<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 MARCH 31, 2000
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) (IRS 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) 706-2500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
As of March 31, 2000, 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
MARCH 31, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
Condensed consolidated balance sheets as of
March 31, 2000 (Unaudited) and June 30, 1999 3
Condensed consolidated statements of operations for
the nine months ended March 31, 2000 and 1999 (Unaudited) 4
Condensed consolidated statements of operations for
the three months ended March 31, 2000 and 1999 (Unaudited) 5
Condensed consolidated statements of cash flows for
the nine months ended March 31, 2000 and 1999 (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 1. LEGAL PROCEEDINGS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
Signatures 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TESSERACT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) MARCH 31, JUNE 30,
2000 1999
-------- --------
ASSETS (UNAUDITED)
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 771 $ 2,545
Settlement Receivable -- 650
Accounts Receivable, Net 3,759 1,958
Other Current Assets and Prepaid Rent 4,115 1,658
-------- --------
TOTAL CURRENT ASSETS 8,645 6,811
Intangible Assets, Net 14,482 17,291
Property and Equipment, Net 33,202 37,002
Deposits and Other Assets 1,200 2,120
-------- --------
TOTAL ASSETS $ 57,529 $ 63,224
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short Term Notes Payable $ 5,849 $ 5,999
Accounts Payable 5,054 1,999
Reserve for Loss on Disposition of ABC 551 --
Notes Payable, Current Portion 25,267 --
Other Current Liabilities 8,447 9,861
-------- --------
TOTAL CURRENT LIABILITIES 45,168 17,859
Long Term Obligations 1,332 21,615
Other 965 990
-------- --------
TOTAL LIABILITIES 47,465 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 March 31, 2000, and
9,780,331 at June 30, 1999 99 98
Additional Paid-in Capital 58,849 58,371
Accumulated Deficit (48,884) (35,709)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 10,064 22,760
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 57,529 $ 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>
NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31, MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
REVENUE
SCHOOL TUITION AND OTHER $ 33,056 $ 25,398
PROGRAM RELATED COSTS 18,725 12,570
-------- --------
PROGRAM OPERATING PROFIT 14,331 12,828
OPERATING EXPENSES 18,047 14,138
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE DEPRECIATION,
AMORTIZATION AND INCOME TAX EXPENSE (3,716) (1,310)
DEPRECIATION AND AMORTIZATION (2,806) (1,894)
INTEREST AND OTHER INCOME (EXPENSE) (2,872) (402)
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAX EXPENSE (9,394) (3,606)
INCOME TAX EXPENSE -- --
-------- --------
LOSS FROM CONTINUING OPERATIONS (9,394) (3,606)
DISCONTINUED OPERATIONS (NOTE 7)
Loss from Operations of ABC (812) (724)
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) (724)
NET LOSS $(13,175) $ (4,330)
======== ========
NET LOSS PER COMMON SHARE (BASIC AND DILUTED)
Continuing Operations $ (0.96) $ (0.37)
Loss from Discontinued Operations and Disposal of ABC (0.38) (0.08)
-------- --------
Net Loss $ (1.34) $ (0.45)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and Diluted 9,831 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) MARCH 31, MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
REVENUE
SCHOOL TUITION AND OTHER $ 11,773 $ 10,298
PROGRAM RELATED COSTS 6,204 4,354
-------- --------
PROGRAM OPERATING PROFIT 5,569 5,944
OPERATING EXPENSES 5,885 3,958
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
DEPRECIATION, AMORTIZATION AND INCOME TAX EXPENSE (316) 1,986
DEPRECIATION AND AMORTIZATION (803) (772)
INTEREST AND OTHER INCOME (EXPENSE) (1,416) (745)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAX EXPENSE (2,535) 469
INCOME TAX EXPENSE -- --
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,535) 469
DISCONTINUED OPERATIONS (NOTE 7)
Loss from Discontinued Operations of ABC
-- (371)
-------- --------
NET INCOME (LOSS) $ (2,535) $ 98
======== ========
NET INCOME (LOSS) PER COMMON SHARE (BASIC AND DILUTED)
Continuing Operations $ (0.26) $ 0.05
Loss from Discontinued Operations of ABC -- (0.04)
-------- --------
Net Income (Loss) $ (0.26) $ 0.01
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 9,900 9,580
Diluted 9,900 9,598
</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>
NINE MONTHS ENDED
(IN THOUSANDS) MARCH 31, MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(13,175) $ (4,330)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities:
Depreciation and Amortization 3,048 2,082
Increase in Allowance for Doubtful Accounts 310 --
Common Stock, Warrants and Option Issuance 479 --
Loss on Sale of Note Receivable 151 --
Loss on Disposition of Fixed Assets 101 --
Loss from Reduction in Net Recoverable Value of Receivable 570 --
School Closure Reserve 447 --
Reserve and Intangible Write-off For Discontinued Operations 2,668 --
Changes in Operating Assets and Liabilities 3,949 353
-------- --------
Net Cash Used in Operating Activities (1,452) (1,895)
-------- --------
INVESTING ACTIVITIES
Additions to Property and Equipment (2,592) (14,689)
Sale of Note Receivable 483 --
Purchase of Academy of Business, Net of Cash Acquired -- (106)
Cash of Preschool Services, Inc. -- 1,137
-------- --------
Net Cash Used in Investing Activities (2,109) (13,658)
-------- --------
FINANCING ACTIVITIES
Proceeds from Exercise of Stock Options -- 31
Proceeds from Financing Transactions 3,291 12,295
Prepayment of Facility Financing Costs -- (581)
Advances (Repayment) on Line of Credit (150) 799
Repayment of Long-Term Debt (1,354) (722)
-------- --------
Net Cash Provided by Financing Activities 1,787 11,822
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (1,774) (3,731)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,545 5,543
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 771 $ 1,812
======== ========
</TABLE>
SUPPLEMENTAL CASH FLOW DISCLOSURE
<TABLE>
<CAPTION>
Non-cash transactions: 2000 1999
- --------------------- ------ -------
<S> <C> <C>
Property and Equipment Written off from Closed School Reserve $1,391 $ --
Sale-Leaseback Financing of North Scottsdale Building $9,400 $ --
Prepaid Rent Escrow and Loan Reserves $1,077 $ --
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
MARCH 31, 2000
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 generally accepted accounting principles
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 March 31,
2000 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 nine months ended
March 31, 2000, 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.
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.
7
<PAGE> 8
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 nine months ended March 31, 2000, approximately 32%
and 35% 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, irrespective of costs incurred, totaled
approximately $1.9 million and $4.5 million for the three months and nine months
ended March 31, 2000, 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 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.
Another underperforming preschool in Arizona was closed in January 2000,
resulting in a loss on closed schools totaling approximately $30,000. During the
three month period ended March 31, 2000, management increased reserves on
previously closed schools by $341,000 to reflect potential future rents payable
under leases that have not been successfully terminated as of March 31, 2000.
While the estimated losses recorded on the various closed schools are based on
management's best estimate, actual losses could differ materially.
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.
8
<PAGE> 9
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 was required to make
certain monthly payments toward the lease during the quarter ended March 31,
2000 in addition to disbursing funds from the escrow account.
At December 31, 1999, management believed it would have sufficient cash by
September 1, 2000 to avoid a recurrence of the default. However, management has
determined it is probable that current and projected operating cash flow does
not appear to support the ability to make the deposit on September 1 and avoid
recurrence of the default. Therefore, the entire balance of $21 million has been
reclassified as current at March 31, 2000.
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 would have potentially been 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 $1.8 million. In addition, the Arizona State Board for Private
Postsecondary Education had notified the Company that it would require ABC to
post a surety bond of $700,000 as a stipulation for licensing renewal.
Subsequent to March 31, 2000, the Company entered into a definitive agreement to
sell ABC, which will obviate the need to post both the letter of credit and the
surety bond. Management believes that the transaction will be completed on or
about June 1, 2000. However, if the transaction is not completed, 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 $442,000 and $1,625,000 for the
three months and nine months ended March 31, 2000, 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 March 31, 2000, the Company had advanced monies 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.
Subsequent to March 31, 2000, the Company has made a commitment to sell the
schools via an agreement that conveys all operations and facilities to the
buyer. Based on an anticipated final purchase price to be computed under this
agreement, management believes approximately $570,000 of the amounts advanced on
these projects is uncollectible and has recorded a loss on net recoverable value
as of March 31, 2000. Net assets remaining on the balance sheet at March 31,
2000 relating to the advances and the assets of the schools total $4.8 million.
As a condition of the agreement, the Company will be expected to clear certain
liens and liabilities associated with the properties.
As of March 31, 2000, additional commitments relating to these schools and
estimated costs to complete the unopened school were estimated to be $5.9
million. The prospective buyer, through third party agreements, would assume
commitments relating to the completion of the schools. Additionally, legal
action for foreclosure on subcontractor mechanics liens would be terminated as a
result of the sale agreement.
Management believes the sale will be completed on or about May 22, 2000 and the
final purchase price to be computed under this agreement will be consistent with
what it has used to estimate the loss on net recoverable value of the funds
9
<PAGE> 10
advanced. However, there is no guarantee the transaction will occur and that all
issues relating to the computation of the final purchase price will be
satisfactorily resolved. If the issues are not satisfactorily resolved, it is
reasonably possible that the amount the Company could eventually recover as a
result of this transaction could materially differ in the near term. Revenue
from the completed site totaled $505,000 and $3,094,000 for the three months and
nine months ended March 31, 2000, respectively. Approximately one-half of the
revenue was attributable to transportation revenue.
In addition, various development agreements for future schools were terminated
in a prior quarter, as the Company did not have sufficient resources to complete
construction of such schools within the time period contemplated by the
agreements.
SCHOOL 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 were to either be advanced or reimbursed to the Company
and distributed by the Company to cover related operational costs. 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 $0 and
$1,490,000 for the three months and nine months ended March 31, 2000,
respectively. As of March 31, 2000, a receivable of $720,000 from these two
contracts is included in accounts receivable. Management and legal counsel are
pursuing the collection of this amount through binding arbitration, and believes
the receivables are collectible at March 31, 2000 and 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.
KEY PERSONNEL AND RELATIONSHIPS
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. During the quarter ended March 31, 2000, the
Company made commitments to certain classifications of employees that, upon the
occurrence of a change in control, as defined by the Company, the Company would
be required to accrue and make certain bonus payments totaling more than
$200,000 plus potential severance payments, should employees not be retained, in
excess of $800,000.
Subsequent to March 31, 2000, Arthur Andersen, who provides back office
accounting services for the Company, and the Company's management agreed to
terminate their contract effective June 30, 2000. The Company is currently
negotiating transition issues with Arthur Andersen as well as with an
alternative provider of accounting services.
LEGAL ACTIONS
The Company is engaged in legal actions arising in the ordinary course of its
business, including various actions to collect delinquent amounts owed by the
Company. Management has accrued estimates of its liabilities relating to the
issues where applicable and believes that the ultimate outcome of all such
matters 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.
10
<PAGE> 11
TAX RETURNS
The Company is delinquent in the filing of various federal and state tax
returns. As there are no taxes anticipated as a result of these delinquent
returns due to the Company's history of recent losses, management does not
believe there will be any material adverse effect as a result of the filing
deficiencies.
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. Subsequent to March 31, 2000,
the Company signed a definitive agreement to sell ABC. 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.
At March 31, 2000, $551,000 of reserves remained on the balance sheet, which
management believes is adequate given the terms of the agreement. While the
estimated net loss from discontinued operations is based on management's
analysis of the transaction, 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. 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 NINE MONTHS ENDED
ABC's OPERATING RESULTS (in thousands) MARCH 31, MARCH 31,
2000 1999 2000 1999
----- ----- ------- -------
<S> <C> <C> <C> <C>
School Tuition and Other Revenue $ 442 $ 757 $ 1,625 $ 2,247
Program Related Costs 292 458 1,071 1,220
----- ----- ------- -------
Program Operating Profit 150 299 554 1,027
Operating Expenses (422) (574) (1,453) (1,568)
Depreciation and Amortization (60) (72) (192) (167)
Interest Income(Expense) (10) (24) (13) (16)
----- ----- ------- -------
Loss From Discontinued Operations $(342) $(371) $(1,104) $ (724)
===== ===== ======= =======
</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 March 31, 2000 consist of the following (in thousands):
<TABLE>
<S> <C>
Accounts Receivable, Net $ 970
Other Current Assets 3
Property and Equipment 390
Deposits and Other Assets 25
------
Total Assets 1,388
------
Accounts Payable 269
Other Current Liabilities 746
------
Total Liabilities 1,015
------
Net Assets in Reserve for Disposition $ 373
======
</TABLE>
8. RECENTLY ISSUED ACCOUNTING STANDARDS
11
<PAGE> 12
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 March 31, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
Preschool Charter Private Corporate
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
Revenue $ 3,786 $4,099 $3,888 $ --
EBITDA $ 509 $ 882 $ 875 $(2,582)
Income(Loss) Before Taxes &
Discontinued Operations $ 158 $ 697 $ 211 $(3,601)
</TABLE>
Information by reportable segment for continuing operations for the nine months
ended March 31, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
Preschool Charter Private Corporate
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
Revenue $11,798 $11,845 $ 9,413 $ --
EBITDA $ 199 $ 2,503 $ 1,492 $(7,910)
Income(Loss) Before Taxes &
Discontinued Operations $(1,168) $ 2,107 $ (895) $(9,438)
</TABLE>
Definition:
EBITDA is defined as the earnings from continuing operations before interest and
other income (expense), taxes, depreciation and amortization.
10. RELATED PARTY TRANSACTIONS
A former member of the Board of Directors, who resigned from the Board
subsequent to March 31, 2000, and his respective firm provide legal services to
the Company. Total amounts incurred for these related party services totaled
$183,000 and $396,000 for the three months and nine months ended March 31, 2000,
respectively. At March 31, 2000, approximately $340,000 is due to the firm.
The Company currently has a $5 million loan from an entity controlled by one of
its directors, who resigned from the Board subsequent to March 31, 2000. When
the loan 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
per share. Effective January 1, 2000, the interest rate on the loan increased to
18%. In addition, the related party is entitled to designate two additional
directors for appointment to the Company's Board of Directors. Interest expense
on the note totaled $224,000 and $531,000 for the three months and nine months
ended March 31, 2000. Accrued interest of $620,000 and $89,000 was owed as of
March 31, 2000 and June 30, 1999, respectively.
The loan remained unpaid at March 31, 2000 placing the Company in default of the
agreement. Subsequent to March 31, 2000 the lender filed suit against the
Company to recover amounts owed. The Company continues to negotiate with the
lender as well as to negotiate alternative sources for refinancing, however
there is no guarantee these efforts will be successful.
11. GOING CONCERN MATTERS
12
<PAGE> 13
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 of business. As shown in the
financial statements, the Company incurred a net loss from continuing operations
of $2.5 million and $9.4 million for the three months and nine months ended
March 31, 2000, respectively, and at March 31, 2000 had negative working capital
of $36.5 million and an accumulated deficit of $48.9 million at March 31, 2000.
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 the
sale of certain assets and its business college, pursuing various financing
alternatives, as well as achieving projected improvement in operating results
for the remainder of the fiscal year. Additionally, the Company is engaged in
discussions with its lenders and vendors in order to improve its liquidity and
cash flow position. Although the Company believes that the best interests of its
lenders, vendors and the Company would be served through modifications in its
debt terms and negotiated payment terms, there can be no assurance that the
lenders or vendors will ultimately agree. In the meantime, the Company continues
to take steps to conserve and manage cash flow. Should the Company be unable to
refinance or restructure its liabilities or raise additional equity, it may be
forced to seek protection under applicable bankruptcy law.
In December 1999, the Board of Directors hired First Security Van Kasper as a
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 OPERATIONS
Revenue from continuing operations for the nine months ended March 31, 2000
increased 30% to $33.1 million as compared to $25.4 million for the same period
in the prior year. For the quarter, revenues from continuing operations were up
14% to $11.8 million from $10.3 million for 1999. 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 the nine months ended
and $0 for the three months ended March 31, 2000 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 increased from approximately 4,300 at
March 31, 1999 to 5,300 as of March 31, 2000.
Program related costs totaled $18.7 million and $12.6 million or 57% and 50% of
revenue for the nine months ended March 31, 2000 and 1999 respectively. For the
quarter, these costs increased by $1.8 million, from 42% to 53% of revenue. The
increases in program-related costs as a percentage of revenue relate 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. Operational efficiencies implemented by management have begun to be
recognized in the current quarter, as reflected in the improvement of the
quarter results relative to the year-to-date.
Operating expenses from continuing operations totaled $18.0 million and $14.1
million, which decreased slightly as a percent of revenue, from 56% to 55% for
the nine months ended March 31, 1999 and 2000. As a percentage of related
revenue, operating expenses increased from 38% to 55% for the quarter ended
March 31, 2000. The increase is primarily due to the costs associated with the
outsourcing of the Company's accounting, its legal and consulting fees, and the
increase in the closed school reserve. Much of the increase was associated with
anticipated expansion, which never occurred due to financial difficulties.
Additionally, the Company had added personnel and infrastructure in 1999 in
anticipation of planned growth, which, starting in November 1999, it began to
take steps to reduce.
The provision for depreciation and amortization from continuing operations
increased to $2.8 million as compared to $1.9 million for the nine months ended
March 31, 2000 and 1999, respectively. For the quarter, it remained consistent.
The increase for the year is due primarily to finance lease treatment for five
of the Company's school sites which were completed during the second and third
quarters of the year ended June 30, 1999, and an overall increase in the
Company's furniture, fixtures and equipment due to the opening of new schools.
Interest and other expenses totaled $2.9 million for the nine months ended March
31, 2000 as compared to $402,000 for the same period in the prior year. The net
amount of interest and other expenses for the quarter remained relatively
consistent with the prior year, before reflecting the $570,000 loss from the
reduction in the net recoverable value of advances on schools being sold. The
change for the year is due primarily to an increase in interest expense for
property held under finance leases, an overall increase in debt and the increase
to 18% for interest charged on the Pioneer note.
The Company reported a net loss from continuing operations of $9.4 million or
$0.96 per share for the nine months ended March 31, 2000 as compared to $3.6
million or $0.37 per share for the nine months ended March 31, 1999. For the
third quarter, the loss from continuing operations was $2.5 million compared to
a $469,000 profit for the same period in the prior year. The increase in the net
loss by $3.0 million from continuing operations for the quarter corresponds to
the $2.5 million increase in corporate expenses, including, as previously
described, accounting outsource costs, legal fees, closed school reserves,
increased interest on the Company's line of credit and so forth. As management
has decided to defer its originally planned growth strategies, general and
administrative expenses relating to previously anticipated growth are being
curtailed. The Company's commitments and contracts relating to the increased
costs are being renegotiated or terminated in order to reduce expenses
sufficiently to avoid losses in future periods.
If the Company is not successful in its restructuring efforts, it is possible
that the Company will be unable to continue its operations.
14
<PAGE> 15
Subsequent to March 31, 2000 Arthur Andersen, who provides back office
accounting services for the Company, and the Company's management agreed to
terminate their contract effective June 30, 2000. The Company is currently
negotiating transition issues with Arthur Andersen as well as with an
alternative provider of accounting services.
CAPITAL RESOURCES AND LIQUIDITY
Historical Sources and Uses of Cash:
During the nine months ended March 31, 2000, net cash used in operating
activities totaled $1.4 million. This was comprised of 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 $3.1 million
increase in accounts payable, funded the cash deficit caused by the losses from
operations. Net losses, as well as the $21 million reclassification of long term
debt to current, resulted in a further deterioration of current assets to
current liabilities since June 30, 1999 of $25.5 million, excluding the
reclassification of the capital lease liability from current to non-current.
Net cash used in investing activities totaled $2.1 million for the nine months
ended March 31, 2000. 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 by financing transactions for the nine months ended March
31, 2000 totaled $1.8 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.
On February 7, 2000, the Company entered into a $1.36 million loan agreement
secured by vacant land that is being held for school expansion.
Expected Sources and Uses of Cash:
The Company's uses of capital for the remainder of the fiscal year ending June
30, 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.
For the remainder of 2000, the Company expects its primary sources of cash will
be from the sale of the two schools as described under "Development Agreements"
below. Failure to collect the amounts anticipated as a result of the transaction
would have a material adverse effect on the Company's business, financial
condition and results of operations.
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. A
definitive agreement has been entered into for sale of the college, with the
transaction expected to be consummated on or about June 1, 2000. The Company has
also established a creditors' committee to assist it with the organized
resolution and/or restructuring of its substantial debt and resulting defaults
and delinquencies.
There can be no assurance the Company will be successful in its restructuring or
financing efforts. In the event the Company is not successful in restructuring
or financing, it may be required to seek protection under bankruptcy laws. 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, the
Company's 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 have been 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
15
<PAGE> 16
approximately $1.8 million. In addition, the Arizona State Board for Private
Postsecondary Education had notified the Company that it would require ABC to
post a surety bond of $700,000 as a stipulation for licensing renewal.
Subsequent to March 31, 2000, the Company entered into a definitive agreement to
sell ABC, which will obviate the need to post both the letter of credit and the
surety bond. It is believed that the transaction will be completed on or about
May 22, 2000. However, if the transaction is not completed, 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 $442,000 and $1,625,000 for the three months and nine
months ended March 31, 2000, respectively.
CHARTER SCHOOL REVENUE
The Company receives a significant amount of charter school revenues from state
agencies. As of and for the nine months ended March 31, 2000, approximately 32%
and 35% 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, irrespective of costs incurred, totaled
approximately $1.9 million and $4.5 million for the three months and nine months
ended March 31, 2000, 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 reclassification of approximately $21
million of long-term obligations as short-term 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 was required to make
certain monthly payments toward the leases during the quarter ended March 31,
2000 in addition to disbursing funds from the escrow account.
At December 31, 1999, management believed it would have sufficient cash by
September 1, 2000 to avoid a recurrence of the default. However, current and
projected operating cash flow does not appear to support the ability to make the
deposit on September 1 and avoid recurrence of the default. Therefore, the
entire balance of $21 million has been reclassified as current at March 31,
2000.
The Company currently has a $5 million loan from an entity controlled by one of
its former directors, who resigned from the Board subsequent to March 31, 2000.
When the loan became due and payable on September 30, 1999, management
16
<PAGE> 17
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. Effective January 1, 2000, the interest rate on the
outstanding balance increased to 18%.
The loan remained unpaid at March 31, 2000, placing the Company in default of
the agreement. Subsequent to March 31, 2000, the lender filed suit against the
Company to recover amounts owed. The Company continues to negotiate with the
lender as well as to negotiate alternative sources for refinancing, however
there is no guarantee these efforts will be successful.
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 March 31, 2000, the Company had advanced monies 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.
Subsequent to March 31, 2000, the Company has made a commitment to sell the
schools via an agreement that conveys all operations and facilities to the
buyer. Based on an anticipated final purchase price to be computed under this
agreement, management believes approximately $570,000 of the amounts advanced on
these projects is uncollectible and has recorded a loss on net recoverable value
as of March 31, 2000. Net assets remaining on the balance sheet at March 31,
2000 relating to the advances and the assets of the schools total $4.8 million.
As a condition of the agreement, the Company will be expected to clear certain
liens and liabilities associated with the properties.
As of March 31, 2000, additional commitments relating to these schools and
estimated costs to complete the unopened school were estimated to be $5.9
million. The prospective buyer, through third party agreements, would assume
commitments relating to the completion of the schools. Additionally, legal
action for foreclosure on subcontractor mechanics liens would be terminated as a
result of the sale agreement.
Management believes the sale will be completed on or about May 22, 2000 and the
final purchase price to be computed under this agreement will be consistent with
what it has used to estimate the loss on net recoverable value of the funds
advanced. However, there is no guarantee the transaction will occur and that all
issues relating to the computation of the final purchase price will be
satisfactorily resolved. If the issues are not satisfactorily resolved, it is
reasonably possible that the amount the Company could eventually recover as a
result of this transaction could materially differ in the near term. Revenue
from the completed site totaled $505,000 and $3,094,000 for the three months and
nine months ended March 31, 2000, respectively. Approximately one-half of the
revenue was attributable to transportation revenue.
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 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 $2.5 million and $9.4 million for the three months and nine months ended
March 31, 2000, respectively, and at March 31, 2000 had negative working capital
of $36.5 million and an accumulated deficit of $48.9 million. 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.
17
<PAGE> 18
Management's plans in process to resolve near-term cash flow issues include the
sale of certain assets and its business college, pursuing various financing
alternatives, as well as achieving projected improvement in operating results
for the remainder of the fiscal year. Additionally, the Company is engaged in
discussions with its lenders and vendors in order to improve its liquidity and
cash flow position. Although the Company believes that the best interests of its
lenders, vendors and the Company would be served through modifications in its
debt terms and negotiated payment terms, there can be no assurance that the
lenders or vendors will ultimately agree. In the meantime, the Company continues
to take steps to conserve and manage cash flow.
In December 1999, the Board of Directors hired First Security Van Kasper as a
representative and financial advisor to pursue strategic alternatives through
the financing, potential sale and/or partial sale of the Company.
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 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 asked its Chairman, John T. Golle to serve
as Chief Executive Officer until a permanent replacement could be named. Dr.
Lucian Spataro was named as Executive Vice President and Debra Taylor Johnson,
CPA, as Chief Financial Officer. On May 11, 2000, the Board named Dr. Spataro as
Chief Executive Officer as well as a member of the Board of Directors. Mr. Golle
will remain with the Company as Chairman of the Board and as a consultant.
FUTURE CAPITAL REQUIREMENTS
TesseracT will need additional funds to support its operations during the next
twelve months. The terms of any potential equity financing may be dilutive to
TesseracT's stockholders, and the terms of any debt financing are likely to
contain restrictive covenants that 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. Should the Company be unable to refinance or restructure its
liabilities or raise additional equity, it may be forced to seek protection
under applicable bankruptcy law.
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.
18
<PAGE> 19
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 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.
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<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On May 12, 2000, Pioneer Venture Fund, L.L.C. ("Pioneer") brought suit against
the Company in the Superior Court of the State of Arizona in and for the County
of Maricopa for the recovery of amounts owed under a $5 million dollar note in
which the Company is in default. The Company is currently negotiating with the
lender, however there can be no guaranty that the Company will be successful.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On March 31, 2000, The Company defaulted on its payment to Pioneer under a
series of notes in the aggregate principal amount of $5 million. The total
amount owed by the Company on the notes and accrued interest is 5,719,000 as of
May 12, 2000, the date Pioneer filed suit for collection.
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 appointed John T. Golle as Chief Executive
Officer on an interim basis, as well as Dr. Lucian Spataro as Executive Vice
President and Debra Taylor Johnson, CPA, as Chief Financial Officer. On May 11,
2000, the Board named Dr. Spataro as Chief Executive Officer, as well as a
member of the Board of Directors. Mr. Golle will remain with the Company as
Chairman of the Board and as a consultant. In addition, subsequent to March 31,
2000, two of the Company's Board members resigned, citing creditor conflicts.
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(1)
3.2 By-Laws of the Company(2)
10.1 Loan Agreement between the Company and JEBCO Group, Inc.
dated February 9, 2000
10.2 Letter Agreement between the Company and Kibel Green Issa
Inc. dated January 13, 2000.
10.3 Employment Agreement between the Company and John T. Golle
dated January 1, 1991.(3)
10.4 Amendment to Employment Agreement between the Company and
John T. Golle dated September 8, 1993.(4)
10.5 Summary of terms of employment agreement between the
Company and John T. Golle.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None
(1) 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)
(2) Incorporated by reference to Exhibit 3.3 of the Company's Registration
Statement on Form S-18 (File No. 33-39481-C)
(3) Incorporated by reference to Exhibit 10.17 to the Company's Amendment No. 1
to Form S-18 Registration Statement (Registration Number 33-39481-C).
(4) Incorporated by reference to Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1993.
20
<PAGE> 21
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: May 22, 2000 THE TESSERACT GROUP, INC.
BY: /s/ Lucian Spataro
--------------------------------
Lucian Spataro
President and
Chief Executive Officer
Date: May 22, 2000
BY: /s/ Debra Taylor Johnson
--------------------------------
Debra Taylor Johnson
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company, as amended(1)
3.2 By-Laws of the Company(2)
10.1 Loan Agreement between the Company and JEBCO Group, Inc.
dated February 9, 2000
10.2 Letter Agreement between the Company and Kibel Green Issa
Inc. dated January 13, 2000.
10.3 Employment Agreement between the Company and John T. Golle
dated January 1, 1991.(3)
10.4 Amendment to Employment Agreement between the Company and
John T. Golle dated September 8, 1993.(4)
10.5 Summary of terms of employment agreement between the
Company and John T. Golle.
27 Financial Data Schedule
</TABLE>
(1)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)
(2)Incorporated by reference to Exhibit 3.3 of the Company's Registration
Statement on Form S-18 (File No. 33-39481-C)
22
<PAGE> 1
Exhibit 10.1
Mr. John T. Golle
Chairman and Chief Executive Officer
The TesseracT Group, Inc.
9701 E. Bell Road
Scottsdale, AZ 85259
Re: Loan Agreement
$1,362,000.00 Loan to The TesseracT Group, Inc., a Minnesota corporation
The undersigned, The TesseracT Group, Inc., a Minnesota corporation (the
"BORROWER"), hereby applies to JEBCO Group, Inc., a Minnesota corporation,
(the "LENDER"), for a loan of $1,362,000.00 (the "LOAN").
1. LOAN TERMS. Subject to the terms, covenants and conditions contained
in Lender's standard form loan documents, the basic terms and conditions of the
Loan are as follows:
1.01. BORROWER: The TesseracT Group, Inc., a Minnesota
corporation
1.02. AMOUNT: $1,362,000.00
1.03. PURPOSE: To provide Borrower with working capital.
1.04. INTEREST RATE: Fixed rate of interest equal to eleven and
one-half percent (11.5%) per annum,
calculated on the basis of the actual number
of days elapsed and a 360 day year.
1.05. TERM: one (1) year, maturity date.
1.06. PAYMENT: Minimum monthly installments of principal and
accrued interest in the amount of $14,524.77,
plus real estate tax and insurance escrow
payments as required by Lender.
1.07. FUNDING: $1,293,000.00 of the loan amount will be
funded to the Borrower at closing, $87,000.00
of which will be funded to the Payment
Reserve Fund.
Borrower hereby acknowledges that the Loan is
a "discount" loan and that Borrower shall be
obligated to repay the entire $1,362,000.00
face amount of the Note despite the
disbursement of only $1,293,000.00 by Lender.
<PAGE> 2
1.08. LATE FEES: Payments received more than ten (10) days after
the due date shall be subject to a five percent
(5%) late fee.
1.09. COLLATERAL: The Loan will be secured by a first priority
Deed of Trust and Assignment of Rents (the
"DEED OF TRUST") on the real property and
improvements at the southwest corner of Bell
Road and North 98th Street in Scottsdale,
Arizona, and legally described in the Deed
of Trust.
1.10. EARLY PAYOFF
REDUCTION: If Borrower repays the entire principal balance
of the Note together with accrued interest
thereon and all other amounts owed in connection
with the Loan on or before three (3) months from
the date of the Note, then the principal balance
of the Note shall be reduced by $32,000.00 This
early payoff reduction is contingent upon
Lender's receipt of all monthly payments within
ten (10) days of the due dates thereof and upon
the non-occurrence of any events of default.
1.11. PAYMENT RESERVE
FUND: Borrower agrees that $87,000.00 of the Loan
shall be deposited by Borrower with Lender to
establish a reserve fund for payment of
principal, interest, real estate taxes and
insurance (the "PAYMENT RESERVE FUND"). Borrower
agrees that the Payment Reserve Fund shall begin
to accrue interest immediately under the Note
from the date of the Note. No earnings or
interest shall be payable to Borrower on the
Payment Reserve Fund and Lender may commingle
the Payment Reserve Fund with other monies held
by Lender. A letter agreement more fully
describing the Payment Reserve Fund will be
executed at closing. Subject to all further
requirements in said letter agreement, an amount
not exceeding three-fourths (3/4) of the total
monthly payments of principal, interest, real
estate taxes and insurance may be disbursed from
the Payment Reserve Fund each month and Borrower
shall pay the one-fourth (1/4) balance of said
monthly payments each month until the Payment
Reserve Fund is exhausted and then the full
amount thereof.
2. CONDITIONS TO CLOSING. The following documents or items are to be
delivered to Lender prior to or at closing and shall be in the form and content
satisfactory to Lender and Lender's legal counsel in their sole discretion, and
shall include but not be limited to the following:
2.01. $1,362,000.00 Promissory Note (the "NOTE").
2.02. The Deed of Trust.
2.03. One or more UCC-1 Financing Statements to be filed in the
Maricopa County, Arizona real estate records and with the Arizona Secretary of
State regarding the Deed of Trust.
2.04. An Environmental Indemnification Agreement for the real
property and improvements described in the Deed of Trust.
<PAGE> 3
2.05 Financial statements and other financial
information/documentation as the Lender may require.
2.06. Borrower shall provide a standard form mortgagee's title
insurance policy issued to Lender in form and substance acceptable to
Lender.
2.07. Borrower shall provide to Lender a recent survey of the real
property and improvements described in the Deed of Trust acceptable to the
Lender, or in the alternative provide Lender with survey coverage
acceptable to Lender under Lender's title insurance policy.
2.08. Borrower will provide evidence satisfactory to Lender that the
use of the real property and improvements described in the Deed of Trust
are permitted by and comply with all prior instruments of record and all
applicable codes and laws.
2.09. Prior to closing, Borrower shall provide Lender with
satisfactory evidence of insurance showing that Borrower has obtained
coverage for liability and hazard insurance, in the amounts and from a
carrier acceptable to Lender for the real property and improvements
described in the Deed of Trust.
2.10. Borrower shall provide evidence that all delinquent taxes and
all assessments relating to the real property and improvements described in
the Deed of Trust, if any, shall have been paid in full.
2.11. Appraisal acceptable to Lender regarding the real property and
improvements described in the Deed of Trust.
2.12. An environmental report acceptable to Lender for the real
property and improvements described in the Deed of Trust.
2.13. A written opinion by an independent third party attorney of
Borrower covering such matters as Lender deems necessary, including,
without limitation, statements of opinion as to the due organization, good
standing and authority of Borrower and that the loan documents are duly and
properly executed and validly binding obligations of the Borrower.
2.14. The Borrower and any other appropriate party shall have
executed and delivered to the Lender such other documents, instruments and
agreements as the Lender may reasonably request.
3. REPRESENTATIONS AND WARRANTIES. To further induce the Lender to make
the requested Loan, Borrower hereby represents and warrants to the Lender that:
3.01. The proceeds of the requested loan will be used by Borrower
exclusively for business and commercial purposes.
3.02. The real property and improvements described in the Deed of
Trust and contemplated uses thereof are permitted by and comply with all
applicable restrictions and requirements in prior conveyances, zoning
ordinances, subdivision and platting requirements and other laws and
regulations.
3.03. Except for any such item as might be shown in any environmental
report received by Lender prior to the date hereof in connection with the
Loan, there are no hazardous waste or substances contained on, under or in
the real property and improvements described in the Deed of Trust except as
may be used in the ordinary course of business in full compliance with all
applicable
<PAGE> 4
laws, rules and regulations.
3.04. There is no action, suit or proceeding pending or threatened
against or affecting the Borrower which, if adversely determined, would
have a material adverse effect on the condition (financial or otherwise),
properties or assets of the Borrower or which would question the validity
of this Loan Agreement or any instrument, document or other agreement
related thereto or required thereby, or impair the ability of the Borrower
to perform the Borrower's obligations hereunder or thereunder.
3.05. The Borrower is not in default of a material provision under
any material agreement, instrument, decree or order to which the Borrower
is a party or by which the Borrower or the Borrower's property is bound or
affected.
3.06. The Borrower has filed all tax returns required to be filed and
have paid all taxes shown thereon to be due, including interest and
penalties, which are not being contested in good faith and by appropriate
proceedings, and have no information or knowledge of any objections to or
claims for additional taxes in respect of federal or state income tax
returns for prior years.
3.07. There are no judgments outstanding or docketed against the
Borrower.
4. COVENANTS OF BORROWER. So long as the Note shall remain unpaid, the
Borrower will comply with the following requirements, unless the Lender shall
otherwise consent in writing:
4.01. FINANCIAL STATEMENTS. The Borrower will deliver to the Lender:
(a) as soon as available and, in any event, within 120 days after the
end of each fiscal year of the Borrower, a copy of the annual
financial statements and tax returns of the Borrower certified by
an officer of the Borrower as true and correct and acceptable
to the Lender, which financial statements shall include the
balance sheet of the Borrower as of the end of such fiscal year
and the related statements of income, retained earnings and
statements of cash flow of the Borrower for the fiscal year then
ended, all in reasonable detail and all prepared in accordance
with generally accepted accounting principles consistently
applied;
(b) immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental
or regulatory agency affecting the Borrower or which seek a
monetary recovery against the Borrower in excess of $25,000; and
(c) such other information regarding the financial condition of the
Borrower and the results of operations of the Borrower as the
Lender may from time to time reasonably request.
4.02. BOOKS AND RECORDS: INSPECTION AND EXAMINATION. The Borrower
will keep accurate books of record and account for itself in which true and
complete entries will be made in accordance with generally accepted
accounting principles consistently applied and, upon request of the Lender,
will give any representative of the Lender access to, and permit such
representative to examine, copy or make extracts from, any and all books,
records and documents in its possession, to inspect any of its properties
and to discuss its affairs, finances and accounts with any of its principal
officers, all at such times during normal business hours and as often as
the Lender may reasonably request.
4.03. COMPLIANCE WITH LAWS. The Borrower will comply with the
requirements of
<PAGE> 5
applicable laws and regulations with which noncompliance would materially and
adversely affect its business or its financial condition.
4.04 PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower will pay or
discharge all taxes, assessments and governmental charges levied or imposed
upon it or upon its income or profits, or upon any properties belonging to it,
prior to the date on which the penalties attach thereto and all lawful claims
for labor, materials and supplies which, if unpaid, might by law become a lien
or charge upon any properties of the Borrower; provided, that the Borrower
shall not be required to pay any such tax, assessment, charge, or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings.
4.05. BUSINESS ORGANIZATION EXISTENCE. Borrower shall preserve
and maintain its corporate existence and all of its rights, privileges and
franchises.
4.06 MATERIAL ADVERSE EVENTS. The Borrower shall immediately
notify the Lender of all events which could have a material adverse effect on
the operation of the Borrower's business or the real property and improvements
described in the Deed of Trust.
4.07 NEGATIVE COVENANTS. The Borrower hereby covenants and
agrees with the Lender that so long as the Note shall remain unpaid, the
Borrower, without the Lender's prior written consent, shall not:
(a) sell, assign, transfer or otherwise convey a majority
or controlling interest in Borrower whether in one
transaction or in a series of transactions;
(b) lease or sell all or substantially all of its
property and business to any other entity or
entities, whether in one transaction or in a series
of related transactions; or
(c) consolidate with or merge into or with any other
entity or entities.
5. DEFAULT.
5.01 Occurrence of one or more of the following shall constitute
an "EVENT OF DEFAULT" hereunder:
(a) The occurrence of an Event of Default under the Note
(as defined therein).
(b) The occurrence of any default under the Deed of
Trust.
(3) The Borrower shall fail to duly observe or perform
any of the terms, conditions, covenants or agreements
required to be observed or performed by it hereunder.
(4) Any representation or warranty made by the Borrower
herein or in any financial statement, certificate or
report furnished pursuant to this agreement or in
order to induce the Lender to make the Loan shall
prove to have been untrue in any materially respect
or
<PAGE> 6
materially misleading as of the time such representation or
warranty was made.
5.02. Upon the occurrence of an Event of Default and at any time
thereafter during the continuance thereof, the Lender may, at its option,
exercise any or all of the following rights and remedies (and any other rights
and remedies available to it under applicable law):
(a) The Lender may declare immediately due and payable all unpaid
principal of an accrued interest on the Note, together with all
other sums payable hereunder, and the same shall thereupon be
immediately due and payable without presentment or other demand,
protest, notice of dishonor or any other notice of any kind, all
of which are hereby expressly waived.
(b) The Lender shall have the right, in addition to any other rights
provided by law to enforce its rights and remedies under the Deed
of Trust and any of the other loan documents executed and
delivered in conjunction with the Loan.
6. ADDITIONAL TERMS.
6.01. This Loan Agreement may be signed in counterparts, all of which
taken together shall constitute one and the same agreement.
6.02. This Loan Agreement is personal to the Borrower and may not be
assigned by the Borrower in whole or in part without the prior written consent
of the Lender.
6.03. All notices to be given pursuant to the Agreement or the Note,
or any request, demand or other communication permitted or required hereunder
or thereunder shall be deemed duly given if delivered or mailed postage
prepaid, certified or registered, addressed to the address of such party at the
following addresses:
If to Borrower: Mr. John T. Golle
Chairman and Chief Executive Officer
<PAGE> 7
The TesseracT Group, Inc.
9701 E. Bell Road
Scottsdale, AZ 85259
If to Lender: JEBCO Group, Inc.
360 N. Robert Street, Suite 700
St. Paul, MN 55101
Attention: Thomas J. Hirsch
with a copy to: Thomas W. Newcome III
Leonard, O'Brien,
Wilford, Spencer & Gale, Ltd.
800 Norwest Center
55 East Fifth Street
St. Paul, MN 55101
6.04. To the extent not inconsistent herewith, the terms of that
certain letter loan proposal between Lender and Borrower dated February 7, 2000
shall control with respect to payment of expenses, costs, fees and other
matters as referenced therein. This Loan Agreement shall control with respect
to any inconsistencies between this Loan Agreement and said letter loan
proposal.
6.05. If any provision of this Loan Agreement is determined to be
void, invalid or unenforceable, the other provisions of this Loan Agreement
shall remain in full force and effect.
6.06. This Agreement shall be governed, construed and interpreted
in accordance with the laws of the State of Arizona in the United States.
Sincerely,
JEBCO GROUP, INC.
By: ____________________________________________
______________
Its: ___________________________________________
____________________________________________
<PAGE> 8
Accepted and agreed this 9th day of February, 2000.
BORROWER:
THE TESSERACT GROUP, INC.,
a Minnesota corporation
By _______________________________________
John T. Golle
Its Chairman and Chief Executive Officer
<PAGE> 1
[KIBEL GREEN ISSA INC. LETTERHEAD] Exhibit 10.2
February 13, 2000
Mr. John Golle
Chairman of the Board
THE TESSERACT GROUP INC.
9977 North 90th Street
Suite 180
Scottsdale, AZ 85258
Dear Mr. Golle:
This letter will confirm the engagement of Kibel Green Issa Inc. ("KGI") as an
independent contractor ("Independent Contractor"), to provide a variety of
financial and management consulting services for The TesseracT Group Inc. (the
"Client") or the "Company"). KGI has already been engaged by the Company to
perform many of the tasks identified herein. The following are the terms and
conditions of our agreement ("Agreement").
1. The Company is experiencing financial difficulties and is asking KGI to use
its best efforts to assist in formulating financial, management and
operational strategies/plans for the affairs of the Company. Services which
may be provided by KGI include but are not limited to the following: (1)
formulating financial, management and/or operating plans; (2) advising and
consulting with management and operating personnel with respect to operations
and management of its business and business plans; (3) reviewing, evaluating,
and participating in various negotiations with creditors, lenders, lessors,
etc. . .; (4) assisting operating personnel with the specific activities
required to implement and complete any operating changes; (5) analyzing and
advising in areas which affect cash flow, marketing, communications and
acquisition/divestiture; (6) evaluating the Company's organization structure
and areas to reduce costs; (7) designing and monitoring systems and controls
to help management control daily operations and relationships with creditors,
including financial institutions; (8) presenting information to the Board of
Directors; and (9) otherwise assisting in such matters as will aid in
accomplishing the foregoing.
2. The services will be rendered by Steven J. Green, Adam M. Michelin, Steven J.
Robinson and various other consultants or professionals ("Professionals") as
appropriate. KGI reserves the right to utilize other KGI Professionals, not
named here, as required.
3. As an Independent Contractor, we cannot be officers, directors, or partners
of the Company or the Company's affiliates, and we are acting solely in an
advisory and
<PAGE> 2
consulting capacity. We cannot, and will not, make decisions on behalf
of the Company. Any final decisions with regard to any of the matters
involved in our engagement will remain solely those of the Client.
4. The terms of our compensation are as follows:
a) Time Charges: Starting February 7, 2000, you will be billed on a
weekly basis on a fixed fee basis for certain professionals and the
amount of time multiplied by the standard hourly billing rates other
Professionals. The Fee schedule for those assigned to this project
are:
Steven J. Green $395
Adam M. Michelin $350
Steven J. Robinson $8,000 per week
Bruce Conklin $10,000 per week
We have agreed that we will manage our weekly fees not to exceed
$25,000. If circumstances require additional time from either
Messer's Michelin or Green or if additional KGI resources are needed
we will seek prior approval for the additional fees.
All invoices for fees will be submitted weekly. Payment of these
fees (expenses paid weekly) will be made by the Company;
1. if KGI's fees and expenses exceed the guarantee from the
Pioneer Capital Group, and the Company wants KGI to
continue its efforts, KGI will receive a retainer of
$20,000 as security and KGI will be paid on a weekly basis
for its services and expenses.
2. the earlier date of when: a Transaction occurs (closes)
where the Company is substantially sold or merged, or a
cash infusion for debt or equity totaling $3.0 million or
more within any 60 day period, or June 30, 2000.
In addition to these Fees, KGI shall earn a bonus computed as
follows:
(i) 50,000 options at a strike price of $.75 per shares upon
signing this Agreement. These options may be exercised at any time
within 5 years; and
(ii) additional Earned Bonus calculated as follows:
1. The current market Shareholder Value is about $7,500,000
and for purposes of this agreement, this shall be called
the Base Value.
2. The definition of Achieved Value is the average stock
price over ten consecutive days, multiplied by the
outstanding shares on any given day,
3. The definition of Differential Value is the Achieved
Value less the Base Value.
4. To calculate the Earned Bonus for KGI, multiply the
Differential Value times the formula percentages of (5%
for the first $1.0 million, plus 4% of $1.0 million to
$2.0 million, plus 3% of $2.0 million to
<PAGE> 3
$3.0 million, plus, plus 2% of $3.0 million to $4.0 million, plus
1% thereafter). This value shall not exceed 100,000 options at
$0.75.
5. In the event the company is not sold, at the sole discretion of
KGI, from one year after signing this agreement, KGI can notify in
writing to the Company that it wishes determine the Differential
Value. KGI will be paid in options at $.75 per share its
Differential Value within 15 days of notification.
6. In the event the Company is sold, KGI's Earned Bonus shall be
calculated in the same manner as 5 above and KGI agrees to accept
its Earned Fees on the same basis as equity shareholders.
In addition to the Fees for future services described above, the Company
agrees that it owns KGI $51,904.38 for Fees and Expenses for the period
ending February 4, 2000.
The Company is responsible for all obligations to KGI. As a condition
for KGI accepting this assignment, KGI will receive a guarantee payment
for Fees and Expenses from Pioneer Capital Group, acceptable to KGI, so
that in the event the Company is unable to meet any of its obligations
to KGI, KGI will be paid directly from Pioneer Capital Group. The
Company and KGI acknowledge that the guarantee may be limited in amount.
The Company agrees that in the event the total due KGI exceeds the
guarantee; KGI can discontinue its services. Any payments received by
KGI from Pioneer Capital Group under this guarantee will reduce the
amount payable by the Company.
b) Expenses: Actual out-of-pocket expenses for travel, reproduction,
printing, graphics, messenger services, overnight mail, shipping, any
other third party charges, telephone, supplies, computer usage/supplies,
fax, postage, administrative support services and clerical assistance
will be billed to you at our cost. We are pre-authorized to incur
expenses for lowest available coach fares between Los Angeles, CA and
Phoenix, AZ, rental cars, hotel rooms, parking/taxi associated with
traveling, and a per diem allowance of $75 per person travelling for
expenses not included here, i.e. meals, tips, etc. Out-of-pocket
expenses are in addition to the professional fees and are due and
payable by the Company upon presentation. You have authorized us to
advance such costs and make such out-of-pocket expenditures as may be
reasonably necessary in connection with our services.
All out of pocket expense will be billed weekly and the Company will pay
for these expenses on a weekly basis.
5. Either the Company or Kibel Green Issa Inc. may terminate this Agreement at
any time with or without cause. Upon termination, all professional fees and
expenses incurred through the close of business on the date of termination
are due and payable. Kibel Green Issa Inc. reserves the right to stop work at
any time if any invoices have not been paid. If KGI chooses to terminate the
agreement without cause, all warrants earned under this agreement will be
forfeited.
<PAGE> 4
costs and expenses of attorneys, accountants, and other professionals
and consultants.
12. This constitutes the entire understanding between Company and KGI
regarding our services. Further, this Agreement supersedes and replaces
any prior agreements between the parties regarding KGI's performance of
services involving the Company. By executing this Agreement, you
acknowledge that you have read it carefully and understand all of its
terms. This Agreement cannot be modified except by further written
agreement signed by each party.
13. If the Company desires to retain KGI to identify sources of capital
(debt and/or equity), a separate agreement will be executed which
outlines the scope of services and fee arrangement.
If the scope of services, compensation, terms and conditions confirm your
understanding, please sign the enclosed copy of this letter and return it to us
with the required retainer. It is the intention of the parties that this
Agreement cover all work performed by KGI on this assignment including work
that was performed prior to the execution of this Agreement.
Sincerely, Accepted By:
KIBEL GREEN ISSA INC. THE TESSERACT GROUP, INC.
/s/ Adam M. Michelin /s/ John Golle
- ------------------------------------- ---------------------------------
Adam M. Michelin John Golle
Managing Director, Sr. Vice President Chairman of the Board
2/22/00
---------------------------------
(Date)
AMM:pjr
Enclosure
<PAGE> 1
Exhibit 10.5
On February 20, 2000, the Board of Directors held a special meeting and elected
John T. Golle as the Chief Executive Officer of the Company. The Board
reinstated the terms of his former employment agreement with the modification
of the following terms: (1) Mr. Golle's salary would be $240,000 per year, and
(2) upon termination, Mr. Golle would receive a severance package of $28,733.33
per month for a period of twelve months.
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 771
<SECURITIES> 0
<RECEIVABLES> 3,759
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,645
<PP&E> 33,202
<DEPRECIATION> 0
<TOTAL-ASSETS> 57,529
<CURRENT-LIABILITIES> 45,168
<BONDS> 0
0
0
<COMMON> 99
<OTHER-SE> 9,965
<TOTAL-LIABILITY-AND-EQUITY> 57,529
<SALES> 0
<TOTAL-REVENUES> 33,056
<CGS> 0
<TOTAL-COSTS> 18,725
<OTHER-EXPENSES> 18,047
<LOSS-PROVISION> 542
<INTEREST-EXPENSE> 2,330
<INCOME-PRETAX> (9,394)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,394)
<DISCONTINUED> (3,781)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,175)
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