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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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.
Minnesota 41-1581297
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
9977 North 90th Street
Suite 180
Scottsdale, Arizona 85258
(Address of principal executive offices) (Zip Code)
(480) 767-2300 (Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
As of September 30, 1999, there were issued and outstanding 9,780,331 shares of
Common Stock, Par value $.01 per share.
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THE TESSERACT GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
Condensed consolidated balance sheets as of
September 30, 1999 (Unaudited) and June 30, 1999 3
Condensed consolidated statements of operations for 4
the three months ended September 30, 1999 and 1998 (Unaudited)
Condensed consolidated statements of cash flows for the
three months ended September 30, 1999 and 1998 (Unaudited) 5
Notes to condensed consolidated financial statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
PART II. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
Signatures 17
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) September 30, June 30,
1999 1999
ASSETS (Unaudited)
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,196 $ 2,545
Settlement receivable -- 650
Accounts receivable, net 3,300 1,958
Other current assets 2,034 2,228
-------- --------
TOTAL CURRENT ASSETS 7,530 7,381
INTANGIBLE ASSETS, NET 17,107 17,291
FURNITURE, FIXTURES AND EQUIPMENT, NET 35,780 37,002
OTHER ASSETS 1,378 1,550
-------- --------
$ 61,795 $ 63,224
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 5,999 $ 5,999
Accounts payable 3,106 1,999
Other current liabilities 31,667 9,861
-------- --------
TOTAL CURRENT LIABILITIES 40,772 17,859
LONG-TERM OBLIGATIONS 913 21,615
OTHER 401 990
-------- --------
42,086 40,464
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
at September 30, 1999 9,780,331 and
9,780,331 at June 30, 1999 98 98
Additional paid-in capital 58,711 58,371
Accumulated deficit (39,100) (35,709)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 19,709 22,760
$ 61,795 $ 63,224
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30,
1999 1998
------- -------
<S> <C> <C>
REVENUE:
School tuition and other $ 9,954 $ 6,905
PROGRAM RELATED COSTS 6,088 3,977
------- -------
PROGRAM OPERATING PROFIT 3,866 2,928
OPERATING EXPENSES 5,839 5,349
------- -------
LOSS FROM OPERATIONS BEFORE DEPRECIATION AND AMORTIZATION
AND INCOME TAX EXPENSE (1,973) (2,421)
DEPRECIATION AND AMORTIZATION (855) (619)
OTHER INCOME (EXPENSE) (563) 99
------- -------
LOSS BEFORE INCOME TAX EXPENSE (3,391) (2,941)
INCOME TAX EXPENSE -- --
------- -------
NET LOSS $(3,391) $(2,941)
NET LOSS PER COMMON SHARE
(Basic and diluted) $ (0.35) $ (0.31)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(Basic and diluted) 9,780 9,577
</TABLE>
See notes to condensed consolidated financial statements.
4
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THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(IN THOUSANDS) SEPTEMBER 30,
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(3,391) $(2,941)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 855 619
Changes in operating assets and liabilities 3,659 2,744
------- -------
Net cash provided by operating activities 1,123 422
------- -------
INVESTING ACTIVITIES
Additions to property and equipment (1,749) (6,896)
Cash of Preschool Services, Inc. -- 1,137
------- -------
Net cash used in investing activities (1,749) (5,759)
------- -------
FINANCING ACTIVITIES
Proceeds from exercise of stock options -- 30
Proceeds from financing transactions 695 5,247
Repayment of long-term debt (418) (543)
------- -------
Net cash provided by financing activities 277 4,734
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (349) (603)
Cash and cash equivalents at beginning of period 2,545 5,543
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,196 $ 4,940
======= =======
</TABLE>
SUPPLEMENTAL CASH FLOW DISCLOSURE:
<TABLE>
<CAPTION>
Non-Cash transaction 1999 1998
------- --------
<S> <C> <C>
Furniture, fixtures and equipment written off the closed school reserve $1,391 $ --
Loss on sale of closed school charged to the closed school reserve $ 250 $ --
Issuance of Warrants $ 340 $ --
</TABLE>
See notes to condensed consolidated financial statements.
5
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THE TESSERACT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited and condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended September 30, 1999, are not necessarily indicative of the results that may
be expected for the year ending June 30, 2000. For further information, refer to
the financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1999.
2. ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
Due to implied control of Preschool Services, Inc. ("PSI"), a Hawaii non-profit
corporation, the accounts of PSI have been combined in the Company's financial
statements as of and for the year ended June 30, 1999. The accounts of PSI for
the period from July 1 through September 30, 1999 were not included in the
condensed consolidated financial statements due to the establishment of an
independent board of directors by PSI resulting in the lack of implied control
by the Company.
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.
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REVENUE RECOGNITION
Revenue is recognized as services are performed. During the three months ended
September 30, 1999, the Company operated schools located in Texas and Washington
D.C., under management contracts with two 501(c)(3) organizations. Revenue is
recognized for schools under management contracts as management fees are earned
and for reimbursable costs as incurred by the Company for the operations of the
schools as defined under the terms of the contracts. Total revenue recognized
under the management contracts totaled $852,000 for the three months ended
September 30, 1999.
FINANCIAL STATEMENT RECLASSIFICATIONS
Certain prior period 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.
3. CONCENTRATION OF CREDIT RISK
The Company receives a significant amount of charter school revenue from state
and federal agencies. As of and for the three months ended September 30, 1999,
approximately 26% and 25% of the Company's accounts receivable and revenue,
respectively, were related to charter funds from state and federal agencies. A
significant amount of the funds received from the State of Arizona relate to
funding for transportation of charter school students. Effective for the
Company's fiscal year beginning July 1, 2000, the State of Arizona funding for
transportation of charter school students will be significantly reduced. If the
Company is unable to secure alternative, additional funding from the State of
Arizona for charter school services, the impact of the reduction in funding in
transportation services could have a material, adverse impact on the Company's
financial position and results of operations. Although management is currently
in negotiations with the State of Arizona to resolve this issue, there can be no
assurance that these negotiations will be successful or that funds will be
obtained sufficient to offset the reduction in transportation funding. Charter
school transportation revenue totaled approximately $760,000 for the three
months ended September 30, 1999.
4. LONG TERM OBLIGATIONS
During 1999 and 1998, the Company entered into certain sale-leaseback
arrangements related to four properties. Under the terms of these agreements,
the Company is required to prepay on September 1 of each year, the next 12
months lease payments, estimated property taxes and insurance into a jointly
held escrow account. The account is jointly
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controlled by the lender and the Company. Each month, funds are to be
transferred from the escrow account to pay rent, property taxes, or insurance as
applicable.
The amount of required annual prepayment due at September 1, 1999 totaled
$2,754,000. The Company has not complied with the prepayment requirement.
Accordingly, approximately $21 Million of long-term obligations have been
reclassified as a current liability in the accompanying condensed consolidated
financial statements. The Company is paying rent of $200,000 on a monthly basis
relative to these obligations. Since the Company is making monthly payments
instead of the annual prepayment, all related and cross-collateralized
obligations have been reflected as a current liability in the accompanying
condensed consolidated financial statements. If the lender proceeds with default
remedies, and the Company is unable to meet the prepayment obligation and fund
any additional costs necessary to cure the default, the four related schools may
be closed. Revenue from the schools totaled $1,755,000 for the three months
ended September 30, 1999.
5. COMMITMENTS AND CONTINGENCIES
TITLE IV PROGRAMS FUNDING:
Participation in the U.S. Department of Education's Title IV programs through
the Company's wholly-owned subsidiary, Academy of Business College ("ABC"), is
subject to certain financial capability requirements. Due to operating losses
incurred by ABC, the financial capability requirements were not met at June 30,
1999. As a result, the Company may be required to post a letter of credit or
meet certain cash deposit requirements for at least one-half of the Title IV
funds received by ABC during fiscal 1999, which amount to approximately
$1,709,000. If the Company is unable to obtain the letter of credit or place the
required funds on deposit, ABC's participation in Title IV programs could be
suspended. Since a majority of students attending ABC participate in the Title
IV program, suspension of these funds without alternative sources available
could have a material adverse impact on ABC's financial position and the
Company's consolidated financial position and results of operations. Tuition
revenue at ABC totaled $639,000 for the three months ended September 30, 1999.
DEVELOPMENT AGREEMENT
During 1999, the Company entered into build-to-suit lease and development
agreements with a developer for the construction of two charter schools in
Arizona and one charter school in Washington D.C. As of September 30, 1999, the
Company has advanced approximately $4,500,000 related to those projects, which
is reflected in the accompanying condensed, consolidated financial statements as
construction in progress or leasehold improvements. Two of the schools are in
operation as of September 30, 1999. Due to the inability of the developer to
obtain financing, one of the Arizona schools has not been completed, further
construction has been suspended and certain commitments have not been paid by
the developer.
As of September 30, 1999, existing commitments related to all three schools and
estimated costs to complete the unopened Arizona charter school totaled
approximately $7,800,000. Management is in negotiations with the developer to
finalize the remaining school and resolve certain issues related to all three of
the schools. Although management believes that negotiations with the developer
will result in the completion of the unfinished school and resolution of issues
at all of these schools, there can be no assurance that these
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negotiations will be successful. Accordingly, the Company may have to obtain
necessary funding for completion. In that event, if the Company is unable to
obtain sufficient capital to meet existing commitments and funds necessary for
completion, the remaining school would remain unopened and the $4,500,000
advanced by the Company could be at risk.
Several contractors have filed mechanics liens against the Arizona school
properties. In addition, a subcontractor has filed suit for foreclosure on its
mechanics lien. Management expects the remaining lien-holders will join in the
suit. As of October 31, 1999 preliminary notices for mechanics liens totaled
$3,972,000.
MANAGEMENT CONTRACTS
In fiscal 1999, the Company entered into management contracts with two 501(c)(3)
organizations for the management and operation of charter schools in Texas and
Washington D.C. Under the terms of the agreements, the Company will receive a
management fee of 12.5% of each school's charter revenue. Funds required for
operations are either advanced or reimbursed to the Company and distributed by
the Company to cover related operational costs. Under the terms of the
agreements, if the schools incur operating losses, the Company incurs such
losses only to the extent costs exceed approved budgeted amounts. At September
30, 1999, management does not expect to incur material losses related to these
management agreements.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
Management does not expect the impact of recently issued accounting standards
that are not yet effective to have a material impact on the Company's financial
position or results from operations.
6. SEGMENT INFORMATION
Information by reportable segment for the three months ended September 30, 1999
is as follows: (in thousands)
<TABLE>
<CAPTION>
Preschool Charter Private College Corporate
<S> <C> <C> <C> <C> <C>
Revenue $ 4,188 $ 3,372 $ 1,755 $ 639 $ --
------- ------- ------- ------- --------
Income
before taxes $ 45 $ 310 $(1,032) $ (271) $(2,443)
------- ------- ------- ------- -------
</TABLE>
7. RELATED PARTY TRANSACTIONS
A member of the Board of Directors and shareholder provides legal services to
the Company. Total amounts incurred for these related party services totaled
$35,000 for the three months ended September 30, 1999. The Company currently has
a $5,000,000 line of credit from a related party. Total borrowings outstanding
at September 30, 1999 totaled $4,999,000. When the line of credit became due and
payable on September 30, 1999, management exercised its option to extend the due
date until March 30, 2000 with the issuance of
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a warrant for the purchase of 250,000 shares of the Company's common stock at
$3.00 per share. Interest expense of $340,000, calculated using the Black Sholes
model, will be amortized over the extended due date period. At March 31, 2000,
if unpaid, the related party holder of the note may elect to convert the debt
into the Company's common stock at $1.00 per share for each dollar then owed.
8. GOING CONCERN MATTERS
The accompanying condensed consolidated 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 or business. As shown in the
financial statements, the Company incurred a net loss of $3,391,000 for the
three months ended September 30, 1999 and had negative working capital of
$33,242,000 and an accumulated deficit of $39,100,000. 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 condensed consolidated
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 and
believes that if it can finalize financing alternatives along with achieving
projected improvement in operating results for the remainder of the fiscal year,
the Company will generate sufficient resources to permit uninterrupted
performance of its operating obligations as currently structured and
anticipated. There can be no assurance, however, that the financing
alternatives will be available to the Company on acceptable terms or when
necessary.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATION
Revenue for the three months ended September 30, 1999 increased 44% to
$9,954,000 as compared to $6,905,000 for the same period in the prior year. The
increase in revenue over the prior year is due primarily to an increase in
student enrollment at TesseracT schools. Total students served in TesseracT
schools increased from 5,200 to 6,500 as of September 30, 1998 and 1999,
respectively.
Program related costs totaled $6,088,000 and $3,977,000, or 61% and 58% of
revenue for the three months ended September 30, 1999 and 1998, respectively.
The 3% increase in program related costs as a percentage of revenue is due
primarily to start-up costs related to the opening of four new charter schools
and the expansion of the Company's Scottsdale, Arizona private school.
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Operating expenses totaled $5,839,000 and $5,349,000, or 59% and 77% of revenue
for the three months ended September 30, 1999 and 1998, respectively. The
increase in operating expenses in total dollars and a decrease as a percentage
of related sales is primarily due to disproportionately high costs in the prior
year related to expenses associated with the acquisitions of Sunrise and ABC.
The provision for depreciation and amortization increased to $855,000 as
compared to $619,000 for the three months ended September 30, 1999 and 1998,
respectively. The increase is due primarily to capital lease treatment and
related interest charge for four of the Company's private school sites, and an
overall increase in the Company's furniture, fixtures and equipment from
$26,254,000 at September 30, 1998 to $35,780,000 at September 30, 1999.
Other expenses totaled $563,000 for the three months ended September 30, 1999 as
compared to other income of $99,000 for the same period in the prior year. The
change is due primarily to an increase in interest expense for property held
under capital leases and an increase in debt as compared to the previous year's
comparable quarter.
The Company reported a net loss of $3,391,000 or $0.35 per share as compared to
$2,941,000 or $0.31 per share for the three months ended September 30, 1999 and
1998, respectively. The increased net loss is due to growth related start-up
costs as previously described, additional interest charges and additional
administrative costs necessary to support this growth.
CAPITAL RESOURCES AND LIQUIDITY
During the three months ended September 30, 1999, net cash provided by operating
activities totaled $1,123,000 primarily due to changes in operating assets and
liabilities, offset by the net loss incurred during the three-month period.
Net cash used by investing activities totaled $1,749,000 for the three months
ended September 30, 1999. The use of cash was primarily related to the
acquisition of furniture, fixtures and equipment related to opening new schools
in the current quarter.
Net cash provided from financing transactions for the three months ended
September 30, 1999 totaled $277,000.
TITLE IV FUNDING
As discussed in Note 5 to the condensed consolidated financial statements, the
financial capability tests as required under Title IV of the U.S. Department of
Education have not been met by ABC, a wholly-owned subsidiary of the Company. As
a result, it appears likely that the Company will be required to post a letter
of credit or equivalent of approximately $850,000 which represents one-half of
Title IV funds received by ABC during fiscal 1999. Management is pursuing
various options to obtain the letter of credit or equivalent deposit as
required. However, there can be no assurance that such
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arrangements will be finalized or obtained prior to the date required. In the
event the Company is unable to comply with the requirement, Title IV funds would
be unavailable for ABC students. Since the majority of students attending ABC as
of September 30, 1999 participate in the Title IV program, non compliance would
have a material, adverse impact on ABC's financial position and results from
operations.
CHARTER SCHOOL REVENUE
The Company receives a significant amount of charter school revenues from state
and federal agencies. As of and for the three months ended September 30, 1999,
approximately 26% and 25% of the Company's accounts receivable and revenue,
respectively, were related to charter funds from state and federal agencies. A
significant amount of the funds received from the State of Arizona relate to
funding for transportation of charter school students. Effective for the
Company's fiscal year beginning July 1, 2000, the State of Arizona funding for
transportation of charter school students will be significantly reduced. If the
Company is unable to secure alternative, additional funding from the State of
Arizona for charter school services, the impact of the reduction in funding in
transportation services could have a material, adverse impact on the Company's
financial position and results of operations. Although management is currently
in negotiations with the State of Arizona to resolve this issue, there can be no
assurance that these negotiations will be successful or that the Company will be
able to obtain funds sufficient to offset the reduction in transportation
funding. Charter school transportation revenue totaled approximately $760,000
for the three months ended September 30, 1999.
DEBT COMPLIANCE
During 1999 and 1998, the Company entered into certain sale-leaseback
arrangements related to four properties. Under the terms of these agreements,
the Company is required to prepay on September 1 of each year, the next 12
months lease payments, estimated property taxes and insurance into an escrow
account jointly controlled by the lender and the Company. Each month, with both
parties approval, funds are transferred from the escrow account to pay rent,
property taxes, or insurance as applicable.
At September 1, 1999, the Company failed to make a required $2,754,000
prepayment resulting in default under the terms of the agreement. Accordingly,
all related and cross-collateralized obligations totaling approximately $21
million has been reflected as a current liability in the accompanying condensed
consolidated financial statements. The Company is paying rent of $200,000
related to these obligations on a monthly basis. If the lender proceeds with
default remedies, and the Company is unable to obtain financing necessary to
meet the prepayment obligation and fund any additional costs necessary to cure
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the default, the four related schools may be closed. Revenue from
these schools totaled $1,755,000 for the three months ended September 30, 1999.
Management is negotiating to cure the default related to these schools with a
restructuring of the agreements. There can be no assurance that the Company will
be able to finalize this restructuring plan.
The Company currently has a $5,000,000 line of credit from a director. Total
borrowings outstanding at September 30, 1999 totaled $4,999,000. The line of
credit was due and payable on September 30, 1999. The Company exercised its
option to extend the due date until March 31, 2000. In connection with this
extension the Company issued a warrant for the purchase of 250,000 shares of the
Company's common stock at $3.00 per share. If the line of credit remains unpaid
at the holder of the note may elect to convert the debt into the Company's
common stock at $1.00 per share for each dollar then owed.
DEVELOPMENT AGREEMENT
During 1999, the Company entered into three build-to-suit lease and development
agreements with a developer for the construction of two charter schools in
Arizona and one charter school in Washington D.C. As of September 30, 1999, the
Company has advanced approximately $4,500,000 related to those projects, which
is reflected in the accompanying condensed consolidated financial statements in
section 1 herein as construction in progress or leasehold improvements. Two of
the schools are in operation as of September 30, 1999. Due to inability of the
developer to obtain financing, one of the Arizona schools has not been
completed, further construction has been suspended and certain commitments have
not been paid by the developer.
As of September 30, 1999, existing commitments related to all three schools and
estimated costs to complete the unopened Arizona charter school totaled
approximately $7,800,000.
Management is in negotiations with the developer to finalize the remaining
school and resolve certain issues related to all three of the schools. Although
management believes that negotiations with the developer will result in the
completion and resolution of issues at both of these schools, there can be no
assurance that these negotiations will be successful. Accordingly, the Company
may have to obtain necessary funding for completion. In that event, if the
Company is unable to obtain sufficient capital to meet existing commitments for
completion, the remaining school would remain unopened and the $4,500,000
advanced by the Company could be at risk.
Several contractors have filed mechanics liens against the Arizona school
properties. In addition a subcontractor has filed suit for foreclosure on its
mechanics lien. Management expects the remaining lienholders will join in the
suit. As of October 31, 1999 preliminary notices for mechanics liens totaled
$3,972,000.
GOING CONCERN ISSUE:
The accompanying condensed consolidated financial statements included in Section
1 herein have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
or business. The Company
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incurred a net loss of $3,391,000 for the three months ended September 30, 1999,
had negative working capital of $33,242,000, and an accumulated deficit of
$39,100,000. 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.
Management believes that if it can finalize some of the financing alternatives
that it is pursuing, 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 would be
available to the Company on acceptable terms or when necessary.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Report on Form 10-Q 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.
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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 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's 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
$100,000 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 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 three months ending September 30, 1999, 25% 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
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<PAGE> 16
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 it controls. In the event the Company has not
completed the system enhancement to its IT systems prior to January 1, 2000, it
will use contingent manual systems as required. Due to the AA agreement,
management believes it would be able to respond effectively. The contingency
plan for material non-IT systems that the Company controls 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation of the Company, as amended.(1)
3.2 By-Laws of the Company.(2)
10 Warrant issued to Pioneer Venture Fund, LLC. dated October 19, 1999
27 Financial Data Schedule (EDGAR) version only).
- --------
(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 by reference to Exhibit 3.3 to the Company's Form S-18
Registration Statement (Registration Number 33-39481-C).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-months ended September 30,
1999.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1999 THE TESSERACT GROUP, INC.
BY: /s/ Martha Taylor Thomas
------------------------------
Martha T. Thomas, Interim
Chief Executive Officer
Date: November 12, 1999
BY: /s/ Richard C. Yonker
------------------------------
Richard C. Yonker, Vice President
Chief Financial Officer
17
<PAGE> 1
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR
DISPOSITION MAY BE EFFECTED WITHOUT (I) AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO, (II) AN OPINION OF
COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (III) RECEIPT
OF A NO-ACTION LETTER(S) FROM THE APPROPRIATE GOVERNMENTAL
AUTHORITY(IES), OR (IV) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
THE TESSERACT GROUP, INC.
WARRANT TO PURCHASE 250,000 SHARES
OF COMMON STOCK (this "WARRANT")
Warrant No. 2
THE TESSERACT GROUP, INC., a Minnesota corporation (the "COMPANY"),
hereby certifies that, for value received, PIONEER VENTURE FUND, L.L.C., a
Delaware limited liability company ("PIONEER"), or registered assigns, is the
registered holder of a warrant (the "WARRANT") to subscribe for and purchase
250,000 shares of the fully paid and nonassessable Common Stock (as adjusted
pursuant to Section 4 hereof, the "WARRANT SHARES") of the Company, at the price
of $3.00 per share (such price and such other price as shall result, from time
to time, from the adjustments specified in Section 4 hereof is herein referred
to as the "WARRANT PRICE"), subject to the provisions and upon the terms and
conditions hereinafter set forth. As used herein, (a) the term "COMMON STOCK"
shall mean the Company's presently authorized Common Stock, par value $.01 per
share, and any stock into or for which such Common Stock may hereafter be
converted or exchanged in a transaction described in paragraph (c) of Section
4.2, (b) the term "DATE OF GRANT" shall mean October 14, 1999, and (c) the term
"OTHER WARRANTS" shall mean any warrant issued upon transfer or partial exercise
of this Warrant. The term "WARRANT" as used herein shall be deemed to include
Other Warrants unless the context hereof or thereof clearly requires otherwise.
1. Term. The purchase right represented by this Warrant is
exercisable, in whole or in part, at any time and from time to time from the
Date of Grant through and including the close of business on September 30, 2004
(the "EXPIRATION DATE").
<PAGE> 2
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, by
the surrender of this Warrant (with the notice of exercise form attached hereto
as Exhibit A duly executed) at the principal office of the Company, along with
(i) the delivery of cash, or a certified or official bank check in the amount of
such Warrant Price, (ii) by an instruction to the Company to withhold a number
of Warrant Shares then issuable upon exercise of the particular Warrant pursuant
to Section 10.2 below (the "Net Exercise Option"), (iii) the surrender to the
Company of Notes (as defined in Section 22) in principal amount plus accrued
interest equal to the applicable Warrant Price, or (iv) the surrender to the
Company of shares of Common Stock previously acquired by the Holder with an
aggregate Fair Market Value (as defined in Section 4(h)) equal to such Warrant
Price, or any combination of foregoing. In the event of any withholding of
Warrant Shares or surrender of Common Stock pursuant to clause (ii) or (iv)
above where the number of shares whose Fair Market Value is equal to the Warrant
Price is not a whole number, the number of shares withheld by or surrendered to
the Company shall be rounded down to the nearest whole share. The person or
persons in whose name(s) any certificate(s) representing shares of Common Stock
shall be issuable upon exercise of this Warrant shall be deemed to have become
the holder(s) of record of, and shall be treated for all purposes as the record
holder(s) of, the shares represented thereby (and such shares shall be deemed to
have been issued) immediately prior to the close of business on the date or
dates upon which this Warrant is exercised. In the event of any exercise of the
rights represented by this Warrant, certificates for the shares of stock so
purchased shall be delivered to the holder hereof as soon as possible and in any
event within thirty (30) days after such exercise and, unless this Warrant has
been fully exercised (including without limitation, exercise pursuant to Section
2(b) below), a new Warrant representing the portion of the Warrant Shares, if
any, with respect to which this Warrant shall not then have been exercised shall
also be issued to the holder hereof as soon as possible and in any event within
such thirty (30)-day period.
3. Stock Fully Paid; Reservation of Shares. All Warrant Shares that may
be issued upon the exercise of the rights represented by this Warrant will, upon
issuance pursuant to the terms and conditions herein, be fully paid and
nonassessable, and free from all taxes (other than any taxes determined with
respect to, or based upon, the income of the person to whom such shares are
issued), liens and charges (other than liens or charges created by actions of
the holder of this Warrant or the person to whom such shares are issued), and
preemptive rights with respect to the issue thereof. The Company shall pay all
transfer taxes, if any, attributable to the issuance of the Warrant Shares upon
the exercise of this Warrant. During the period within which the rights
represented by this Warrant may be exercised, the Company will at all times have
authorized, and reserved for the purpose of the issue upon exercise of the
purchase rights evidenced by this Warrant, a sufficient number of shares of its
Common Stock to provide for the exercise of the rights represented by this
Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and
kind of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
a. Reclassification or Merger. In case of any
reclassification, change or conversion of securities of the class issuable upon
exercise of this Warrant (other than a change in
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<PAGE> 3
par value, or from par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination), or in case of any merger of the
Company with or into another corporation (other than a merger with another
corporation in which the Company is the acquiring and the surviving corporation
and which does not result in any reclassification or change of outstanding
securities issuable upon exercise of this Warrant), or in case of any sale of
all or substantially all of the assets of the Company, the Company, or such
successor or purchasing corporation, as the case may be, shall duly execute and
deliver to the holder of this Warrant a new Warrant (in form and substance
satisfactory to the holder of this Warrant), so that the holder of this Warrant
shall have the right to receive, at a total purchase price not to exceed that
payable upon the exercise of the unexercised portion of this Warrant, and in
lieu of the shares of Common Stock theretofore issuable upon exercise of this
Warrant, the kind and amount of shares of stock, other securities, money and
property receivable upon such reclassification, change or merger by a holder of
the number of shares of Common Stock then purchasable under this Warrant. Such
new Warrant shall provide for adjustments that shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 4. The
provisions of this subparagraph (a) shall similarly apply to successive
reclassifications, changes, mergers and transfers.
b. Subdivision or Combination of Shares. If the Company at any
time while this Warrant remains outstanding and unexpired shall subdivide or
combine its outstanding shares of Common Stock, the Warrant Price shall be
proportionately decreased in the case of a subdivision or increased in the case
of a combination, effective at the close of business on the date the subdivision
or combination becomes effective.
c. Stock Dividends. If the Company at any time while this
Warrant is outstanding and unexpired shall pay a dividend with respect to Common
Stock payable in Common Stock, then the Warrant Price shall be adjusted, from
and after the date of determination of stockholders entitled to receive such
dividend or distribution, to that price determined by multiplying the Warrant
Price in effect immediately prior to such date of determination by a fraction
(i) the numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend, and (ii) the denominator of
which shall be the total number of shares of Common Stock outstanding
immediately after such dividend. In the event such dividend is not so paid, the
Warrant Price shall again be adjusted to the Warrant Price that would then be in
effect if the holders of Common Stock to receive such dividend had not been so
determined, but such subsequent adjustment shall not affect the number of
Warrant Shares issued upon any exercise of the Warrant prior to the date such
subsequent adjustment was made.
d. Rights Offering. In case the Company shall, at any time
after the Date of Grant, issue rights, options or warrants to the holders of
equity securities of the Company, entitling them to subscribe for or purchase
shares of Common Stock (or securities convertible or exchangeable into Common
Stock) at a price per share of Common Stock (or having a conversion or exchange
price per share of Common Stock if a security convertible or exchangeable into
Common Stock) less than the Fair Market Value per share of Common Stock on the
record date for such issuance (or the date of issuance, if there is no record
date), the Warrant Price to be in effect on and after such record date (or
issuance date, as the case may be) shall be determined by multiplying the
Warrant Price in effect immediately prior to such record date (or issuance date,
as the case may be) by a fraction (i) the numerator of which shall be the number
of shares of Common Stock outstanding on such record
3
<PAGE> 4
date (or issuance date, as the case may be) plus the number of shares of Common
Stock which the aggregate offering price of the total number of shares of such
Common Stock so to be offered (or the aggregate initial exchange or conversion
price of the exchangeable or convertible securities so to be offered) would
purchase at such Fair Market Value on such record date (or issuance date, as the
case may be) and (ii) the denominator of which shall be the number of shares of
Common Stock outstanding on such record date (or issuance date, as the case may
be) plus the number of additional shares of Common Stock to be offered for
subscription or purchase (or into which the convertible securities to be offered
are initially exchangeable or convertible). In case such purchase or
subscription price may be paid in part or in whole in a form other than cash,
the fair value of such consideration shall be determined by the Board of
Directors of the Company in good faith as set forth in a duly adopted board
resolution certified by the Company's Secretary or Assistant Secretary. Such
adjustment shall be made successively whenever such an issuance occurs; and in
the event that such rights, options, warrants, or convertible or exchangeable
securities are not so issued or expire or cease to be convertible or
exchangeable before they are exercised, converted, or exchanged (as the case may
be), then the Warrant Price shall again be adjusted to be the Warrant Price that
would then be in effect if such issuance had not occurred, but such subsequent
adjustment shall not affect the number of Warrant Shares issued upon any
exercise of this Warrant prior to the date such subsequent adjustment is made.
e. Special Distributions. In case the Company shall fix a
record date for the making of a distribution to all holders of shares of Common
Stock (including any such distribution made in connection with a consolidation
or merger in which the Company is the surviving corporation) or evidences of
indebtedness or assets (other than dividends and distributions referred to in
subparagraphs (d) and (e) above and other than cash dividends) or of
subscription rights, options, warrants, or exchangeable or convertible
securities containing the right to subscribe for or purchase shares of any class
of equity securities of the Company (excluding those referred to in subparagraph
(f) above), the Warrant Price to be in effect on and after such record date
shall be adjusted by multiplying the Warrant Price in effect immediately prior
to such record date by a fraction (i) the numerator of which shall be the Fair
Market Value per share of Common Stock on such record date, less the fair value
(as determined by the Board of Directors of the Company in good faith as set
forth in a duly adopted board resolution certified by the Company's Secretary or
Assistant Secretary) of the portion of the assets or evidences of indebtedness
so to be distributed or of such subscription rights, options, warrants, or
exchangeable or convertible securities applicable to one (i) share of the Common
Stock outstanding as of such record date, and (ii) the denominator of which
shall be such Fair Market Value per share of Common Stock. Such adjustment shall
be made successively whenever such a record date is fixed; and in the event that
such distribution is not so made, the Warrant Price shall again be adjusted to
be the Warrant Price which would then be in effect if such record date had not
been fixed, but such subsequent adjustment shall not affect the number of
Warrant Shares issued upon any exercise of this Warrant prior to the date such
subsequent adjustment was made.
f. Other Issuances of Securities. In case the Company or any
subsidiary shall, at any time after the Date of Grant, issue shares of Common
Stock, or rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase shares of Common Stock
(excluding (i) shares, rights, options, warrants, or convertible or exchangeable
securities or issued in any of the transactions described in subparagraphs (a),
(b), (c), (d) or (e) above,
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<PAGE> 5
(ii) shares issued upon the exercise of such rights, options or warrants or upon
conversion or exchange of such convertible or exchangeable securities, (iii)
shares, rights or options issued to employees, officers or directors of the
Company pursuant to a plan approved by the board of directors of the Company
(and shares issued upon exercise of such rights or options), and (iv) this
Warrant and any shares issued upon exercise thereof), at a price per share of
Common Stock (determined in the case of such rights, options, warrants, or
convertible or exchangeable securities by dividing (x) the total amount
receivable by the Company in consideration of the sale and issuance of such
rights, options, warrants, or convertible or exchangeable securities, plus the
total minimum consideration payable to the Company upon exercise, conversion, or
exchange thereof by (y) the total maximum number of shares of Common Stock
covered by such rights, options, warrants, or convertible or exchangeable
securities) lower than the Fair Market Value per share of Common Stock on the
date the Company fixes the offering price of such shares, rights, options,
warrants, or convertible or exchangeable securities, then the Warrant Price
shall be adjusted so that it shall equal the price determined by multiplying the
Warrant Price in effect immediately prior thereto by a fraction (i) the
numerator of which shall be the sum of (A) the number of shares of Common Stock
outstanding immediately prior to such sale and issuance plus (B) the number of
shares of Common Stock which the aggregate consideration received (determined as
provided below) for such sale or issuance would purchase at such Fair Market
Value per share, and (ii) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such sale and issuance.
Such adjustment shall be made successively whenever such an issuance is made.
For the purposes of such adjustment, the maximum number of shares of Common
Stock which the holder of any such rights, options, warrants or convertible or
exchangeable securities shall be entitled to subscribe for or purchase shall be
deemed to be issued and outstanding as of the date of such sale and issuance and
the consideration received by the Company therefor shall be deemed to be the
consideration received by the Company for such rights, options, warrants, or
convertible or exchangeable securities, plus the minimum consideration or
premium stated in such rights, options, warrants, or convertible or exchangeable
securities to be paid for the shares of Common Stock covered thereby. In case
the Company shall sell and issue shares of Common Stock, or rights, options,
warrants, or convertible or exchangeable securities containing the right to
subscribe for or purchase shares of Common Stock for a consideration consisting,
in whole or in part, of property other than cash or its equivalent, then in
determining the price per share of Common Stock and the consideration received
by the Company for purposes of the first sentence of this subparagraph (h), the
Board of Directors of the Company shall determine, in good faith, the fair value
of said property, and such determination shall be described in a duly adopted
board resolution certified by the Company's Secretary or Assistant Secretary. In
case the Company shall sell and issue rights, options, warrants, or convertible
or exchangeable securities containing the right to subscribe for or purchase
shares of Common Stock together with one (1) or more other securities as a part
of a unit at a price per unit, then in determining the price per share of Common
Stock and the consideration received by the Company for purposes of the first
sentence of this subparagraph (h), the Board of Directors of the Company shall
determine, in good faith, which determination shall be described in a duly
adopted board resolution certified by the Company's Secretary or Assistant
Secretary, the fair value of the rights, options, warrants, or convertible or
exchangeable securities then being sold as part of such unit. Such adjustment
shall be made successively whenever such an issuance occurs, and in the event
that such rights, options, warrants, or convertible or exchangeable securities
expire or cease to be convertible or exchangeable before they are exercised,
converted, or exchanged (as the case may be), then the Warrant Price shall again
be adjusted to the Warrant Price that would then be in effect if such sale
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<PAGE> 6
and issuance had not occurred, but such subsequent adjustment shall not affect
the number of Warrant Shares issued upon any exercise of the Warrant prior to
the date such subsequent adjustment is made.
g. Adjustment of Number of Shares. Upon each adjustment in
the Warrant Price, the number of Warrant Shares purchasable hereunder shall be
adjusted, to the nearest whole share, to the product obtained by multiplying the
number of Warrant Shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
h. Determination of Fair Market Value. For purposes of this
Section 4, "FAIR MARKET VALUE" of a share of Common Stock as of a particular
date (the "DETERMINATION DATE") shall mean (i) if shares of Common Stock are
traded on a national securities exchange (an "EXCHANGE"), the weighted average
of the closing prices of a share of the Common Stock of the Company on the last
five (5) trading days prior to the Determination Date reported on such Exchange
as reported in The Wall Street Journal (weighted with respect to the trading
volume with respect to each such day), (ii) if shares of Common Stock are not
traded on an Exchange but trade in the over-the-counter market and such shares
are quoted on the Nasdaq National Market ("NASDAQ"), (A) the average of the last
sale prices reported on NASDAQ or (B) if such shares are an issue for which last
sale prices are not reported on NASDAQ, the average of the closing bid and ask
prices, in each case on the last five (5) trading days (or if the relevant price
or quotation did not exist on any of such days, the relevant price or quotation
on the next preceding business day on which there was such a price or quotation)
prior to the Determination Date as reported in The Wall Street Journal, or (iii)
if no price can be determined on the basis of the above methods of valuation,
then the judgment of valuation shall be determined in good faith by the Board of
Directors of the Company, which determination shall be described in a duly
adopted board resolution certified by the Company's Secretary or Assistant
Secretary. If the Board of Directors of the Company is unable to determine any
Valuation (as defined below), or if the holders of at least fifty-one percent
(51%) of all of the Warrant Shares then issuable hereunder (collectively, the
"REQUESTING HOLDERS") disagree with the Board's determination of any Valuation
by written notice delivered to the Company within five (5) business days after
the determination thereof by the Board of Directors of the Company is
communicated to holders of the Warrants affected thereby, which notice specifies
a majority-in-interest of the Requesting Holders' determination of such
Valuation, then the Company and a majority-in-interest of the Requesting Holders
shall select a mutually acceptable investment banking firm of national
reputation which has not had a material relationship with the Company or any
officer of the Company within the preceding two (2) years, which shall determine
such Valuation. Such investment banking firm's determination of such Valuation
shall be final, binding and conclusive on the Company and the holders of all of
the Warrants issued hereunder and then outstanding. If the Board of Directors of
the Company was unable to determine such Valuation, all costs and fees of such
investment banking firm shall be borne by the Company. If the Requesting Holders
disagreed with the Board's determination of such Valuation, the party whose
determination of such Valuation differed from the Valuation determined by such
investment banking firm by the greatest amount shall bear all costs and fees of
such investment banking firm. For purposes of this Section 4(h), the term
"VALUATION" shall mean the determination, to be made initially by the Board of
Directors of the Company, of the Fair Market Value per share of Common Stock
pursuant to clause (iii) above.
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<PAGE> 7
i. If, at any time after any adjustment of the
Warrant Price shall have been made hereunder as the result of any issuance,
sale or grant of any rights, options, warrants or convertible or exchangeable
securities, any of such rights, options or warrants or the rights of conversion
or exchange associated with such convertible or exchangeable securities shall
expire by their terms or any of such rights, options, warrants or convertible or
exchangeable securities shall be repurchased by the Company or a subsidiary
thereof for a consideration per underlying share of Common Stock not exceeding
the amount of such consideration received by the Company in connection with the
issuance, sale or grant of such rights, options, warrants or convertible or
exchangeable securities, the Warrant Price then in effect shall forthwith be
increased to the Warrant Price that would have been in effect if such expiring
right, option or warrant or rights of conversion or exchange or such repurchased
rights, options, warrants or convertible or exchangeable securities had never
been issued. Similarly, if at any time after any such adjustment of the Warrant
Price shall have been made pursuant to subparagraph (e) above (i) any additional
aggregate consideration is received or becomes receivable by the Company in
connection with the issuance of exercise of such rights, options, warrants or
convertible or exchangeable securities or (ii) there is a reduction in the
conversion or exchange ratio applicable to such convertible or exchangeable
securities so that fewer shares of Common Stock will be issuable upon the
conversion or exchange thereof or there is a decrease in the number of shares of
Common Stock issuable upon exercise of such rights, options or warrants, the
Warrant Price then in effect shall be forthwith readjusted to the Warrant Price
that would have been in effect had such changes taken place at the time that
such rights, options, warrants or convertible or exchangeable securities were
initially issued, granted or sold. In no event shall any readjustment under this
subparagraph (i) affect the validity of any Warrant Shares issued upon any
exercise of this Warrant prior to such readjustment.
5. Notice of Adjustments. Whenever the Warrant Price or the number
of Warrant Shares purchasable hereunder shall be adjusted pursuant to Section 4
hereof, the Company shall deliver to the holder of this Warrant a certificate
signed by its chief financial officer setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated, and the Warrant Price and the number of
Warrant Shares purchasable hereunder after giving effect to such adjustment.
6. Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor based on the Fair Market
Value of a share of Common Stock on the date of exercise.
7. Compliance with Securities Act; Disposition of Warrant or Warrant
Shares.
a. Compliance with Securities Act. The holder of this Warrant,
by acceptance hereof, agrees that this Warrant and the shares of Common Stock to
be issued upon exercise hereof are being acquired for investment and that such
holder will not offer, sell or otherwise dispose of this Warrant, or any shares
of Common Stock to be issued upon exercise hereof except under circumstances
which will not result in a violation of the Securities Act of 1933, as amended
(the "ACT"). Upon exercise of this Warrant, the holder hereof shall confirm in
writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that
the shares of Common Stock so purchased are being acquired for investment and
not with a view toward distribution or resale. This Warrant and
7
<PAGE> 8
all shares of Common Stock issued upon exercise of this Warrant (unless
registered under the Act) shall be stamped or imprinted with a legend in
substantially the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (I) AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO, (II) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT
REQUIRED, (III) RECEIPT OF A NO-ACTION LETTER(S) FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITY(IES), OR (IV) OTHERWISE
COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT
UNDER WHICH THESE SECURITIES WERE ISSUED DIRECTLY OR
INDIRECTLY."
In addition, in connection with the issuance of this Warrant,
the holder specifically represents to the Company by acceptance of this Warrant
as follows:
i. The holder is aware of the Company's business
affairs and financial condition, and has acquired information about the Company
sufficient to reach an informed and knowledgeable decision to acquire this
Warrant. The holder is acquiring this Warrant for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Act.
ii. The holder understands that this Warrant and the
Warrant Shares have not been registered under the Act in reliance upon a
specific exemption therefrom, which exemption depends upon, among other things,
the bona fide nature of the holder's investment intent as expressed herein. In
this connection, the holder understands that, in the view of the Securities and
Exchange Commission (the "SEC"), the statutory basis for such exemption may be
unavailable if the holder's representation was predicated solely upon a present
intention to hold the Warrant and the Warrant Shares for the minimum capital
gains period specified under applicable tax laws, for a deferred sale, for or
until an increase or decrease in the market price of the Warrant and the Warrant
Shares, or for a period of one (1) year or any other fixed period in the future.
iii. The holder further understands that this Warrant
and the Warrant Shares must be held indefinitely unless subsequently registered
under the Act and any applicable state securities laws, or unless exemptions
from registration are otherwise available.
iv. The holder is aware of the provisions of Rule 144
and 144A, promulgated under the Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly, from the
issuer thereof (or from an affiliate of such issuer), in a non-public offering
subject to the satisfaction of certain conditions, if applicable, including,
among other things: the availability of certain public information about the
Company, the resale occurring not less than one (1) year after the party has
purchased and paid for the securities to be sold; the sale being
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<PAGE> 9
made through a broker in an unsolicited "broker's transaction" or in
transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934, as amended) and the amount of securities being
sold during any three-month period not exceeding the specified limitations
stated therein.
v. The holder further understands that at the time it
wishes to sell this Warrant and the Warrant Shares there may be no public market
upon which to make such a sale, and that, even if such a public market then
exists, the Company may not be satisfying the current public information
requirements of Rule 144 and 144A, and that, in such event, the holder may be
precluded from selling this Warrant and the Warrant Shares under Rule 144 and
144A even if the one (1)-year minimum holding period had been satisfied.
vi. The holder further understands that in the event
all of the requirements of Rule 144 and 144A are not satisfied, registration
under the Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144
and 144A is not exclusive, the Staff of the SEC has expressed its opinion that
persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 and 144A will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.
b. Disposition of Warrant or Warrant Shares. With respect to
any offer, sale or other disposition of this Warrant, or any Warrant Shares
acquired pursuant to the exercise of this Warrant prior to registration of such
Warrant or Warrant Shares, the holder hereof and each subsequent holder of this
Warrant agrees to give written notice to the Company prior thereto, describing
briefly the manner thereof, together with a written opinion of such holder's
counsel, if reasonably requested by the Company, to the effect that such offer,
sale or other disposition may be effected without registration or qualification
(under the Act as then in effect or any federal or state law then in effect) of
this Warrant or such Warrant Shares and indicating whether or not under the Act
certificates for this Warrant or such Warrant Shares to be sold or otherwise
disposed of require any restrictive legend as to applicable restrictions on
transferability in order to ensure compliance with applicable law. Promptly upon
receiving such written notice and reasonably satisfactory opinion, if so
requested, the Company, as promptly as practicable, shall notify such holder
that such holder may sell or otherwise dispose of this Warrant or such Warrant
Shares, all in accordance with the terms of the notice delivered to the Company.
If a determination has been made pursuant to this subsection (b) that the
opinion of counsel for the holder is not reasonably satisfactory to the Company,
the Company shall so notify the holder promptly after such determination has
been made and neither this Warrant nor any Warrant shall be sold or otherwise
disposed of until such disagreement has been resolved. The foregoing
notwithstanding, this Warrant or such Warrant Shares may, as to such federal
laws, be offered, sold or otherwise disposed of in accordance with Rule 144 and
144A under the Act, provided that the Company shall have been furnished with
such information as the Company may reasonably request to provide a reasonable
assurance that the provisions of Rule 144 and 144A have been satisfied. Each
certificate representing this Warrant or the Warrant Shares thus transferred
(except a transfer pursuant to Rule 144) shall bear a legend as to the
applicable restrictions on transferability in order to ensure compliance with
such laws, unless in the aforesaid opinion of counsel for the holder, such
legend is not required in order to ensure compliance with such laws. The
9
<PAGE> 10
Company may issue stop transfer instructions to its transfer agent or, if acting
as its own transfer agent, the Company may stop transfer on its corporate books,
in connection with such restrictions.
8. Rights as Stockholders; Information. No holder of this Warrant, as
such, shall be entitled to vote or receive dividends or be deemed the holder of
Common Stock or any other securities of the Company which may at any time be
issuable on the exercise hereof for any purpose, nor shall anything contained
herein be construed to confer upon the holder of this Warrant, as such, any of
the rights of a stockholder of the Company or any right to vote for the election
of the directors or upon any matter submitted to stockholders at any meeting
thereof, or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until this Warrant shall have been exercised
and the Warrant Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein. The foregoing notwithstanding, the Company will
transmit to the holder of this Warrant such information, documents and reports
as are generally distributed to the holders of any class or series of the
securities of the Company concurrently with the distribution thereof to the
stockholders.
9. Registration Rights.
The shares of Common Stock issued or issuable upon exercise of the
Warrant are subject to registration and other rights granted to the Holders
pursuant to that certain Registration Rights Agreement dated as of March 31,
1999.
10. Additional Rights.
10.1 Mergers. In the event that the Company undertakes to (i) sell,
lease, exchange, convey or otherwise dispose of all or substantially all of its
property or business, or (ii) merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary of the Company), or effect any
transaction (including a merger or other reorganization) or series of related
transactions, in which more than 50% of the voting power of the Company is
disposed of, the Company will use its best efforts to provide at least thirty
(30) days notice of the terms and conditions of the proposed transaction.
10.2 Right to Convert Warrant into Common Stock; Net Issuance.
a. Right to Convert. In addition to and without limiting the rights of
the holder under the terms of this Warrant, the holder shall have the right to
convert this Warrant or any portion thereof (the "CONVERSION RIGHT") into shares
of Common Stock as provided in this Section 10.2 at any time or from time to
time during the term of this Warrant. Upon exercise of the Conversion Right with
respect to a particular number of shares subject to this Warrant (the "CONVERTED
WARRANT SHARES"), the Company shall deliver to the holder (without payment by
the holder of any exercise price or any cash or other consideration) that number
of shares of fully paid and nonassessable Common Stock equal to the quotient
obtained by dividing (i) the value of this Warrant (or the specified portion
hereof) on the Conversion Date (as defined in subsection (b) hereof), which
value shall be equal to (A) the aggregate Fair Market Value of the Converted
Warrant Shares issuable upon exercise of this Warrant (or the specified portion
hereof) on the Conversion Date less (B) the aggregate Warrant Price of the
Converted Warrant Shares immediately prior to the
10
<PAGE> 11
exercise of the Conversion Right by (ii) the Fair Market Value of one (1) share
of Common Stock on the Conversion Date.
Expressed as a formula, such conversion shall be computed as follows:
X=A-B
---
Y
Where: X= the number of shares of Common Stock that may be issued to
holder
Y = the Fair Market Value (FMV) of one (1) share of Common Stock
A = the aggregate FMV (i.e., FMV x Converted Warrant Shares)
B = the aggregate Warrant Price (i.e., Converted Warrant Shares x
Warrant Price)
No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance with
the foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the Fair Market Value of the resulting
fractional share on the Conversion Date.
b. Method of Exercise. The Conversion Right may be exercised
by the holder by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to this Warrant which are being surrendered (referred to in subsection
(a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "CONVERSION DATE"). Certificates for the shares issuable
upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the holder within
thirty (30) days following the Conversion Date.
11. Representations and Warranties. The Company represents and warrants
to the holder of this Warrant as follows:
a. This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors;
b. The Warrant Shares have been duly authorized and reserved
for issuance by the Company and, when issued in accordance with the terms
hereof, will be validly issued, fully paid and nonassessable,
11
<PAGE> 12
c. The rights, preferences, privileges and restrictions
granted to or imposed upon the Common Stock and the holders thereof are as set
forth in the Restated Articles of Incorporation of the Company, as amended to
the Date of Grant (as so amended, the "CHARTER"), a true and complete copy of
which has been delivered to the original holder of this Warrant;
d. The execution and delivery of this Warrant are not, and the
issuance of the Warrant Shares upon exercise of this Warrant in accordance with
the terms hereof will not be, inconsistent with the Charter or by-laws of the
Company, do not and will not contravene, in any material respect, any
governmental rule or regulation, judgment or order applicable to the Company,
and do not and will not conflict with or contravene any provision of, or
constitute a default under, any indenture, mortgage, contract or other
instrument of which the Company is a party or by which it is bound or require
the consent or approval of, the giving of notice to, the registration or filing
with or the taking of any action in respect of or by, any Federal, state or
local government authority or agency or other person, except for the filing of
notices pursuant to federal and state securities laws, which filings will be
effected by the time required thereby and except for such conflicts and
contraventions as will not, individually or in the aggregate, have or reasonably
be expected to have, a material adverse effect on the Warrant Shares so issued
or the Company's ability to perform its obligations hereunder;
e. There are no actions, suits, audits, investigations or
proceedings pending or, to the knowledge of the Company, threatened against the
Company in any court or before any governmental commission, board or authority
which, if adversely determined, will have a material adverse effect on the
ability of the Company to perform its obligations under this Warrant;
f. The authorized capital stock of the Company consists of the
following:
(i) 25,000,000 shares of Common Stock, par value $.01
per share, of which approximately 9,580,331 shares of Common Stock were issued
and outstanding as of the close of business on the date immediately prior to the
Date of Grant. All such outstanding shares have been validly issued and are
fully paid, nonassessable shares free of preemptive rights;
(ii) 5,000,000 shares of Preferred Stock, of which
200,000 have been designated as Series A Junior Participating Preferred Shares,
and none of which were issued and outstanding as of the close of business on the
date immediately prior to the Date of Grant; and
g. Other than options to purchase 1,804,171 shares of Common
Stock and warrants to purchase 450,742 shares of Common Stock, there are no
subscriptions, rights, options, warrants, or calls relating to any shares of the
Company's capital stock, including any right of conversion or exchange under any
outstanding security or other instrument; and
h. The Company is not subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any
12
<PAGE> 13
security convertible into or exchangeable for any of its capital stock.
12. Modification and Waiver. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought, except that
the provisions of Section 9 hereof may be amended with the consent of the
Company and the holders of Registrable Securities constituting a majority of the
Registrable Securities then outstanding. For purposes of Section 9 and this
Section 12, "REGISTRABLE SECURITIES THEN OUTSTANDING" shall mean, with respect
to a specified determination date, the Registrable Securities owned
(beneficially or of record) by all Securityholders on such date.
13. Notices. Unless otherwise specifically provided herein, all
communications under this Warrant 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 the Company or to the Company at the address indicated therefor
on the signature page of this Warrant. Any party hereto may change its address
for purposes of this Section 13 by giving the other party written notice of the
new address in the manner set forth herein.
14. Binding Effect on Successors. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the Company's assets, and all of the obligations
of the Company relating to the Common Stock issuable upon the exercise or
conversion of this Warrant shall survive the exercise, conversion and
termination of this Warrant and all of the covenants and agreements of the
Company shall inure to the benefit of the successors and assigns of the holder
hereof. The Company will, at the time of the exercise or conversion of this
Warrant; in whole or in part, upon request of the holder hereof but at the
Company's expense, acknowledge in writing its continuing obligation to the
holder hereof in respect of any rights to which the holder hereof shall continue
to be entitled after such exercise or conversion in accordance with this
Warrant; provided, that the failure of the holder hereof to make any such
request shall not affect the continuing obligation of the Company to the holder
hereof in respect of such rights.
15. Lost Warrants or Stock Certificates. The Company covenants to the
holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any loss, theft or destruction, upon
receipt of an executed lost securities bond or indemnity reasonably satisfactory
to the Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant or stock certificate, the Company will make and
deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
13
<PAGE> 14
16. Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
17. Governing Law. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of California, without giving effect to conflict of law principles.
18. Survival of Representations, Warranties and Agreements. All
representations and warranties of the Company and the holder hereof contained
herein shall survive the Date of Grant, the exercise or conversion of this
Warrant (or any part hereof) and the termination or expiration of rights
hereunder. All agreements of the Company and the holder hereof contained herein
shall survive indefinitely until, by their respective terms, they are no longer
operative.
19. Remedies. In case any one (1) or more of the covenants and
agreements contained in this Warrant shall have been breached, the holders
hereof (in the case of a breach by the Company), or the Company (in the case of
a breach by a holder), may proceed to protect and enforce their or its rights
either by suit in equity and/or by action at law, including, but not limited to,
an action for damages as a result of any such breach and/or an action for
specific performance of any such covenant or agreement contained in this
Warrant.
20. Acceptance. Receipt of this Warrant by the holder hereof shall
constitute acceptance of and agreement to the foregoing terms and conditions.
21. No Impairment of Rights. The Company will not, by amendment of its
Charter or through any other means, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holder of this Warrant against impairment.
[Signature page follows.]
14
<PAGE> 15
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on its behalf by one of its officers thereunto duly authorized.
THE TESSERACT GROUP,
a Minnesota corporation
By /s/ John T. Golle
--------------------------------------
John T. Golle
Chief Executive Officer
Address: 9977 N. 90th Street
Suite 180
Scottsdale, AZ 85258
Dated: as of October 14, 1999
S-1
<PAGE> 16
EXHIBIT A
NOTICE OF EXERCISE
To: THE TESSERACT GROUP, INC.
1 . The undersigned hereby elects to purchase shares of Common
Stock of THE TESSERACT GROUP, INC. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
2. Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name or names as are specified
below:
----------------------------------
(Name)
----------------------------------
----------------------------------
(Address)
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Schedule 1.
-------------------------------------------
(Signature)
- ---------------------
(Date)
A-1
<PAGE> 17
Schedule 1
INVESTMENT REPRESENTATION STATEMENT
Purchaser:
Company: THE TESSERACT GROUP, INC.
Security: Common Stock
Amount:
Date:
In connection with the purchase of the above-listed securities (the
"SECURITIES"), the undersigned (the "PURCHASER") represents to the Company as
follows:
(a) The Purchaser is aware of the Company's business affairs and
financial condition, and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Securities. The
Purchaser is purchasing the Securities for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
(the "ACT").
(b) The Purchaser understands that the Securities have not been
registered under the Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of the
Purchaser's investment intent as expressed herein. In this connection, the
Purchaser understands that, in the view of the Securities and Exchange
Commission ("SEC"), the statutory basis for such exemption may be unavailable if
the Purchaser's representation was predicated solely upon a present intention to
hold these Securities for the minimum capital gains period specified under
applicable tax laws, for a deferred sale, for or until an increase or decrease
in the market price of the Securities, or for a period of one year or any other
fixed period in the future.
(c) The Purchaser further understands that the Securities must be held
indefinitely unless subsequently registered under the Act or unless an exemption
from registration is otherwise available. In addition, the Purchaser understands
that the certificate evidencing the Securities will be imprinted with the legend
referred to in the Warrant under which the Securities are being purchased.
(d) The Purchaser is aware of the provisions of Rule 144 and 144A,
promulgated under the Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such
A-2
<PAGE> 18
issuer), in a non-public offering subject to the satisfaction of certain
conditions, if applicable, including, among other things: The availability of
certain public information about the Company, the resale occurring not less than
one (1) year after the party has purchased and paid for the securities to be
sold; the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934, as amended) and the amount of
securities being sold during any three-month period not exceeding the specified
limitations stated therein.
(e) The Purchaser further understands that at the time it wishes to
sell the Securities there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144 and 144A, and
that, in such event, the Purchaser may be precluded from selling the Securities
under Rule 144 and 144A even if the one-year minimum holding period had been
satisfied.
(f) The Purchaser further understands that in the event all of the
requirements of Rule 144 and 144A are not satisfied, registration under the Act,
compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden or proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Purchaser:
--------------------------------
Date:
-------------------------------------
A-3
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,196
<SECURITIES> 0
<RECEIVABLES> 3,300
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,530
<PP&E> 35,780
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,455
<CURRENT-LIABILITIES> 40,772
<BONDS> 0
0
0
<COMMON> 98
<OTHER-SE> 19,272
<TOTAL-LIABILITY-AND-EQUITY> 61,455
<SALES> 9,954
<TOTAL-REVENUES> 0
<CGS> 6,088
<TOTAL-COSTS> 11,927
<OTHER-EXPENSES> 1,418
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,391)
<EPS-BASIC> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
