesseracT Group, Inc. 1992
Long-Term Executive Stock Option Plan (the "1992 Plan"). The Option Committee
met one time during fiscal 1999.
AUDIT COMMITTEE
- ----------------
The Audit Committee, made up of Messrs. Karon, Mellum, and Nelkin, makes
recommendations concerning the selection and appointment of independent
auditors, reviews the scope and findings of the completed audit and reviews the
adequacy and effectiveness of the Company's accounting policies and system of
internal accounting controls. The Audit Committee met two times during fiscal
1999.
All current directors attended at least 75% of the meetings of the Board of
Directors and of the committees on which they served during fiscal 1999.
4
<PAGE>
DIRECTOR COMPENSATION
The 1988 Plan provides for the nondiscretionary grant of a nonstatuatory stock
option to purchase 10,000 shares of common stock to each non-employee director
on the date of each annual meeting of the Company's shareholders as compensation
for services for the ensuring year. Non-employee directors joining the board
between annual meetings are granted an option to purchase a pro-rata portion of
such number of shares. All non-employee director options have an exercise price
equal to the fair market value of a share of common stock on the date of grant
and the options become fully exercisable one year after the date of grant.
In addition to the stock options provided to non-employee directors, beginning
in April 1998, each non-employee director will receive an annual cash retainer
of $24,000, payable quarterly in arrears, plus per meeting fees of $1,000 for
each meeting of the Board of Directors attended, $250 for each board meeting
held by telephonic conference call which lasts over thirty minutes and in which
the director participates, and $500 for each committee meeting attended.
ELECTION OF DIRECTORS
Pursuant to the Restated Articles of Incorporation of the Company, no person
(other than a person nominated by or on behalf of the Board of Directors) shall
be eligible for election as a director at any annual or special meeting of
shareholders unless a written request that his or her name be placed in
nomination is received from a shareholder of record by the Secretary of the
Company not less than 50 days prior to the date fixed for such meeting, together
with the written consent of such person to serve as a director.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
As required by the Securities and Exchange Commission and based solely on a
review of copies of forms furnished to the Company and written representations
from the Company's officers and directors, the Company makes the following
disclosure. On October 12, 1999, Ms. Taylor Thomas and Messrs. Karon, Mellum,
Nazarian, Severson and Spataro each filed a Form 5 that was due on August 16,
1999. These Form 5s reported a grant of options to purchase the Company's common
stock in the case of Ms. Taylor Thomas and Messrs. Karon, Mellum and Severson, a
grant of options and a purchase of common stock in the case of Mr. Spataro, and
a grant of options and the purchase by Pioneer Venture Fund, L.L.C. of the Notes
and the warrant to purchase 150,000 shares of common stock described later in
this Proxy Statement in the case of Mr. Nazarian.
REPORT OF THE COMPENSATION AND OPTION
COMMITTEES ON EXECUTIVE COMPENSATION
The Company's policies regarding the compensation of executive officers are the
responsibility of the Compensation and Option Committees of the Board of
Directors. The fundamental goal of the Compensation and Option Committees is to
develop a compensation program that will attract and retain highly talented
executives, provide the executives with incentives to meet the strategic
objectives of the Company and create a common interest between executives and
shareholders by sharing the risks and rewards of strategic decision making.
The primary components of each executive officer's compensation package are base
salary, an annual performance bonus, and stock options. Base salaries and annual
performance bonuses of executive officers are determined by the Compensation
Committee. The Option Committee determines the size and other terms of all stock
options granted to executive officers.
5
<PAGE>
BASE SALARY
To attract and retain talented executives who are critical to the Company's
long-term success, the Compensation Committee believes the Company must offer a
competitive total compensation package to that offered by other companies
providing educational services and products and companies with similar market
capitalizations. In addition the Compensation Committee also considers personal
criteria when determining base salaries, including the decision-making
responsibilities of each executive officer's position and the experience, work
performance, and team-building skills of the executive officer.
During fiscal 1999, compensation amounts for executive officers were adjusted to
account for the impact of inflation only.
ANNUAL PERFORMANCE BONUS
Each executive officer is eligible to receive some form of cash performance
bonus at the end of each fiscal year. The purpose of the performance bonus is to
provide incentives to executives to meet specific strategic and financial goals
of the Company set by the Compensation Committee on an annual basis, as well as
defined personal objectives. Each executive officer's bonus is limited to the
amount of his or her base salary, with the exception of Mr. Golle, whose bonus
is limited to an amount equal to two times his base salary.
During fiscal 1999, performance bonuses were not awarded to the executive
officers because the Company failed to achieve its goals.
STOCK OPTIONS
The policy of the Option Committee has historically been to grant stock options
on an annual basis to each employee of the Company, including executive
officers. The exercise price of the stock options is set at the fair market
value of the underlying stock as of the date of grant. Accordingly, the stock
options provide value to executive officers only when the price of the Company's
stock increases above the price on the date of grant. During fiscal 1999, stock
options to purchase a total of 325,000 shares of the Company's common stock were
granted to executive officers of the Company, including 200,000 shares granted
to persons upon becoming executive officers of the Company. The vesting terms of
the grants were structured by the Option Committee to ensure continuity within
the Company by retaining key officers and to create a common interest in the
executive officers and the shareholders in increasing long-term value of the
Company.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Golle received a base salary of $344,800 in fiscal 1999, representing a 3%
increase over his fiscal 1998 base salary. Because the Company did not meet the
performance goals set by the Compensation Committee, Mr. Golle was not paid a
performance bonus in fiscal 1999.
<TABLE>
<S> <C>
Gale Mellum Harold Nelkin
Benjamin Nazarian Benjamin Nazarian
Martha Taylor Thomas Martha Taylor Thomas
MEMBERS OF THE COMPENSATION COMMITTEE MEMBERS OF THE OPTION COMMITTEE
</TABLE>
6
<PAGE>
EXECUTIVE OFFICERS AND COMPENSATION
The Company's executive officers, other than Mr. Golle, are identified below.
DR. LUCIAN P. SPATARO, JR., age 42, was appointed Executive Vice President of
the Company in March 1999. From July 1998 to January 1999, Dr. Spataro served as
the Company's Vice President of Business Development. From 1996 to 1998, Dr.
Spataro held several positions at the University of Arizona's International
College, including Associate to the Provost, Director of Recruiting and
Enrollment Services, and Director of Academic Program on Sustainable
Development. From 1993 to 1996, Dr. Spataro was Director of Academic Affairs at
the Universidad del Noroeste in Hermosillo, Sonora, Mexico.
RICHARD C. YONKER, age 52, was appointed Vice President and Chief Financial
Officer of the Company in April 1999. Prior to joining the Company, Mr. Yonker
was Vice President, Chief Financial Officer and Director of InteSys
Technologies, a privately owned contract manufacturing company. Mr. Yonker has
also been Vice President and Chief Financial Officer of Computron Software and
Finance Director for Digital Equipment Corporation.
TODD K. SEVERSON, age 51, was appointed Chief Personnel Officer of the Company
in March 1999. From November 1997 to February 1999, Mr. Severson served as the
Company's Vice President of Human Resources. From April 1996 to July 1997, Mr.
Severson served as Vice President of Human Resources for CILCO, an energy
services company. From February 1993 to March 1996, Mr. Severson was Vice
President of Human Resources for Thorn, EMI PLC, a worldwide music retail and
rental company.
Each executive officer is elected by and serves at the pleasure of the Board of
Directors. There is no family relationship between any of the executive
officers.
7
<PAGE>
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information for the fiscal years
ended June 30, 1999, 1998, and 1997 concerning compensation paid or accrued by
the Company to or on behalf of the Company's Chief Executive Officer and the
Company's other executive officers whose total salary and bonus compensation for
fiscal 1999 exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
FISCAL ---------------------------------- -----------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS GRANTED
- --------------------------------- ------ --------- ------ ---------------
<S> <C> <C> <C> <C>
John T. Golle 1999 $344,800 $ - -
(Chairman and Chief 1998 334,750 - 245,000
Executive Officer) 1997 325,000 - -
Dr. Lucian P. Spataro, Jr. (1) 1999 103,302 - 100,000
(Executive Vice President)
Todd K. Severson (2) 1999 131,300 - 75,000
(Vice President and Chief 1998 72,500 - 25,000
Personnel Officer)
Dr. Phillip E. Geiger 1999 209,583(3) - 50,000(4)
(President and Chief 1998 206,000 - 100,000
Operating Officer) 1997 200,000(5) - 5,000
Tony L. Verbeten (6) 1999 131,334(7) - -
(Chief Financial Officer) 1998 103,750 - 45,000
</TABLE>
(1) Dr. Spataro was named an officer of the Company on March 15, 1999.
(2) Mr. Severson was named Vice President of Human Resources of the Company
in November of 1997.
(3) Dr. Geiger's earnings include $132,333 in severance payments.
(4) Options granted in fiscal 1999 through the reclassification of existing
options. Previously granted Class I options were reclassified to Class II
options with immediate vesting.
(5) Included a guaranteed bonus of $50,000 paid in equal installments as part
of Dr. Geiger's monthly salary.
(6) Mr. Verbeten was named as the Company's CFO in February of 1998.
(7) Mr. Verbeten's earnings include $5,208 in severance payments and $6,334
of paid-out earned vacation time.
EMPLOYMENT AGREEMENTS
JOHN T. GOLLE. On April 19, 1991, the Company entered into an employment
agreement with Mr. Golle which provides that Mr. Golle will receive a base
salary at the annual rate of $120,000 or such higher amount as the Company in
its discretion may determine to be appropriate. The initial term of the
employment agreement continued until June 30, 1994, at which time the agreement
renewed automatically for successive one-year terms. Mr. Golle's base salary for
fiscal 1999 is $344,800 as set by the Compensation Committee. The Company may
terminate Mr. Golle's employment without cause by giving 90 days' written notice
upon which Mr. Golle would be entitled to receive his current base salary for
nine months plus the pro-rata portion of his performance bonus, as described
below, calculated as of a date 30 days after such termination. Under the
agreement, Mr. Golle may not compete with the Company for a
8
<PAGE>
period of two years after the termination of his employment unless
termination is involuntary and effected by the Company without cause.
Effective July 1, 1993, Mr. Golle's employment agreement was amended to
change the terms of the performance bonus. Under the amended employment
agreement, for each fiscal year beginning with 1994, Mr. Golle will receive as a
performance bonus a share of the management bonus pool established by the
Compensation Committee for such year. The amount and the terms of Mr. Golle's
share of each management bonus pool are to be determined by the Compensation
Committee in its discretion.
DR. LUCIAN P. SPATARO, JR. On March 15, 1999, the Company entered into an
employment agreement with Dr. Lucian P. Spataro, Jr. which provides that Dr.
Spataro will receive a base salary at the annual rate of $150,000 or such higher
amount as the Company in its discretion may determine to be appropriate. In
addition, Dr. Spataro will be eligible to receive an annual performance bonus to
be determined by the Board of Directors in annual amounts not to exceed 50% of
base pay based on the achievement of mutually agreed upon individual and
corporate performance objectives. The Company may terminate Dr. Spataro's
employment without cause by giving 30 days' written notice of termination, upon
which Dr. Spataro would be entitled to receive his regular base salary for a
period of six months. Under the employment agreement, Dr. Spataro may not
compete with the Company for a period of one year after termination of the
employment agreement or last severance payment whichever comes later.
TODD K. SEVERSON. On November 3, 1997, the Company entered into an
employment agreement with Todd K. Severson which provides that Mr. Severson will
receive a base salary at the annual rate of $120,000 or such higher amount as
the Company in its discretion may determine to be appropriate. In addition, Mr.
Severson shall be eligible to receive annual performance bonuses to be
determined by the Chief Executive Officer and the Board of Directors in annual
amounts not to exceed $25,000, based on the achievement of mutually agreed upon
individual and corporate performance objectives. The Company may terminate Mr.
Severson's employment without cause by giving 30 days' written notice of
termination, upon which Mr. Severson would be entitled to receive his regular
base salary for a period of twelve months. The Company may terminate Mr.
Severson's employment with cause by giving 30 days' written notice of
termination, upon which Mr. Severson would be entitled to his regular base
salary for a period of six months. Under the agreement, Mr. Severson may not
compete with the Company for a period of one year after termination of his
employment, unless such termination is involuntary and effected by the Company
without cause.
DR. PHILLIP E. GEIGER. Until his resignation which was effective on
November 14, 1998, the Company and Dr. Geiger were parties to an employment
agreement. The employment agreement provided that Dr. Geiger would receive a
base salary at the annual rate of $150,000 or such higher amount as the Company
in its discretion determined to be appropriate, and would be eligible to receive
annual performance bonuses with a guaranteed bonus of $50,000.
Dr. Geiger resigned as an officer and employee of the Company effective
November 14, 1998, and entered into a Separation Agreement with the Company. The
Separation Agreement provides for severance pay in the total amount of $100,000
for the period of November 15, 1998 to May 14, 1999, to be paid in semi-monthly
payments of $8,333.33. Dr. Geiger is also eligible to receive monthly payments
in the amount of $18,666.67 from June through November of 1999, contingent upon
Dr. Geiger's employment status. Furthermore, Dr. Geiger agreed to serve as a
consultant to the Company and was paid a retainer of $94,700 for consulting
services. Dr. Geiger also agreed that he will not compete with the Company until
December 14, 1999.
TONY L. VERBETEN. On February 16, 1998, the Company entered into an
employment agreement with Mr. Verbeten which provides that Mr. Verbeten will
receive a base salary at the annual rate of $125,000 or such higher amount as
the Company in its discretion may determine to be appropriate. In addition, the
employment agreement provides that Mr. Verbeten shall be eligible to receive
annual performance bonuses to be determined by the Chief Executive Officer and
the Board of Directors in annual amounts not to exceed $50,000, based on the
achievement of mutually agreed upon individual and corporate performance
objectives. On March 19, 1999, the Company notified Mr. Verbeten of its
intention to end the existing employment agreement and offered Mr. Verbeten a
Transition Package. Mr. Verbeten worked for the Company until June 15, 1999.
Under the Transition Package, the Company will pay Mr. Verbeten his base salary
through December 14, 1999, and Mr. Verbeten will be eligible for any bonus
amounts allowed under his former employment agreement. Beginning December 14,
1999 and continuing
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<PAGE>
until June 14, 2000, Mr. Verbeten will be eligible for payments in the amount
of his base salary, but those payments will be contingent upon his employment
status.
STOCK OPTIONS
The following table provides information regarding stock options granted to the
Named Executive Officers during fiscal 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants For Option Term (7)
--------------------------------------------------- ----------------------------
Percent of
Total Options
Granted to Exercise
Options Employees Price Per Expiration
Name Granted In Fiscal Year Share (6) Date 5% 10%
- -------------------- ------------ -------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Phillip E. Geiger 50,000(1) 12% $ 4.56 08/18/2007 $143,388 $363,373
Todd K. Severson 25,000(2) 6 4.38 08/10/2008 68,864 174,515
50,000(3) 12 3.38 03/14/2009 106,283 269,342
Lucian P. Spataro 50,000(4) 12 4.75 07/13/2008 149,362 378,514
50,000(5) 12 3.38 03/14/2009 106,283 269,342
</TABLE>
(1) These options were previously granted under the 1992 Plan and were
reclassified from Class I options to Class II options with immediate
vesting on August 11, 1998.
(2) Fifteen thousand (15,000) of these options were granted under the 1992
Plan and are exercisable in annual 20% increments beginning August 11,
2003, provided that the options may become exercisable on an accelerated
schedule if certain performance objectives are met. The remaining 10,000
options were granted under the 1988 Plan and are immediately exercisable.
(3) These options were granted under the 1992 Plan and are exercisable in
annual 20% increments beginning March 15, 2004, provided that the options
may become exercisable on an accelerated schedule if certain performance
objectives are met.
(4) Thirty-five thousand (35,000) of these options were granted under the
1992 Plan and are exercisable in annual 20% increments beginning July 14,
2003, provided that the options may become exercisable on an accelerated
schedule if certain performance objectives are met. The remaining 15,000
options were granted under the 1998 Plan and are exercisable in 33%
increments beginning on the date of grant, July 14, 1998.
(5) These options were granted under the 1992 Plan and are exercisable in
annual 20% increments beginning March 15, 2004, provided that the options
may become exercisable on an accelerated schedule if certain performance
objectives are met.
(6) The exercise price per share of the options listed in the table are not
less than the fair market value of a share of the Company's common stock
on the date of grant, as determined under the 1988 and 1992 Plans.
(7) Potential realizable values shown above represent the potential gains
based upon annual compound stock price appreciation of 5% and 10% from
the date of grant through the full option term. The actual
10
<PAGE>
value realized, if any, on stock option exercises will be dependent upon
overall market conditions and the future performance of the Company and
the Company's common stock. There is no assurance that the actual value
realized will approximate the amounts reflected in this table.
The following table summarizes options exercised during fiscal 1999 and provides
information regarding unexercised options held by the Named Executive Officers
at fiscal year-end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES (1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISABLE OPTIONS OPTIONS AT
AT FISCAL YEAR END FISCAL YEAR END (2) (3)
---------------------------------- ------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ --------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C>
John T. Golle 275,000 465,000 - -
Phillip E. Geiger 210,000(4) - -
Tony L. Verbeten 39,167 33,333 - -
Todd K. Severson 10,000 90,000 - -
Lucian P. Spataro 5,000 95,000 - -
</TABLE>
(1) No options were exercised by the Named Executive Officers during fiscal
1999.
(2) Value is based on a share price of $2.63, which was the closing price for
a share of the Company's common stock on the NASDAQ National Market
System on June 30, 1999, minus the exercise price.
(3) None of the above options, exercisable or unexercisable, were
in-the-money at fiscal year-end.
(4) Pursuant to the termination of Mr. Geiger's employment and the terms of
the Stock Option Agreement, Mr. Geiger's options all expired prior to
fiscal year-end.
11
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Company's common stock from June 30, 1994, to June 30, 1999, with the cumulative
total return on the CRSP Total Return Index for the NASDAQ Stock Market - U.S.
Companies (the "CRSP Index"), and the Company - Determined Peer Group Index (the
"Peer Index") over the same period. The Peer Index, comprised of a
representative sample of publicly-owned companies which are competitive with the
Company, includes the following issuers: Childtime Learning Centers, Nobel
Education Dynamics, Berlitz International, Noodle Kidoodle, Sylvan Learning
Systems, Apollo Group, Computer Learning Centers, DeVry, International Business
Schools, ITT Educational Services, and Education Management Corporation.
[GRAPH]
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1994 1995 1996 1997 1998 1999
------------ ------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
The TesseracT
Group, Inc. $ 100.00 $ 96.10 $ 26.50 $ 34.30 $ 39.20 $ 20.60
CRSP Index 100.00 133.50 171.40 208.40 274.40 393.60
Peer Index 100.00 153.90 365.70 476.10 663.90 557.80
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
During fiscal 1999, Messrs. Mellum, Nazarian, Nelkin, and Karon, and Ms. Taylor
Thomas served on the Compensation Committee and/or the Option Committee. Mr.
Karon is no longer a member of either committee.
Faegre & Benson, a law firm in which Mr. Mellum is a partner, provides the
Company with legal services.
The Company believes that the above-referenced transactions were on terms no
less favorable to the Company than those obtainable at arms-length transactions
with unaffiliated third parties.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Between March 31, 1999 and June 9, 1999, Pioneer Venture Fund, L.L.C., of which
Benjamin Nazarian is a managing member, purchased the Notes described later in
this Proxy Statement pursuant to the terms of its Securities Purchase Agreement
with the Company. In connection with this transaction, Pioneer also
12
<PAGE>
received a warrant to purchase up to 150,000 shares of the Company's common
stock on March 31, 1999, and an additional warrant to purchase up to 250,000
shares of the Company's common stock on October 15, 1999. Both of these
warrants are exercisable at an initial price of $3.00 per share, subject to
adjustment, and expire on March 31, 2004 and September 30, 2004,
respectively. The second warrant was issued in connection with an extension
of the Maturity Date of the Notes from September 30, 1999 to March 31, 1999.
The Company believes that the above-referenced transactions were on terms no
less favorable to the Company than those obtainable in arms-length transactions
with unaffiliated third parties.
PROPOSAL NUMBER TWO
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON
STOCK PURSUANT TO THE TERMS OF THE
SECURITIES PURCHASE AGREEMENT
INTRODUCTION
On March 31, 1999, the Company entered into a Securities Purchase Agreement (the
"Securities Purchase Agreement") with Pioneer Venture Fund, L.L.C. ("Pioneer").
Under the Securities Purchase Agreement, the Company is required to use its best
efforts to obtain shareholder approval for the issuance of all shares of the
Company's common stock that may be issued upon conversion of the 12% Convertible
Notes (the "Notes") received by Pioneer pursuant to the Securities Purchase
Agreement to the extent that such approval is necessary to comply with the rules
of the Nasdaq National Market. The Company must use its best efforts to obtain
this approval by December 31, 1999 (the "Approval Deadline"). The Notes were
issued to Pioneer to evidence the Company's $5,000,000 in borrowings from
Pioneer between March 31, 1999 and June 9, 1999.
The Marketplace Rules (the "Marketplace Rules") of the Nasdaq National Market,
on which the Company's common stock is listed, require shareholder approval for
the issuance of shares of common stock upon conversion of the Notes in the event
that the shares issued in such transaction are equal to 20% or more of the
common stock or 20% or more of the voting power outstanding immediately prior to
transaction and the shares are issued for less than the greater of book or
market value of the Company's common stock. As of September 30, 1999, the
Marketplace Rules would require shareholder approval for the issuance of more
than 1,916,066 shares of common stock at less than the greater of book or market
value.
Benjamin Nazarian, a director of the Company, is a managing member of Pioneer.
Mr. Nazarian did not participate in any discussions or votes of the Company's
Board of Directors with respect to the transactions relating to the Securities
Purchase Agreement or the preparation or recommendation of this proposal.
PROPOSAL
Pursuant to the terms of the Securities Purchase Agreement, advance shareholder
approval is being sought for any issuance or series of issuances of common stock
upon conversion of the Notes that requires such approval to comply with the
Marketplace Rules. Shareholder approval is not being sought and will not be
sought for any issuance or series of issuances of common stock upon conversion
of the Notes that does not require such approval to comply with the Marketplace
Rules
13
<PAGE>
CONSEQUENCES OF DISAPPROVAL
Under the Securities Purchase Agreement, in the event that this proposal is not
approved by the Approval Deadline, the rate of interest applicable to the Notes
will increase from 12% to 18% per annum and the holders of the Notes will have
the right to designate two additional directors for appointment to the Company's
Board of Directors.
TERMS OF THE NOTES
Under the Securities Purchase Agreement, the Company issued Notes to Pioneer
with the following principal amounts and on the following dates:
- $798,822.65 Note dated March 31, 1999;
- $1,500,000.00 Note dated April 16, 1999;
- $1,000,000.00 Note dated May 17, 1999; and
- $1,700,000.00 Note dated June 9, 1999.
The Notes currently bear interest at 12% per annum. The principal amount of the
Notes, together with all accrued but unpaid interest, is due and payable on
March 31, 2000 (the "Maturity Date"). In the event that the Notes are not paid
in full within 15 days after the Maturity Date, all or any part of the unpaid
principal of the Notes and accrued but unpaid interest thereon will become
convertible, at the option of Pioneer, into shares of the Company's common
stock.
Once convertible, the Notes may be converted at the Conversion Price (as defined
below); provided that until this proposal is approved, no more than 1,500,000
shares of common stock will be issued upon conversion of the Notes.
The Conversion Price of the Notes is the lesser of $1.00 and the lowest sale
price for the Company's common stock on the Nasdaq National Market during the 30
trading days preceding the conversion. The minimum Conversion Price is the par
value of the Company's common stock, which is $.01 per share. In addition, the
Conversion Price is subject to adjustment upon the occurrence of certain events,
including stock splits, stock dividends and similar changes in the
capitalization of the Company, the issuance of rights or warrants to all holders
of common stock and certain other distributions by the Company to all common
stockholders. The purpose of these adjustments is so that the Conversion Price
will prevent the value of conversion to Pioneer from being reduced as the result
of certain actions by the Company.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors unanimously recommends, with the exception of Mr.
Nazarian who did not participate in the discussions relating to or the vote on
this recommendation, a vote for the proposal to approve the future issuance of
shares of common stock pursuant to the terms of the Securities Purchase
Agreement to prevent an increase in the interest rate on the Notes from 12% to
18% and the addition of two nominees of Pioneer to the Board. The Company is
pursuing various sources of financing for repayment of, and will use its best
efforts to repay, the Notes to prevent the conversion of the Notes into common
stock even though such conversion is being approved hereby.
PROPOSAL NUMBER THREE
APPOINTMENT OF AUDITORS
The firm of PricewaterhouseCoopers LLP, independent public accountants, was
appointed the auditors for the Company in May 1999. Upon the recommendation of
the Audit Committee, the Board of Directors has again selected
PricewaterhouseCoopers LLC to serve as the Company's independent auditors for
the fiscal year ending June 30, 2000, subject to ratification by the
shareholders. While it is not required to do so, the Board of Directors is
submitting the selection of that firm for ratification in order to ascertain the
view of the shareholders. If the selection is not ratified, the Board of
Directors will reconsider its selection.
14
<PAGE>
A representative of PricewaterhouseCoopers LLC will be present at the Meeting
and will be afforded an opportunity to make a statement if such representative
so desires and will be available to respond to appropriate questions during the
Meeting.
SHAREHOLDER PROPOSALS AND OTHER MATTERS
The Annual Report to Shareholders of the Company for the fiscal year ended June
30, 1999, including financial statements, is being mailed with this Proxy
Statement.
Shareholder proposals intended to be presented at the 2000 annual meeting of
shareholders that are requested to be included in the proxy statement for that
meeting must be received by the Company at its principal executive office no
later than June 8, 2000. Any other shareholder proposals intended to be
presented at the 2000 annual meeting of shareholders must be received by the
Company at its principal executive office no later than August 22, 2000.
As of the date of this Proxy Statement, the Board of Directors knows of no
matters that will be presented for consideration at the Meeting other than those
referred to herein. If any other matters do properly come before the Meeting
calling for a vote of shareholders, it is intended that the shares represented
by the proxies solicited by the Board of Directors will be voted by the persons
named therein in accordance with their best judgement.
By order of the Board of Directors,
/s/ Gale R. Mellum
Gale R. Mellum
Secretary
October 18, 1999
15
<PAGE>
THE TESSERACT GROUP, INC.
ANNUAL MEETING OF SHAREHOLDERS
THURSDAY, NOVEMBER 18, 1999
3:30 P.M.
FLETCHER HEIGHTS CHARTER SCHOOL
7877 WEST HILLCREST BOULEVARD
PEORIA, ARIZONA 85345
THE TESSERACT GROUP, INC.
9977 NORTH 90TH STREET, SUITE 180
SCOTTSDALE, ARIZONA 85258 PROXY
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING
ON NOVEMBER 18, 1999.
The shares of stock you hold in your account or in a dividend reinvestment
account will be voted as you specify below.
IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED "FOR" ITEMS 1, 2 AND 3.
By signing the proxy, you revoke all prior proxies and appoint John T. Golle
and Richard C. Yonker, and each of them, with full power of substitution, to
vote your shares on the matters shown on the reverse side and any other
matters which may come before the Annual Meeting and all adjournments.
SEE REVERSE FOR VOTING INSTRUCTIONS.
<PAGE>
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to The TesseracT Group, Inc., c/o Shareowner
Services-TM-, P.O. Box 64873, St. Paul, MN 55164-0873.
| PLEASE DETACH HERE |
v v
<TABLE>
<S><C>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3.
1. Election of directors: 01 Benjamin Nazarian 02 Harold Neikin / / Vote FOR / / Vote WITHHELD
all nominees from all nominees
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, ------------------------------------------
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) ------------------------------------------
2. APPROVAL OF THE FUTURE ISSUANCE OF SHARES OF COMMON
STOCK PURSUANT TO THE TERMS OF THE SECURITIES PURCHASE
AGREEMENT BETWEEN THE COMPANY AND PIONEER VENTURE
FUND, LLC. DATED MARCH 31, 1999, AS DESCRIBED MORE FULLY IN THE
ACCOMPANYING PROXY STATEMENT. / / For / / Against / / Abstain
3. RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS
LLP AS INDEPENDENT ACCOUNTANTS OF THE COMPANY FOR THE 2000 FISCAL YEAR. / / For / / Against / / Abstain
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTOR OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR EACH PROPOSAL
Address change? Mark Box / / Indicate changes below: Date
------------------------------
------------------------------------------
------------------------------------------
Signature(s) in Box
Please sign exactly as your name(s) appear on Proxy. If
held in joint tenancy, as persons must sign. Trustees,
administrators etc., should include title and authority.
Corporations should provide full name of corporation and
title of authorized officer signing the proxy.
</TABLE>
