<PAGE> 1
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 December 31, 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.
____________________________________
<TABLE>
<S> <C>
Minnesota 41-1581297
- ---------------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3820 E. Ray Road, Suite 2
Phoenix, Arizona 85044
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(480) 767-2300
-------------------------
(Registrant's telephone number, including area code)
9977 North 90th Street, Suite 180
Scottsdale, Arizona, 85258
(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 December 31, 1999, there were issued and outstanding 9,900,331 shares of
Common Stock, Par value $.01 per share.
<PAGE> 2
THE TESSERACT GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
DECEMBER 31, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
Condensed consolidated balance sheets as of
December 31, 1999 (Unaudited) and June 30, 1999 3
Condensed consolidated statements of operations for
the six months ended December 31, 1999 and 1998 (Unaudited) 4
Condensed consolidated statements of operations for
the three months ended December 31, 1999 and 1998 (Unaudited) 5
Condensed consolidated statements of cash flows for the
six months ended December 31, 1999 and 1998 (Unaudited) 6
Notes to condensed consolidated financial statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
PART II. OTHER INFORMATION 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
Signatures 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
(DOLLARS IN THOUSANDS) 1999 1999
ASSETS (Unaudited)
----------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 1,309 $ 2,545
Settlement Receivable -- 650
Accounts Receivable, Net 3,755 1,958
Other Current Assets and Prepaid Rent 5,871 2,228
-------- --------
TOTAL CURRENT ASSETS $ 10,935 7,381
Intangible Assets, Net 14,644 17,291
Property and Equipment, Net 33,741 37,002
Deposits and Other Assets 612 1,550
-------- --------
TOTAL ASSETS 59,932 63,224
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of Credit 5,849 5,999
Accounts Payable 5,549 1,999
Reserve for Loss on Disposition of ABC 903 --
Other Current Liabilities 11,207 9,861
-------- --------
TOTAL CURRENT LIABILITIES 23,508 17,859
Long - Term Obligations 23,022 21,615
Other 823 990
-------- --------
TOTAL LIABILITIES 47,353 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
9,900,331 at December 31, 1999, and
9,570,803 at June 30, 1999 99 98
Additional Paid-in Capital 58,829 58,371
Accumulated Deficit (46,349) (35,709)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 12,579 22,760
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 59,932 $ 63,224
======== ========
</TABLE>
The accompanying notes and the notes in the financial statements
included in the Registrant's Annual Report on Form 10-K/A are an
integral part of these financial statements.
3
<PAGE> 4
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
REVENUE:
School Tuition and Other $ 21,284 $ 15,100
PROGRAM RELATED COSTS 12,522 8,122
-------- --------
PROGRAM OPERATING PROFIT 8,762 6,978
OPERATING EXPENSES 12,162 10,096
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE DEPRECIATION,
AMORTIZATION AND INCOME TAX EXPENSE (3,400) (3,118)
DEPRECIATION AND AMORTIZATION (2,002) (1,165)
INTEREST AND OTHER INCOME (EXPENSE) (1,457) 208
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE (6,859) (4,075)
INCOME TAX EXPENSE -- --
-------- --------
LOSS FROM CONTINUING OPERATIONS (6,859) (4,075)
DISCONTINUED OPERATIONS (NOTE 7):
Loss from Operations of ABC (812) (353)
Loss on Disposal of ABC, Including Provision of $500,000 for
Operating Losses During the Phase Out Period (2,969) --
-------- --------
LOSS FROM DISCONTINUED OPERATIONS (3,781) (353)
NET LOSS $(10,640) $ (4,428)
======== ========
NET LOSS PER COMMON SHARE (BASIC AND DILUTED)
Continuing Operations $ (0.70) $ (0.42)
Loss from Discontinued Operations and Disposal of ABC (0.39) (0.04)
-------- --------
Net Loss $ (1.09) $ (0.46)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(Basic and Diluted) 9,814 9,579
</TABLE>
The accompanying notes and the notes in the financial statements
included in the Registrant's Annual Report on Form 10-K/A are an
integral part of these financial statements.
4
<PAGE> 5
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31,
1999 1998
-------- -------
<S> <C> <C>
REVENUE:
School Tuition and Other $ 11,685 $ 8,961
PROGRAM RELATED COSTS 6,574 4,512
-------- -------
PROGRAM OPERATING PROFIT 5,111 4,449
OPERATING EXPENSES 6,772 5,215
-------- -------
LOSS FROM CONTINUING OPERATIONS BEFORE DEPRECIATION
AMORTIZATION AND INCOME TAX EXPENSE (1,661) (766)
DEPRECIATION AND AMORTIZATION (1,223) (577)
INTEREST AND OTHER INCOME (EXPENSE) (868) 112
-------- -------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE (3,752) (1,231)
INCOME TAX EXPENSE -- --
-------- -------
LOSS FROM CONTINUING OPERATIONS (3,752) (1,231)
DISCONTINUED OPERATIONS (NOTE 7):
Loss from Operations of ABC (528) (255)
Loss on Disposal of ABC, Including Provision of $500,000 for
Operating Losses During the Phase Out Period (2,969) --
-------- -------
LOSS FROM DISCONTINUED OPERATIONS (3,497) (255)
-------- -------
NET LOSS $ (7,249) $(1,487)
======== =======
NET LOSS PER COMMON SHARE (BASIC AND DILUTED)
Continuing Operations $ (0.38) $ (0.13)
Loss from Discontinued Operations and Disposal of ABC (0.36) (0.03)
-------- -------
Net Loss $ (0.74) $ (0.16)
======== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(Basic and Diluted) 9,814 9,579
</TABLE>
The accompanying notes and the notes in the financial statements
included in the Registrant's Annual Report on Form 10-K/A are
an integral part of these financial statements.
5
<PAGE> 6
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(IN THOUSANDS) DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(10,640) $ (4,428)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and Amortization 2,002 1,271
Common Stock Issuance 120 --
School Closure Reserve 307
Reserve For Discontinued Operations 903 --
Write-offs of Intangible Assets on Discontinued Operations, Net 2,248 --
Changes in Operating Assets and Liabilities 5,476 1,614
-------- --------
Net Cash Provided by (Used in) Operating Activities 416 (1,543)
-------- --------
INVESTING ACTIVITIES
Additions to Property and Equipment (3,281) (12,040)
Cash of Preschool Services, Inc. -- 1,137
-------- --------
Net Cash Used in Investing Activities (3,281) (10,903)
-------- --------
FINANCING ACTIVITIES
Proceeds from Exercise of Stock Options -- 30
Proceeds from Financing Transactions 2,529 12,295
Repayment of Long-Term Debt and Line of Credit (900) (601)
-------- --------
Net Cash Provided by Financing Activities 1,629 11,724
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (1,236) (722)
Cash and Cash Equivalents at Beginning of Period 2,545 5,543
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,309 $ 4,821
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Non-cash transactions: 1999 1998
---------------------- ---- ----
Property and Equipment Written off from Closed School Reserve $ 1,391 --
======== ========
Sale-Leaseback Financing of North Scottsdale Building $ 9,400 --
Issuance of Warrants $ 340 --
======== ========
Prepaid Rent Escrow $ 990 --
======== ========
Reclassification of Fixed Assets to Due From Developer $ 2,544 --
======== ========
</TABLE>
The accompanying notes and the notes in the financial statements
included in the Registrant's Annual Report on Form 10-K/A are
an integral part of these financial statements.
6
<PAGE> 7
THE TESSERACT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited and condensed consolidated financial statements have
been prepared by The TesseracT Group, Inc. (the "Company") 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. In the
opinion of management, all adjustments (consisting solely of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with the generally accepted accounting
principals have been condensed or omitted pursuant to such SEC rules and
regulations. It is suggested that these financial statements are read in
conjunction with the consolidated financial statements and notes thereto
included in the Registrant's Annual Report on Form 10-K/A for the year ended
June 30, 1999.
Due to the inherent seasonal nature of the education and child care businesses,
annualization of amounts in these interim financial statements would not
necessarily be indicative of the results that may be expected for the year
ending June 30, 2000.
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 non-profit
corporation now known as Schools of Distinction, Inc., 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 December
31, 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.
REVENUE RECOGNITION
Revenue is recognized as services are performed. During the six months ended
December 31, 1999, the Company operated schools located in Texas and Washington
D.C., under management contracts with two 501(c)3 organizations. Revenue was
recognized for these schools as management fees were earned and for reimbursable
costs as incurred by the Company for the operations of the schools as defined
under the terms of the contracts.
7
<PAGE> 8
Disputes under these contracts resulted in the company withholding its services
under both contracts in December 1999. As of December 31, 1999, the Company's
balance sheet includes accounts receivable for uncollected revenue of
approximately $720,000. The Company's legal counsel is currently pursuing
collection of these amounts. Although management believes these receivables are
collectible at December 31, 1999, it is reasonably possible that what the
Company may collect may differ materially in the near term.
PROGRAM RELATED COSTS
Program related costs are direct costs related to the educational activities and
programs of the schools including salaries and benefits for directors, teachers,
contract instructors, aides and assistants; direct instructional materials and
program costs; student related transportation expenses; and other similar
expenses. Facility costs and site overhead are not included in program related
costs.
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 revenues from state
agencies. As of and for the six months ended December 31, 1999, approximately
27% and 29% 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 the Company and other Charter school operators are
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 $1.8 million and
$2.6 million for the three months and six months ended December 31, 1999,
respectively.
4. CLOSED SCHOOL RESERVE
In August 1999, the Company sold property related to a New Jersey school that
was closed during June 1999. The related loss on the sale of $245,000 has been
reflected as a reduction in the closed school reserve. An additional $280,000 of
related costs of closure were incurred and expensed during the three-month
period ended September 30, 1999.
In December 1999, the Company closed two underperforming preschools in Colorado
resulting in a loss of $471,000, of which $278,000 has been reflected as an
increase to the closed school reserve with the remainder being a reduction in
goodwill associated with the original acquisition of the schools. Included in
this loss is one year's lease payments, which is management's estimate of the
time required for
8
<PAGE> 9
the landlords to reasonably mitigate their claims. While the estimated loss of
$471,000 is based on management's best estimate, actual losses could differ
materially.
Subsequent to December 31, 1999, another underperforming preschool in Arizona
was closed, which resulted in a loss on closed schools totaling approximately
$30,000.
5. 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, 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 September 1, 1999 totaling
$2,754,000 was not made, however, the Company began paying on a monthly basis.
The result of this default was the reclassification of approximately $21 million
of long-term obligations as current in the interim condensed consolidated
balance sheet as of September 30, 1999.
During December 1999, the Company converted the financing of an additional
school to a sale-leaseback transaction with the same lender. As a result of this
transaction, the Company funded the escrow account with an additional $1.1
million and issued 120,000 shares of common stock to the lender, thereby curing
the default. Under the terms of the agreement, the Company is required to make
certain monthly payments toward the lease in addition to disbursing funds from
the escrow account.
At this time, based on anticipated recovery of funds due the Company under the
development agreements described in Note 6, management believes it will have
sufficient cash by September 1, 2000 to avoid a recurrence of the default.
Although management is currently in negotiations to resolve the issues and
obtain financing for the affected schools covered by the developers' agreements,
there can be no assurance that these negotiations will be successful and that
the funds will be received in sufficient time to avoid a default with regard to
the escrow requirements. If another default should occur with respect to this
debt, $21.4 million now classified as a long-term obligation would be considered
a current liability.
Management believes adequate cash flow will exist at September 1, 2000 to fund
the next required escrow deposit. If another default should occur with respect
to this debt, $21.4 million now classified as a long-term obligation would be
considered a current liability.
6. COMMITMENTS AND CONTINGENCIES
TITLE IV PROGRAMS FUNDING AND SURETY BOND ISSUES:
Participation in the U.S. Department of Education's Title IV programs through
its 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 amounted 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.
In addition, the Arizona State Board for Private Postsecondary Education is
requiring that ABC post a surety bond of $700,000 before March 2, 2000 as a
stipulation for licensing renewal.
As of December 31, 1999, ABC is reflected as a discontinued segment. Management
has received letters of intent to purchase ABC and believes that these letters
of intent may obviate the Company's need to post the bond or letter of credit.
However,
9
<PAGE> 10
if a sale of the business has not been negotiated, since a majority of students
attending ABC participate in the Title IV program, suspension of Title IV funds
without alternative sources available, combined with a loss of licensing, could
have a material, adverse impact on ABC's financial position and the Company's
consolidated financial position and results of operations. Student revenue at
ABC totaled $544,000 and $1,183,000 for the three months and six months ended
December 31, 1999, respectively.
DEVELOPMENT AGREEMENTS
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. As of December 31, 1999, the Company has advanced approximately $4.4
million on behalf of the developer related to these projects. The developer was
unable to obtain necessary financing, therefore one of these schools has not
been completed and further construction has been suspended.
As of December 31, 1999, the Company has $2 million relating to the school under
construction reflected in the accompanying financial statements as land and
construction in progress. The remaining $2.4 million was advanced on behalf of
the developer for the open school and is reflected in other current assets.
As of December 31, 1999, additional commitments relating to these schools and
estimated costs to complete the unopened school totaled approximately $5.9
million. Additionally, a subcontractor has filed suit for foreclosure on its
mechanics lien. A court has stayed action on the lien until after February 22,
1999 in order to allow the Company or developer to obtain evidence of a
financing commitment or potentially relinquish control of the properties. The
Company has received and accepted a letter of intent, which it believes meets
its evidentiary burden, from a qualified buyer to purchase both Arizona schools
at a price that would repay the Company substantially all of its investment in
such properties. Such letter of intent also requires the approval of the
developer, which to this point has not been willing to accept such purchase
offer.
Management is currently negotiating with all parties and believes it will be
successful in resolving these issues recovering the funds advanced. However,
there is no guarantee that these negotiations will be successful. Failure to
cure the outstanding liens could have a material, adverse effect on the
Company's financial position and results of operations up to and including the
inability to recover the $4.4 million advanced and loss of the operational
revenue from the opened school. Although management believes the $4.4 million
will be recovered, it is reasonably possible that the amount the Company could
eventually recover could materially differ in the near term. Revenue from the
completed site totaled $1,450,000 and $2,228,000 for the three-months and
six-months ended December 31, 1999, respectively.
In addition, the Company's development agreements for a future school in Ohio
and two future schools in Arizona were terminated as the Company did not have
sufficient resources to complete the construction of such schools within the
time period contemplated by such agreements.
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 if the issue is not resolved in a timely manner. The most recent
information available indicated that mechanics liens totaled at least $4.0
million.
MANAGEMENT CONTRACTS
In fiscal 1999, the Company entered into separate 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 was to
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.
10
<PAGE> 11
Disputes under these contracts resulted in the Company withholding its services
under both contracts in December 1999. No revenue was recognized under these
contracts after October 1999.
Total revenue recognized under the management contracts totaled $638,000 and
$1,490,000 for the three months and six months ended December 31, 1999,
respectively. A receivable of $720,000 from these two contracts is included in
accounts receivables. Management is pursuing the collection of this amount, and
believes no additional liabilities will be incurred under the contracts. However
it is reasonably possible that the amounts the Company will collect may differ
materially in the near term.
LEGAL ACTIONS
The Company is engaged in legal actions arising in the ordinary course of its
business. Management believes that the ultimate outcome of all such matters that
have arisen in the ordinary course will not have a material adverse effect on
the Company's consolidated financial position. The significance of these matters
on the Company's future operating results and cash flows depends on the level of
future results of operations and cash flows as well as on the timing and
amounts, if any, of the ultimate outcome
The Company carries fire and other casualty insurance on its schools and
liability insurance in amounts which management believes are adequate for its
operations. As is the case with other entities in the education and preschool
industry, the Company cannot effectively insure itself against certain risks
inherent in its operations.
7. DISCONTINUED OPERATIONS - SALE OF SUBSIDIARY
In February 2000, the Company's Board of Directors adopted a plan to sell its
Academy of Business College ("ABC") subsidiary. Accordingly, the operating
results of ABC are accounted for as a discontinued operation for all periods in
the accompanying financial statements. During the quarter ended December 31,
1999, the Company recorded a reserve of $903,000 for estimated future losses of
ABC and the estimated costs and losses associated with a possible sale of the
subsidiary. Additionally, due to the decision to discontinue the operations of
ABC, the Company also wrote off the remaining goodwill of $2,066,000 associated
with the original acquisition of ABC.
While the estimated net loss from discontinued operations is based on
management's analysis, it is difficult to estimate what the Company may
ultimately realize on the sale of this division. Therefore, what the Company
could eventually realize may differ materially in the near term from the amounts
assumed in arriving at the estimated net loss from discontinued operations.
The historical statements of operations have been adjusted to show the results
of the discontinued operations separately.
11
<PAGE> 12
The following information reflects the results of the discontinued operation for
the periods presented in the Company's Condensed Consolidated Statements of
Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
ABC'S OPERATING RESULTS (in thousands) DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
----- ----- ------- ------
<S> <C> <C> <C> <C>
School tuition and other $ 544 $ 723 $ 1,183 $1,489
Program related costs 442 392 779 762
----- ----- ------- ------
Program operating profit 102 331 404 727
Operating Expenses (526) (528) (1,031) (993)
Depreciation and Amortization (103) (63) (182) (95)
Interest Income (Expense) (1) 5 (3) 8
----- ----- ------- ------
Loss from discontinued operations $(528) $(255) $ (812) $ (353)
===== ===== ======= ======
</TABLE>
The components of the net assets and liabilities of the discontinued
operations to be disposed of and included in the Company's Condensed
Consolidated Balance Sheet at December 31, 1999 consist of the following (in
thousands):
<TABLE>
<S> <C>
Accounts Receivable $ 916
Other Current Assets 12
Property and Equipment 488
Deposits and Other Assets 28
------
Total Assets 1,444
------
Accounts Payable 328
Other Current Liabilities 695
Other Liabilities 18
------
Total Liabilities 1,041
------
Net Assets in Reserve for Disposition $ (403)
======
</TABLE>
8. 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.
9. SEGMENT INFORMATION
Information by reportable segment for continuing operations for the three months
ended December 31, 1999 is as follows: (in thousands)
<TABLE>
<CAPTION>
Preschool Charter Private Corporate
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
Revenue $ 3,575 $4,375 $3,735 $ --
EBITDA $ (776) $ 806 $1,091 $(2,782)
Income (Loss) before taxes
& discontinued operations $(1,371) $ 621 $ 73 $(3,075)
</TABLE>
12
<PAGE> 13
Information by reportable segment for continuing operations for the six months
ended December 31, 1999 is as follows: (in thousands)
<TABLE>
<CAPTION>
Preschool Charter Private Corporate
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
Revenue $ 8,012 $7,747 $ 5,525 $ --
EBITDA $ (308) $1,621 $ 617 $(5,330)
Income (Loss) before taxes and
discontinued operations $(1,326) $ 1,410 $(1,056) $(5,885)
</TABLE>
Definition
EBITDA is defined as the earnings from continuing operations before interest,
taxes, depreciation and amortization.
10. RELATED PARTY TRANSACTIONS
A member of the Board of Directors and shareholder and his respective firm
provide legal services to the Company. Total amounts incurred for these related
party services totaled $188,718 and $212,354 for the three months and six months
ended December 31, 1999, respectively. At December 31, 1999, $211,867 is due
to the firm.
The Company currently has a $5,000,000 line of credit from an entity
controlled by one of its directors. Total borrowings outstanding at December 31,
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 31, 2000 with the issuance of a warrant for the purchase of 250,000 shares
of the Company's common stock at $3.00 per share. Under the terms of this note,
because shareholders rejected a proposed issuance of additional shares to
convert this loan to equity, as of January 1, 2000, the interest rate on the
outstanding balance increases to 18%. In addition, the related party is entitled
to designate two additional directors for appointment to the Company's Board of
Directors. Interest accrued but not yet paid on the note totaled $153,000 and
$307,000 for the three months and six months ended December 31, 1999 with a
total of $395,000 owed as of that date.
If line of credit remains unpaid at March 1, 2000, the Company will likely seek
an extension of the agreement. There can be no assurance, however, that such an
extension would be granted.
11. 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 from continuing operations
of $3.8 million and $6.9 million for the three months and six months ended
December 31, 1999, respectively, and at December 31, 1999 had negative working
capital of $12.6 million and an accumulated deficit of $46.3 million at December
31, 1999. These factors, among other things, raise substantial doubt that the
Company will be able 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 of assets and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Management's plans in process to resolve near-term cash flow issues include
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.
In December 1999, the Board of Directors hired First Security Van Kasper as the
exclusive representative and financial advisor to pursue strategic alternatives
through the financing, potential sale and/or partial sale of the Company.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATION
Revenue from continuing operations for the six months ended December 31, 1999
increased 41% to $21.3 million as compared to $15.1 million for the same period
in the prior year. For the quarter, revenues were up 30% to $11.7 million from
$9.0 for 1998. The increase in revenue over the prior year is due primarily to
the addition of two new charter schools in Arizona, as well as increases in
student enrollment at the Company's private schools. Approximately $1.5 million
of the increase for six months and $638,000 for the quarter was from the two
management contracts, which were suspended during the quarter ended December 31,
1999. After reflecting the discontinuance of ABC and the managed charter
contracts, total students served in TesseracT schools decreased from 5,200 to
4,800 as of December 31, 1998 and 1999, respectively.
Program related costs totaled $12.5 million and $8.1 million or 59% and 54% of
revenue for the six months ended December 31, 1999 and 1998, respectively. For
the quarter, these costs increased by $2 million and from 50% to 56% of revenue.
The 5% and 6% 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, costs incurred relating to closed schools, and the fact that no
revenues were recorded from management contracts after October 1999, even though
costs continued to be incurred.
Operating expenses from continuing operations totaled $12.2 million and $10.1
million, or 57% and 67% of revenue for the six months ended December 31, 1999
and 1998, respectively. While operating expenses in aggregate increased, is as a
percentage of related revenue. Operating expenses decreased from 67% to 57% for
the six months ended December 31, 1999. For the quarter, operating expenses as
a percent of revenue were consistent with prior year. The percentage variance
is primarily due to disproportionately high costs in the prior year
associated with the acquisitions and integration of Sunrise. Additionally, the
Company added personnel and infrastructure in 1998 in anticipation of planned
growth.
The provision for depreciation and amortization from continuing operations
increased to $2.0 million as compared to $1.2 million for the six months ended
December 31, 1999 and 1998, respectively. For the quarter, it increased from
$577,000 to $1.2 million. The increase is due primarily to finance lease
treatment for five of the Company's school sites, and an overall increase in the
Company's furniture, fixtures and equipment due to the opening of new schools.
Interest and other expenses totaled $1,457,000 for the six months ended December
31, 1999 as compared to other expenses of $208,000 for the same period in the
prior year. Similarly, the net amount went from $112,000 of income to $869,000
of expense. The change is due primarily to an increase in interest expense for
property held under finance leases and an increase in debt as compared to the
previous year's comparable quarter.
The Company reported a net loss from continuing operations of $6.9 million or
$0.70 per share for the six months ended December 31, 1999 as compare to $4.1
million or $0.42 per share for the six months ended December 31, 1998. For the
second quarter, the loss from continuing operations was $3.8 million compared to
$1.2 million for the same period in the prior year. The increased net loss is
due to growth related start-up costs as previously described, additional
interest charges and additional administrative costs deemed necessary to support
anticipated growth. As management has decided to defer any material growth
strategies for the foreseeable future, general and administrative expenses
relating to previously anticipated growth are being curtailed. Nonetheless, the
Company has commitments and contracts which would require renegotiation in order
to reduce expenses sufficiently to avoid losses in future periods.
14
<PAGE> 15
CAPITAL RESOURCES AND LIQUIDITY
Historical Sources and Uses of Cash:
During the six months ended December 31, 1999, net cash provided by operating
activities totaled $416,000. This was comprised of positive cash flow on an
aggregate basis from continuing school sites, offset by the imposition of
corporate overhead as well as losses relating to closed sites and discontinued
operations. Changes in operating assets and liabilities, most significantly, a
deterioration of current assets to current liabilities since June 30, 1999 of
$2.1 million, including a $3.5 million increase in accounts payable, funded the
consolidated positive cash flow from operations.
Net cash used by investing activities totaled $3.3 million for the six months
ended December 31, 1999. The use of cash was primarily related to the
acquisition of furniture, fixtures and equipment related to opening new schools
in the first quarter.
Net cash provided from financing transactions for the six months ended December
31, 1999 totaled $1.6 million. The sale-leaseback transaction that cured the
default on the Company's existing capital leases by funding a required escrow
account, as well as sale-leaseback agreements on new school computer equipment
provided the majority of the cash.
Expected Sources and Uses of Cash:
The Company's uses of capital for the remainder of the fiscal year ending June
2000, other than providing working capital for operating losses (including
scheduled payments on the Company's lease obligations) and paying creditors,
will be maintaining schools and paying interest and principal on outstanding
indebtedness.
Subsequent to December 31, 1999, the Company negotiated a $1.3 million loan on
vacant land that is being held for school expansion. For the remainder of the
fiscal year, the Company expects its primary sources of cash will be from
collection of amounts still outstanding under the terminated management
contracts and from the recovery of advances made on behalf of the developer as
described below. The Company is aggressively pursuing collection of these
amounts and is attempting to negotiate settlement of all outstanding issues and
believes amounts recorded at December 31, 1999 will be recovered. However, there
can be no assurance the Company will be successful in these negotiations. A
failure to recover these receivables and advances would have a material adverse
effect on the Company's business, financial condition and results of operations.
Additionally, the Company has engaged First Security Van Kasper to pursue
strategic alternatives to enable the Company to resolve its going concern
issues. Concurrent with this, the Board adopted a plan of disposition for ABC,
which anticipates the transaction being concluded by April 30, 2000.
There can be no assurance the Company will be successful in restructuring or
financing efforts. Any such restructuring, refinancing and/or additional
financing could entail equity dilution to the holders of the Company's stock at
that time, and that dilution could be material.
DISCONTINUED OPERATIONS, TITLE IV FUNDING AND POSTSECONDARY LICENSING
As discussed in Note 6 to the condensed consolidated financial statements,
participation in the U.S. Department of Education's Title IV programs through
its wholly-owned subsidiary, 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
15
<PAGE> 16
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 amounted 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. Management is pursuing various options,
including possible sale of ABC.
In the event the Company is unable to comply with the requirement, Title IV
funds would be unavailable for ABC students. In addition to the Title IV
requirements, the Arizona State Board for Private Postsecondary Education has
stipulated that the Company post a surety bond of $700,000 before March 2, 2000
in order to qualify for licensing renewal if ABC is not sold to a party who
otherwise meets the licensing requirements.
Management believes its plan to dispose of ABC through a sale occurring by April
30, 2000 will ultimately be successful and that the Company will not be required
to post the letter of credit or the bond. However, non-compliance with these two
requirements, if the subsidiary is not sold in a timely manner, 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 six months ended December 31, 1999,
approximately 27% and 29% 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 and other
charter school operators are 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 $1.8 million and $2.6 million for the three months and six
months ended December 31, 1999, respectively.
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.
The amount of required annual prepayment due September 1, 1999 totaling
$2,754,000 was not made. The Company began paying the expenses on a monthly
basis. The result of this default was the
16
<PAGE> 17
reclassification of approximately $21 million of long-term obligations as
short-term in the interim condensed consolidated balance sheet as of December
31, 1999.
During December 1999, the Company converted the financing of an additional
school to a sale-leaseback transaction with the same lender. As a result of this
transaction, the Company funded the escrow account with an additional $1.1
million and issued 120,000 shares of common stock to the lender, thereby curing
the default. Under the terms of the agreement, the Company is required to make
certain monthly payments toward the lease in addition to disbursing funds from
the escrow account.
At this time, based on anticipated recovery of funds due the Company under the
development agreements described in Note 6, management believes it will have
sufficient cash by September 1, 2000 to avoid a recurrence of the default.
Although management is currently in negotiations to resolve the issues and
obtain financing for the affected schools covered by the developers' agreements,
there can be no assurance that these negotiations will be successful and that
the funds will be received in sufficient time to avoid a default with regard to
the escrow requirements. If another default should occur with respect to this
debt, $21.4 million now classified as a long-term obligation would be considered
a current liability.
The Company currently has a $5,000,000 line of credit from an entity controlled
by one of its directors. Total borrowings outstanding at December 31, 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 31,
2000 with the issuance of a warrant for the purchase of 250,000 shares of the
Company's common stock at $3.00 per share. Under the terms of this note, because
shareholders rejected a proposed issuance of additional shares to convert this
loan to equity, as of January 1, 2000, the interest rate on the outstanding
balance increases to 18%.
If the line of credit remains unpaid at March 31, 2000, the Company will likely
seek an extension of the agreement. There can be no assurance, however, that
such an extension would be granted.
DEVELOPMENT AGREEMENTS
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. As of December 31, 1999, the Company has advanced approximately $4.4
million related to these projects. The Developer was unable to obtain necessary
financing. Therefore one of these schools has not been completed and further
construction has been suspended.
As of December 31, 1999, the Company has $2 million relating to the school under
construction, which is reflected in the accompanying financial statements as
land and construction in progress. The remaining $2.4 million was advanced on
behalf of the developer for the open school and is reflected in other current
assets.
As of December 31, 1999, additional commitments relating to these schools and
estimated costs to complete the unopened school totaled approximately $5.9
million. Additionally, a subcontractor has filed suit for foreclosure on its
mechanics lien. A court has stayed action on the lien until after February 22,
1999 in order to allow the Company or developer to obtain evidence of a
financing commitment or potentially relinquish control of the properties. The
Company has received and accepted a letter of intent from a qualified buyer to
purchase both Arizona schools at a price that would repay the Company
substantially all of its investment in such properties. Such letter of intent
also requires the approval of the developer, which to this point has not been
willing to accept such purchase offer.
17
<PAGE> 18
Management is currently negotiating with all parties and believes it will be
successful in resolving these issues and recovering of the funds advanced.
However, there is no guarantee that these negotiations will be successful.
Failure to cure the outstanding liens could have a material, adverse effect on
the Company's financial position and results of operations up to and including
the inability to recover the $4.4 million advanced and loss of the operational
revenue from the opened school. Although management believes the $4.4 million
will be recovered, it is reasonably possible that the amount the Company could
eventually recover could materially differ in the near term. Revenue from the
site totaled $1,450,000 and $2,228,000 for the three-months and six-months ended
December 31, 1999, respectively.
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 if the issue is not resolved in a timely manner. The most recent
information available indicated that mechanics liens totaled at least $4.0
million.
NASDAQ DELISTING
On February 9, 2000, the Company was delisted from the Nasdaq Stock Market for
non-compliance with the Nasdaq's minimum net tangible asset requirement.
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
of business. The Company incurred a net loss from continuing operations of $3.8
million and $6.9 million for the three months and six months ended December 31,
1999, respectively, and at Dec. 31, 1999, had negative working capital of $12.6
million and an accumulated deficit of $46.3 million. The Company's current
liquidity may adversely affect its relationship with its suppliers, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. 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 and resolve the issues relating to the development
agreement, 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. If the Company
is unable to secure sufficient financing, there could be a material, negative
impact on the Company's financial position and results from operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend upon its ability to attract and retain
highly qualified personnel. Loss of key personnel or inability to hire and
retain qualified personnel could have a material adverse effect on the Company's
business and results of operations.
On February 1, 2000, the Company's Interim Chief Executive Officer, Martha
Taylor Thomas, and its Chief Financial Officer, Richard Yonker, resigned their
positions over differences with the Board of Directors concerning direction of
the Company.
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<PAGE> 19
The Board appointed John Golle, as Chief Executive Officer, and re-hired Dr.
Lucian Spataro, as Executive Vice President, the same positions they previously
had occupied. In addition, Debra Taylor Johnson, CPA, was promoted to Chief
Financial Officer and Dr. Gary Lilyquist was promoted to Vice President of
School Operations.
FUTURE CAPITAL REQUIREMENTS
It is anticipated that TesseracT will need additional funds to support its
operations during fiscal year 2000. The term of any equity financing may be
dilutive to TesseracT's stockholders, and the terms of any debt financing are
likely to contain restrictive covenants which limit TesseracT's ability to
pursue certain other courses of action. There can be no assurance that
additional funding will be available on acceptable terms, if at all. If adequate
funds are not available, TesseracT will experience severe liquidity problems.
This matter raises substantial doubt as to TesseracT's ability to continue as a
going concern.
YEAR 2000 COMPLIANCE
As of the date of this filing, TesseracT has experienced no disruptions or
problems regarding the year 2000 changeover.
During the fourth quarter of fiscal 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 completed its system conversion integrating
its current multiple financial systems into a consolidated system and
implemented PeopleSoft for all financially significant systems. Through the date
of this filing, all of TesseracT's internal hardware and software continue to
operate as normal and to-date, and have not indicated any Year 2000 anomalies.
Other than the conversion to AA, TesseracT's expenditures for the Year 2000
effort were not material and TesseracT does not expect to incur any material
costs over the next few months in regards to Year 2000.
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 new charter
schools, the disposition of certain of the company's assets, 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
failure of the company to secure favorable terms for the disposition of its
assets the acceptance of the education services offered by the Company;
unanticipated expenses; the ability of the Company to successfully integrate all
of its
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<PAGE> 20
services into single education facilities; changes in government regulation of
the education industry or in state charter school statutes; the availability of
equipment financing at acceptable terms; and future claims for accidents at the
Company's education facilities and the extent of insurance coverage for such
claims.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 1999 Annual Meeting of Shareholders held on November 18, 1999,
and an adjournment of the meeting on December 6, 1999, the following proposals
were submitted to the shareholders:
1. Election of directors to serve until his successor is
duly elected. The directors were elected as follows:
<TABLE>
<CAPTION>
DIRECTORS NOMINEE VOTES FOR VOTES FOR WHICH AUTHORITY WITHHELD
- ----------------- --------- ----------------------------------
<S> <C> <C>
Benjamin Nazarian 7,871,311 1,257,378
Harold Nelkin 8,955,953 172,736
</TABLE>
2. Proposed to ratify the appointment of
PricewaterhouseCoopers LLP as independent public
accounts for the 2000 fiscal year. The proposal
received 8,983,897 votes for and 134,353 votes
against. There were 10,439 abstentions and no broker
non-votes.
3. Proposed to approve the issuance of shares of Common
Stock of the Company in accordance with the terms of
the Securities Purchase Agreement between the Company
and Pioneer Venture Fund, L.L.C. dated March 31,
1999, as amended. The proposal received 3,113,893
votes for and 3,870,013 votes against. There were
11,157 abstentions and 2,133,626 broker non-votes.
ITEM 5. OTHER INFORMATION
On February 1, 2000, the Company's director and interim Chief Executive
Officer, Martha Taylor Thomas, and its Chief Financial Officer, Richard Yonker,
resigned their positions over differences with the Board of Directors concerning
the direction of the Company. The Company has appointed John T. Golle as Chief
Executive Officer, Dr. Lucian Spataro as Executive Vice President and Debra
Taylor Johnson, CPA, as Chief Financial Officer. John T. Golle and Dr. Lucian
Spataro previously held the same offices of the Company that they now hold.
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Restated Certificate of Incorporation of the Company, as amended*
3.2 By-Laws of the Company**
10.1 Agreement made as of December 29, 1999 by and between Education
Properties Investors, Inc. and the Company
10.2 WARRANT NO. 2 ISSUED TO PIONEER VENTURE FUND
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None
- --------------------------------------------------------------------------------
*Incorporated by reference to the corresponding exhibit number of the Company's
Form 10-K/A for the year ended June 30, 1999 (File No. 1-11111)
**Incorporated by reference to Exhibit 3.3 of the Company's Registration
Statement on Form S-18 (File No. 33-39481-C)
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<PAGE> 22
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: February 22, 2000 THE TESSERACT GROUP, INC.
BY: /S/ John T. Golle
--------------------------------
John T. Golle
Chairman and
Chief Executive Officer
Date: February 22, 2000
BY: /s/ Debra Taylor Johnson
--------------------------------
Debra Taylor Johnson
Chief Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Restated Certificate of Incorporation of the Company, as amended*
3.2 By-Laws of the Company**
10.1 Agreement made as of December 29, 1999 by and between Education
Properties Investors, Inc. and the Company
10.2 WARRANT NO. 2 ISSUED TO PIONEER VENTURE FUND
27 Financial Data Schedule
</TABLE>
- --------------------------------------------------------------------------------
*Incorporated by reference to the corresponding exhibit number of the Company's
Form 10-K/A for the year ended June 30, 1999 (File No. 1-11111)
**Incorporated by reference to Exhibit 3.3 of the Company's Registration
Statement on Form S-18 (File No. 33-39481-C)
<PAGE> 1
Exhibit 10.1
AGREEMENT
This AGREEMENT is made as of December 29, 1999, by and between EDUCATION
PROPERTIES INVESTORS, INC., a Nevada corporation (formerly known as EduCorp
Properties, Inc., and hereinafter referred to as "EPI" and THE TESSERACT GROUP,
INC., a Minnesota corporation ("TesseracT"), with reference to the following
facts:
A. On or about November 19, 1998, EPI made a loan ("Loan") to TesseracT
for the purpose of funding the construction of certain improvements on property
located in North Scottsdale, Arizona, more particularly described on EXHIBIT
"A" attached hereto and incorporated herein ("North Scottsdale Property").
TesseracT has subdivided the North Scottsdale Property into two legal parcels,
one constituting the primary school and legally described on EXHIBIT "B"
attached hereto and incorporated herein ("Primary School Parcel"), and one
constituting the high school and legally described on EXHIBIT "C" attached
hereto and incorporated herein ("High School Parcel"). The original, maximum
principal amount of the Loan was Eight Million Three Hundred Ninety Thousand
and No/100 Dollars ($8,390,000.00).
B. EPI is the landlord, and TesseracT is the tenant, under and pursuant
to those certain three (3) leases; one dated June 9, 1998, pertaining to
certain property located in Eagan, Minnesota ("Eagan Lease"); one dated June 9,
1998, pertaining to two (2) certain properties located in Paradise Valley,
Arizona ("Paradise Valley Properties Lease"); and one dated September 18, 1998,
pertaining to certain property located in Ahwatukee, Phoenix, Arizona
("Ahwatukee Lease"). Pursuant to the Option Agreement (described in Paragraph E,
below), the property which is subject to the Ahwatukee Lease will become part
of the Ahwatukee/Primary School Lease.
C. Pursuant to that certain Collateral Pledge Agreement dated May 29,
1998, by and between EPI and TesseracT, as amended pursuant to that certain
Amendment to Collateral Pledge Agreement dated November 19, 1998 (collectively,
the "Pledge Agreement") and pursuant to certain provisions of the Eagan Lease,
Paradise Valley Properties Lease, and Ahwatukee Lease, TesseracT is required to
prepay twelve (12) months of "Minimum Rent" (as that term is defined in such
respective Leases) and, under certain conditions, prepay twelve (months) of
Impositions (as that term is defined in the respective Leases) on the first day
of September of each year during the term of each respective Lease.
D. Pursuant to the Leases and the Pledged Agreement, TesseracT was
required to deposit Two Million Four Hundred Ninety Four Thousand Four Hundred
Forty Dollars ($2,494,440.00) in the Pledged Account (as that term is defined
in the Pledge Agreement) on September 1, 1999, in respect of prepaid Minimum
Rent and prepaid Impositions, but TesseracT failed to do so. Accordingly, an
"Event of Default" has occurred under the Eagan Lease, Paradise Valley
Properties Lease and Ahwatukee Lease. On the Closing Date (defined below),
TesseracT is required to deposit prepaid
-1-
<PAGE> 2
Minimum Rent and prepaid Impositions pursuant to the Ahwatukee/Primary School
Lease (defined in Paragraph 2, below).
E. EPI and TesseracT are parties to that certain Option to Purchase and
Right of First Refusal dated November 19, 1998 ("Option Agreement") pursuant to
which EPI has the right to purchase the North Scottsdale Property. On or about
November 24, 1999, EPI exercised its option to purchase the North Scottsdale
Property pursuant to the Option Agreement. However, and as provided below, EPI
will purchase only the Primary School Parcel, and the High School Parcel will
not be subject to the Option Agreement.
F. EPI and TesseracT are parties to that certain Put Agreement dated
November 19, 1998, pursuant to which TesseracT may compel EPI to purchase the
North Scottsdale Property. The parties desire to terminate the Put Agreement.
G. TesseracT has agreed to fund the Pledged Account for the period
September 1, 1999 through August 31, 2000, pursuant to the terms more
specifically described below in this Agreement.
H. On or about October 29, 1999, EPI and TesseracT executed that certain
non-binding letter of intent, which contemplates the transactions described in
this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. PURCHASE OF PRIMARY SCHOOL PARCEL.
1.1 TesseracT shall sell, and EPI shall purchase, the Primary School
Parcel. The purchase price and the other terms and conditions of the sale of
the Primary School Parcel shall be consistent in every respect with the Option
Agreement; except that (i) EPI shall not purchase (nor have the right to
purchase) the High School Parcel; (ii) the "Closing Date" (as that term is
defined in the Option Agreement) shall be as soon as possible after full
execution of this Agreement; (iii) the "Escrow" (as that term is defined in the
Option Agreement) shall be opened as soon as reasonably practicable after the
full execution of this Agreement or, if the parties mutually agree, no formal
escrow will be opened and, instead, the parties shall each deposit the
documents and monies with the Escrow Holder (as that term is defined in the
Option Agreement) necessary to consummate the purchase and sale in accordance
with the Option Agreement and this Agreement; and (iv) the Nine Million Four
Hundred Thousand and No/100 Dollar ($9,400,000.00) purchase price to be paid by
EPI pursuant to the Option Agreement shall be paid as follows: (A) a portion of
the purchase price shall be used to pay off the entire balance of the Loan
(which amount shall not be funded through the Escrow, but shall merely be
credited against the purchase price); and (B) the balance of the purchase price
shall be deposited in the Pledged Account.
1.2 On or prior to the Closing Date, EPI shall deposit with the
Escrow Holder (as that term is defined in the Option Agreement) a release of
the Deed of Trust,
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<PAGE> 3
and terminations of all UCC-1 Financing Statements given by TesseracT in
connection with the Loan, in form customarily used in the State of Arizona.
1.3 Upon the closing of the purchase and sale, EPI's right of first
refusal to purchase the North Scottsdale Property (pursuant to Paragraph 10 of
the Option Agreement) shall automatically, and without further notice or action
by any party, terminate.
1.4 TesseracT shall at TesseracT's expense (i) cause to be released
from record title to the Property that certain "City of Scottsdale Covenant And
Agreement To Hold Property As One Parcel," as set forth in instrument recorded
in Document No. 98-0896122 (the "Covenant and Agreement"), or (ii) cause the
Covenant and Agreement to be modified so as to allow for the subdivision of the
Property and for the separate ownership of the High School Parcel and the
Primary School Parcel, subject to EPI's review and approval.
2. LEASE OF PRIMARY SCHOOL PARCEL. Effective upon the closing of the
purchase and sale of the Primary School Parcel, EPI, as landlord, and
TesseracT, as tenant, shall enter into that certain Amended and Restated Lease,
more particularly described in Exhibit "C" of the Option Agreement
("Ahwatukee/Primary School Lease"). The said Amended and Restated Lease shall
constitute a lease of the Primary School Parcel, as well as a lease of the
property located in Ahwatukee, Arizona (which is described in and currently the
subject of the Ahwatukee Lease).
3. PUT AGREEMENT. Upon full execution of this Agreement, the Put
Agreement shall automatically terminate without further notice or action by any
party and TesseracT shall have no right to exercise any of its rights under the
Put Agreement.
4. PLEDGED ACCOUNT; CURE OF LEASE DEFAULTS: ACKNOWLEDGEMENT REGARDING
RENT.
4.1 On the Closing Date, that portion of the purchase price which is
not applied to satisfy and pay off the Loan shall be deposited by EPI into the
Pledged Account (to serve as prepaid Minimum Rent and prepaid Impositions (as
those terms are defined in the various Leases). However, the parties
acknowledge that, even after the balance of the purchase price is deposited
into the Pledged Account, the amount in the Pledged Account will still be
insufficient to satisfy the requirements of the Eagan Lease, Paradise Valley
Properties Lease and Ahwatukee/Primary School Lease (collectively, "Leases")
with respect to prepaid Minimum Rent and prepaid Impositions. EPI and TesseracT
have therefore agreed that, for the period from the Closing Date until such
time as there are sufficient sums remaining in the Pledged Account to then pay
the entire balance of prepaid Minimum Rent and prepaid Impositions through
August 31, 2000, TesseracT shall pay Minimum Rent in the amount provided in
Paragraph 4.2. Accordingly, the current Events of Default under the Leases with
respect to prepaid Minimum Rent and prepaid Impositions shall be deemed waived
by EPI as of the Closing Date. In addition, to the extent any default exists
under the Pledge Agreement by reason of TesseracT's failure to deposit prepaid
Minimum Rent and prepaid Impositions under
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<PAGE> 4
the Leases as and when currently due, such default shall be deemed waived by
EPI to the same extent as EPI has waived the Events of Default presently
existing under the Leases by reason of TesseracT's failure to deposit prepaid
Minimum Rent and prepaid Impositions as and when presently required.
4.2 TesseracT shall pay aggregate monthly Minimum Rent under all of
the Leases in the amount of One Hundred Fifty Thousand and No/100 Dollars
($150,000.00) per month on the first day of each and every month commencing
January 1, 2000 until such time as there are sufficient sums remaining in the
Pledged Account to pay the entire Minimum Rent and Impositions through August
31, 2000. The parties acknowledge that aggregate monthly Minimum Rent for all
of the Leases shall, on January 1, 2000, be Two Hundred Seven Thousand Eight
Hundred Seventy and 36/100 Dollars ($207,870.36). Accordingly, commencing
January 1, 2000, TesseracT shall pay One Hundred Fifty Thousand No/100 Dollars
($150,000.00) directly to EPI as a portion of the said aggregate monthly
Minimum Rent, with the balance of such aggregate monthly Minimum Rent (to wit,
Fifty-Seven Thousand Eight Hundred Seventy and 36/100 Dollars ($57,870.36))
being distributed from the Pledged Account directly to EPI. Until there are
sufficient funds remaining in the Pledged Account to cover prepaid Minimum Rent
and prepaid Impositions through August 31, 2000, TesseracT shall continue to
pay EPI (as a partial payment toward the then applicable monthly Minimum Rent)
the sum of One Hundred Fifty Thousand and No/100 Dollars ($150,000.00) per
month. (The said $150,000.00 shall be deemed to apply to monthly Minimum Rent
under each Lease, pro-rata, in the ratio that Minimum Rent under each Lease
bears to the other.) Notwithstanding the foregoing, and irrespective of
anything else in this Agreement, on or prior to September 1, 2000, TesseracT
shall deposit in the Pledged Account all prepaid Minimum Rent and prepaid
Impositions for all Leases for the twelve (12) month period from September 1,
2000 through August 31, 2001. Accordingly, except as specifically provided
above in this Paragraph 4, nothing shall be deemed to modify TesseracT's
obligation to pay annual prepaid Minimum Rent and prepaid Impositions on
September 1 of each year pursuant to the specific requirements of the Leases.
4.3 The provisions of this Paragraph 4 regarding the waiver by EPI
of Events of Default constitute a limited waiver, specifically limited to the
provisions of Paragraph 4.1 and 4.2 above, then no other waiver of any
provision of any of the Leases (or any other agreement between EPI and
TesseracT) shall be implied. Among other things, to the extent that Minimum
Rent under any of the Leases is increased pursuant to the Leases, such
increases shall remain applicable to adjust the Minimum Rent. In addition, and
without limiting anything set forth above in this Paragraph 4, TesseracT shall
not be entitled to have any monies disbursed from the Pledged Account in
respect of any Impositions until such time as there are sufficient sums
remaining in the Pledged Account to then pay the entire Minimum Rent and
Impositions through August 31, 2000. As soon as reasonably practicable after
the date hereof, the parties shall agree upon a written schedule reflecting the
amounts existing in the Pledged Account and the anticipated month during which
there shall be sufficient funds in the Pledged Account to pay Impositions and
Minimum Rent for the then balance of the Lease year ending August 31, 2000.
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<PAGE> 5
5. TRANSFER OF 120,000 SHARES OF TESSERACT COMMON STOCK TO EPI. At least
one (1) day prior to the Closing, TesseracT shall deliver to EPI, a certificate
or certificates representing 120,000 shares of the issued and outstanding common
stock of TesseracT, .01 par value, issued in the name of Education Property
Investors, Inc. ("Shares"), in the form attached hereto as Exhibit "D." The
shares shall be duly authorized, validly issued and fully paid. No additional
consideration shall be paid or given by EPI for the transfer for the aforesaid
shares, it being acknowledged and agreed by TesseracT and EPI that the shares
are being transferred to EPI in consideration of EPI's agreements under this
Agreement.
6. NOTICES. All notices required or permitted to be given pursuant to
this Agreement shall be either (i) personally delivered; (ii) sent via
facsimile transmission; or (iii) sent via overnight courier (such as Federal
Express, DHL, etc.). If sent via facsimile on a business day, during normal
business hours, receipt shall be deemed effective upon confirmation of
transmittal thereof. If sent via overnight courier, receipt shall be deemed
effective one (1) business day after the sending thereof. All notices to be
given pursuant to this Agreement shall be given to the parties at the following
respective addresses.
If to Optionor:
The TesseracT Group, Inc.
9977 North 90th Street, Suite 180
Scottsdale, Arizona 85258
Attention: Mr. Richard Yonkers
Telecopier No.: (480) 767-2323
with a copy to:
Faegre & Benson, LLP
2500 Republic Plaza
370 Seventeenth Street
Denver, Colorado 80202-4004
Attention: Diane B. Davies, Esq.
Telecopier No.: (303) 820-0600
If to Optionee:
Education Properties, Inc.
c/o LTC Properties, Inc.
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
Attention: Mr. Christopher T. Ishikawa
Telecopier No.: (805) 981-8663
with a copy to:
Education Properties, Inc.
c/o LTC Properties, Inc.
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
Attention: Julia Kopta, Esq.
Telecopier No.: (805) 981-3616
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<PAGE> 6
and: Stern, Neubauer, Greenwald & Pauly
1299 Ocean Avenue, Suite 400
Santa Monica, CA 90401-1007
Attention: Dennis L. Greenwald, Esq.
Telecopier No.: (310) 395-5961
7. NO ASSIGNMENT. Neither party may assign to any other party any of its
right or interest in this Agreement, nor delegate any of its duties under this
Agreement.
8. WAIVER. No waiver by any party at any time of any breach of any
provision of this Agreement shall be deemed a waiver or a breach of any other
provision herein or a consent to any subsequent breach of the same or another
provision. If any action by any party shall require the consent or approval of
another party, such consent or approval of such action on any one occasion
shall not be deemed a consent to or approval of such action on any subsequent
occasion or a consent to or approval of any other action.
9. CAPTIONS AND HEADINGS. The captions and paragraphs numbers appearing
in this Agreement are inserted only as a matter of convenience and do not
define, limit, construe, or describe the scope or intent of this Agreement.
10. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be considered an original and all of which taken together shall
constitute one and the same instrument.
11. GOVERNING LAW. This Agreement has been prepared, negotiated and
executed in, and shall be construed in accordance with, the laws of the State
of California.
12. ATTORNEYS FEES. If either party named herein brings an action or
proceeding to enforce the terms hereof or declare rights hereunder, the
prevailing party in any such action (or proceeding), on trial or appeal, shall
be entitled to its reasonable attorneys' fees to be paid by the losing party as
fixed by the Court.
13. TIME OF ESSENCE. Time is of the essence with respect to all matters
contained in this Agreement.
14. DRAFTING OF AGREEMENT. EPI and TesseracT acknowledge that this
Agreement has been negotiated at arm's length, that each party has been
represented by independent counsel and that this Agreement has been drafted by
both parties and no one party shall be construed as the draftsperson.
15. NO THIRD PARTY BENEFICIARY RIGHTS. This Agreement is entered into
for the sole benefit of EPI and TesseracT and no other parties are intended to
be direct or incidental beneficiaries of this Agreement and no third party
shall have any right in, under or to this Agreement.
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<PAGE> 7
16. CLOSING COSTS AND LEGAL FEES. TesseracT shall pay all costs necessary
to consummate the transactions contemplated by this Agreement, including but
not limited to all costs required to be paid by TesseracT pursuant to the
Option Agreement and all other legal fees of EPI in connection with this
Agreement. All such costs shall be paid on the Closing Date and none of such
costs may be paid from net proceeds from the purchase price paid by EPI for the
Primary School Parcel (all of which net proceeds shall be deposited in the
Pledged Account pursuant to Paragraph 1.1, above).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement this
day and year first above written.
"TENANT":
THE TESSERACT GROUP, INC.,
a Minnesota corporation
By: /s/ Martha Taylor Thomas
--------------------------
Its: CEO
--------------------------
[SIGNATURES CONTINUED ON NEXT PAGE]
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<PAGE> 8
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
"LANDLORD":
EDUCATION PROPERTIES INVESTORS, INC.,
a Nevada corporation
By: /s/ Chris Ishikawa
----------------------------------
Its: V.P. & Chief Financial Officer
----------------------------------
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<PAGE> 1
Exhibit 10.2
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").
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
<PAGE> 2
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 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
2
<PAGE> 3
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 Offerings. 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
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<PAGE> 4
Stock outstanding on such record 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 (1) 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.
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<PAGE> 5
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, (ii) shares issued upon the
exercise of such rights, options or warrants or upon conversion or exchange of
such convertible or exchangeable securities, and (iii) 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,
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<PAGE> 6
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 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 National Association of Securities Dealers Automated
Quotations System ("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
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<PAGE> 7
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.
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
<PAGE> 8
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 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.
8
<PAGE> 9
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 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
9
<PAGE> 10
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 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.
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<PAGE> 11
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
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. For purposes of Section 9 of
this Warrant, shares issued pursuant to the Conversion Right shall be treated as
if they were issued upon the exercise of this Warrant.
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.
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<PAGE> 12
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;
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 certificate 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
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<PAGE> 13
g. Other than options to purchase 1,729,506 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 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
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<PAGE> 14
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.
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 Minnesota, 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
------------------------------------
Name:
Title:
Address: 9977 North 90th Street
Scottsdale, AZ 85258
Dated: as of October 14, 1999
15
<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)
16
<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.
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<PAGE> 18
(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 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:
-----------------------------------
18
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<S> <C>
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<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
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0
0
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</TABLE>
