UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2004
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to _________
Commission file number 0-18113
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TENET INFORMATION SERVICES, INC.
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(Exact name of small business issuer in its charter)
Utah 87-0405405
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3380 North El Paso Street, Suite G, Colorado Springs, Colorado 80907
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (719) 630-3800
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Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [
]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $525,856
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
a specified date within the past 60 days. September 29, 2004: $427,360
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. June 30, 2004: 6,779,074
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X]
Certain statements made herein are forward-looking statements under the Private
Securities Litigation Reform Act of 1995. They include statements regarding the
timing and expected benefits of the acquisition of LGA by Tenet. These
statements are based on management's current expectations and estimates; actual
results may differ materially due to certain risks and uncertainties. For
example, the ability of LGA to achieve expected results may be affected by
external factors such as competitive price pressures, conditions in the economy
and industry growth, and internal factors, such as future financing of the
acquired operations and the ability to control expenses.
PART I
Item 1. Description of Business.
Tenet Information Systems, Inc., ("Tenet") is the sole owner of its operating
subsidiary, Let's Go Aero, Inc. ("LGA"). Tenet acquired LGA effective June 30,
2004 through a stock for stock exchange under which the former shareholders of
LGA were issued new Tenet shares of common stock in exchange for all of LGA's
outstanding shares and $1,518,440 of debt. The former LGA shareholders and debt
holders ended up with 85% of the outstanding common stock of Tenet. Prior to the
acquisition, Tenet had no business or operations after having sold what business
it did have October 22, 2003, several months before the acquisition of LGA.
Therefore, at the time of the acquisition of LGA, Tenet was what is know as a
publicly held shell company.
Upon the acquisition of LGA, two of Tenet's three Directors resigned and two
Directors of LGA were appointed to fill those positions. The third Tenet
director was and is a director of both companies. In addition, all of the
officers of Tenet resigned and members of LGA's management team were appointed
to those positions. See Item 9, below. For accounting purposes, however, the
transaction was deemed to have been an acquisition of Tenet by LGA. Further
information on the details of the transaction can be had by reviewing Tenet's
Form 8-K filed July 21, 2004 and Form 8-K/A filed October 20, 2004 available at
the EDGAR website of the Securities and Exchange Commission (www.sec.gov) or
from Tenet upon request.
Let's Go Aero, Inc.
LGA, Tenet's wholly owned subsidiary, is Tenet's only operating business. LGA is
in the business of designing and selling gear management solutions for the
automotive and recreation industries. LGA's family of products use patented
designs, and includes the Herman(R) line of Sport Performance Trailers(R), and
the Remora(TM) line of hitch-mount cargo carriers. LGA was formed in 1998. For
the year ended June 30, 2004 it had sales of approximately $188,266, a gross
profit of approximately $118,000 and a net operating loss of approximately
$365,921 (including approximately $170,698 of interest that had accrued and will
be converted into common stock as mentioned above).
2
LGA
LGA was founded as a product design, development and engineering company. It
specializes in providing novel solutions for vehicular cargo carrying
enhancements. LGA has patents issued and pending that protect its intellectual
property. These patents and claims relate to how cargo can be attached and
carried on a vehicle's hitch receiver, frame, or body surface. Some examples
are:
o Silent Hitch Pin(TM) rigidly couples the connection between the
trailer hitch receiver and any inserted ball mount or accessory;
o TwinTube(TM) provides a universal mounting structure for carrying gear
and equipment with a receiver style hitch;
o The fully-enclosed, encapsulated, and easy-opening designs of LGA's
product enclosures for cargo safety, security, and accessibility; and
o Extensive designs for the use of C-Channel for making "HardpointTM"
attachments to LGA's carriers, trailers, and all vehicular surfaces.
LGA also has numerous product extensions and accessories that complement and
expand these core technologies.
LGA's intellectual property has broad application in the automotive industry,
and several automotive original equipment manufacturers (OEM's) are in various
stages of integrating aspects of LGA's technology into their product lines. In
May 2002, LGA licensed three pieces of its intellectual property to Sport Rack
International/Valley Industries, Inc., an affiliate of Advanced Accessory
Systems, LLC, (AAS), the largest supplier to automotive manufacturers worldwide
of LGA style products similar to LGA's products. LGA's product licenses with
Sport Rack International/Valley Industries, Inc. resulted in the payment to LGA
of $300,000 in 2004 and an ongoing royalty of 10% of the revenues (after
$300,000) Sport Rack generates with the technology until May 2007.
At the November 2002 Specialty Equipment Manufacturers Association (SEMA) annual
trade show, LGA won the GMC Professional Grade Challenge for the Best New SUV
Accessory Idea. This prestigious award from General Motors Corp. is for the
Company's TwinTube system technology.
LGA has and will continue to develop intellectual property for the Automotive,
recreation vehicle and recreation industries. It is LGA's intent to license its
technology to the industry leaders that can most effectively bring the licensed
technology to market. LGA plans to license the production and sales of its
products for an up-front fee and an ongoing royalty based on unit sales.
Products
LGA currently has several product lines that it has been selling for several
years and other product lines that are emergent. These product lines are
describes as follows:
o HERMAN(R) Sport Performance Trailers(R). LGA's Herman(R) line of Sport
Performance Trailers(R) are designed for carrying all types of
personal, recreational, and commercial gear in an aerodynamic,
weather-resistant, secure and attractive transport.
3
o REMORA(TM) Carriers. The Remora(TM) hitch based carrier line consists
of two fully enclosed cargo carrier models, Remora(TM) SUV and
Remora(TM) Mini, with three structural options to choose from for
varying function while on the vehicle's hitch receiver. These patented
designs offer versatility, security and safety.
o SILENT HITCH PIN(TM). This anti-vibration device takes all movement
out of the connection between the vehicle towing system and what's
being towed or carried. In short, it freezes the attachment securely
in place. It works with most consumer vehicle towing systems.
o TWINTUBE(TM) System. The TwinTube(TM) (TT(TM)) System is a new,
patent-pending design that has been licensed to Sport Rack
International/Valley Industries, Inc. for sale to the automotive
original equipment manufacturers ("OEM's") and the after-market.
TwinTube(TM) is a universal mounting structure for carrying gear and
equipment with a hitch receiver. Let's Go Aero is integrating this
technology into all of its hitch based carriers during the second half
of 2004. TwinTube(TM) is also available as a UBI(TM) system
(U-Build-It).
o GEARDECK(TM) System. Incorporating LGA's novel TwinTube(TM)
technology, GearDeck(TM) is a modular carrier that functions as an
open platform carrier or a fully-enclosed carrier through the use of a
modular hardtop lid enclosure that is easily attached and removed. The
open platform can carry bicycles, among many other large items; the
full enclosure system carries all kinds of general cargo as well as
items such as power generators.
o SPIDERGEAR(TM) Carrier System. SpiderGear(TM) is a novel patent
pending design for carrying gear, bikes and spare tires on the rear of
vehicles.
o Hardpoint(TM) Technology. LGA has patents issued and patents pending
for the integration of C-Channel onto vehicle surfaces, including
pickup truck beds, vehicle roofs and tailgates. The Hardpoint(TM)
system is another potential source of royalty revenue for LGA in the
future.
Business History
The impetus for LGA was a 1990 concept by its principal founder for a
lightweight aerodynamic trailer to carry recreational gear. This concept led to
the creation of a prototype product that was tested in 1997. In the fall of
1997, work began on what came to be the Herman(R) line of Sport Performance
Trailers(R) (SPT). LGA was incorporated in April 1998, the first Herman(R) SPT
hit the road in July 1998, and LGA debuted two Herman(R) SPT's at the Interbike
Trade Show in October 1998.
4
During the development of the Herman(R) product, several additional product
opportunities became apparent. The Herman(R) Hardpoint(TM) system was designed
using Unistrut(TM) and/or B-Line(TM) engineering C-Channel. The Hardpoint(TM)
system appeared to have great promise for use in the motor vehicle and
recreation vehicle industries, and LGA filed patent claims for the integration
of C-Channel on vehicular surfaces in 1998. The original patent claims for
Hardpoint(TM) technology were issued in 2001. LGA has also filed many
continuation claims for this technology.
After the Interbike Show in the Fall of 1998, LGA began receiving orders for
Herman(R) trailers. Medallion Plastics in Elkhart, IN became LGA's manufacturer
of Herman(R) trailers in January 1999.
In early 1999, LGA joined the Specialty Equipment Market Association (SEMA).
SEMA is the largest trade organization for the automotive aftermarket industry.
Basically, SEMA is the entire automotive industry worldwide, less new vehicle
sales. LGA displayed its products at SEMA's industry convention in November 1999
as a debut to the automotive industry.
During the development of the Herman(R) line, the Company developed a concept
for a hitch based cargo carrier line that resulted in LGA's Remora(TM) product
line. The Remora(TM) SUV capsule also debuted at the 1999 SEMA convention.
LGA went on to design the Silent Hitch Pin(TM). LGA's patent application for the
Silent Hitch Pin(TM), which was filed in mid-2000, was granted in May 2003. In
early 2000, LGA moved the production of its products from Medallion's operation
in Elkhart to Prodesign, a Division of Coachmen Industries, Inc., which is also
based in Elkhart, IN.
After the SEMA 2001 convention LGA entered into a relationship with J.S.
Chamberlain and Associates. Chamberlain and Associates has been an automotive
supplier developer since the early 1960's. Through a series of meetings arranged
by Chamberlain, LGA and Sport Rack International/Valley Industries, Inc. agreed
to a product license for LGA's Silent Hitch Pin(TM) and Twin-Tube(TM) Technology
in May 2002.
At the SEMA 2002 convention LGA won the Best New SUV Accessory Idea from General
Motors Corporation for its TwinTube(TM) carrier system.
The Future
LGA has the Herman(R) trailer line, Remora(TM) line, Silent Hitch Pin(TM) line,
the GearDeck(TM) system, and TwinTube(TM) UBI(TM) that are patent protected.
LGA's Hardpoint(TM) technology may also be a significant royalty generator for
LGA in the future.
LGA's future focus is on partner and product development. There is a very large
consumer market for LGA's products and its approach to this market is to enter
it through partnership arrangements with large existing participants.
LGA has been doing product testing, primarily with its Herman(R) trailer, with
the U.S. Military for 18 months. LGA recently delivered a customized Herman(R)
trailer to the Air Force Rapid Deployment Security Forces for use with their
Honda ATV's.
LGA is in discussions with various automotive and recreation vehicle OEM's for
custom versions of its products and technology that compliment and extend the
capabilities of the OEMs' vehicles.
Objectives and Sales
Objectives
o To establish manufacturing, sales and marketing partners for LGA's
products domestically and internationally
o To continue product development and invention work where a clear
payoff is predictable
o To establish positive operating cash flow and earnings
LGA has licensed Sport Rack International/Valley Industries, Inc. to manufacture
and sell three LGA designs in the consumer market. At the same time, LGA is
focusing on opportunities to customize its products for business and
governmental use.
5
Customer Direct Sales
Close to 50% of LGA's sales revenue has come from direct-to-customer sales that
are the result of the customer finding its web site. LGA has exhibited products
at several trade shows over the last four years. Primarily, LGA has attended the
SEMA automotive trade show that is held annually in early November in Las Vegas.
LGA has also displayed its products at the Denver International Auto show and
the Denver Sportsman show.
LGA has promoted its products primarily through a "Public Relations" approach.
As a result of these efforts, LGA has spent little on direct advertising, yet
has been featured in many national magazines, newspapers, and TV and radio
shows. Because LGA's product designs are novel, publishers of magazines
frequently feature its products in the magazines "New Product Review" sections
along with LGA's address and web site. This approach has been important to LGA's
products getting discovered, while keeping its promotional expenses low.
LGA's customers also provide great leads for product sales. In addition to
current owners giving LGA positive reviews to prospective new owners, LGA's
products all feature its web site address on its product logo. LGA regularly
gets inquiries from individuals who have seen LGA products in the field.
It is LGA's intent to establish a sales relationship with market partners or an
OEM to promote, manage and distribute its product lines for gear transport
through the partners' established market channels.
Market for Products
For many years, people have been increasing their recreation time and recreation
interests. This trend has spurred a dramatic increase in the purchase of sport
utility vehicles (SUV), mini-vans, and pick-up trucks. The purchase of these
style vehicles reflects in part the consumers' perceived need for increased
cargo capacity.
Today nearly 50% of American households own a SUV, mini-van, or pick-up truck,
and 70% of these vehicles are equipped with tow packages from the factory in
addition to aftermarket hitch installations of nearly 6 million estimated for
2003 alone.(1) Accessory item sales for these vehicles, a segment of the
automotive specialty equipment industry, have grown nearly 60% in the past ten
years, and hitch accessories continue to represent the fastest growing segment
of the SUV's aftermarket ccessory sales.(2) LGA's Sport Performance
Carriers(TM) and products serve this expanding market. According to the
Specialty Equipment Manufacturers Association (SEMA), the overall automotive
retail after-market equipment sales for 2000 exceeded $23 billion.(3) Accessory
and appearance products are estimated to represent 54% of those sales.(4) In
addition, SEMA reports that the marketplace has expanded nearly 60% since
1990.(5) Sales of sport utility vehicles and passenger vans have increased by
more than 10% annually during the same time period.(6) For the first time in
the history of the automotive industry, in 2002 more SUV's and Trucks were sold
than passenger cars. Many of these SUV's and trucks are coming with hitch
receivers from the factory, and the trend toward towing equipment being a
standard vehicle feature appears to be accelerating.
Based on SEMA research, in 1999 there were 3,800,000 receiver style hitches
either installed by the aftermarket or delivered on new vehicles. In 2002, that
number climbed to 4,900,000 and by 2005 it's projected that the number will
increase to 5,800,000 units.
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(1) Specialty Equipment Market Association, Market Highlights, 2001 & 2002
Market Study.
(2) Ibid.
(3) Ibid.
(4) Ibid.
(5) Ibid.
(6) Ibid.
6
The installed base of receiver style hitches presents a large latent market for
LGA's products. Further, LGA believes that the automotive OEM's would like to
migrate the accessories currently being carried on the roofs of SUV's to the
receiver hitch to reduce the roll-over risk of SUV's and provide consumers with
more convenient cargo carrying solutions.
Competition
The sport equipment carrier market is a competitive environment with numerous
participants that are larger than LGA and have the following advantages relative
to LGA:
Name recognition
Several competitors, like Yakima Products and Thule have long established names
with the public. LGA is still relatively unknown. It can take years to establish
a Brand name, and LGA is at the beginning of exposing its products and brand to
the public
Product Lines
Several competitors have broad product lines compared to LGA. LGA does not
participate in the roof top cargo carrier market and does not plan to
participate in this market, except potentially in a limited way with one
emergent product line.
In terms of product strength, LGA believes it has several distinct advantages
over the competition:
o Large cargo capacities and lightweight designs easily surpass the
cargo transport capabilities of roof top products and other receiver
based products currently on the market
o The opening systems enable LGA products to enclose space more
efficiently
o LGA enclosed carrier products offer increased security over open
carriers
o LGA products are safer than rooftop carriers, their primary competitor
o Patent filings protect LGA products' ergonomics and efficiencies
o LGA products' aerodynamic efficiencies reduce impact on fuel economy
o Multiple product offerings provide consumers with various options and
price consideration
Opening Systems
LGA's Herman(R) and Remora(TM) capsules represent a new category of container.
These containers have shells that are concave so that the lids open by dropping
and "nesting" under the base. When closed, the shells are "self-reinforcing" and
very tough.
Content Security
LGA's Herman(R) and Remora(TM) carriers are lockable and fully enclosed so the
owner's gear is in a water and dust free environment. When traveling, having
gear out of sight is one of the best theft prevention. This means high-value,
lightweight objects like cameras and computers can be stowed in LGA's carriers.
Safety Factor
Safety comes in many forms for LGA customers. When compared to roof-based
systems, LGA carriers do not raise a vehicle's center of gravity and therefore,
when compared to a similar weight on the roof of a vehicle, make the vehicle
less prone to rollover.
7
LGA's carriers are also loaded by standing on the ground. Roof carriers are
commonly loaded by standing on a running board, a doorsill or a stepladder--all
precarious positions from which to be lifting and moving gear. Most roof systems
are limited to 100 pounds of gear weight. Most SUV hitch receivers are rated for
500 pounds of load carrying.
Patent Protection
Starting in 1998, LGA has been very diligent at protecting its technology with
"utility" patent protection, which is the highest form of invention protection.
Utility patents are issued for truly novel technological achievements. The
method by which LGA's product capsules open, the Hardpoints(TM) used on LGA's
products, the way LGA's Remora(TM) carrier platforms slide and pivot, and the
features of the Silent Hitch Pin(TM) are all patented aspects of LGA's products.
All LGA's patents have at least 14 years remaining in their respective terms.
The advantages of patent protection can be seen most clearly with the Silent
Hitch Pin(TM) and the TwinTube(TM) system. LGA has licensed this technology to
Sport Rack International/Valley Industries, Inc. which is selling to industry
participants.
Aerodynamic Efficiencies and Fuel Economy
It appears from informal evidence that LGA's Herman(R) line of Sport Performance
Trailers(R) are fuel efficient. It also appears from informal evidence that
LGA's Remora(TM) carriers have no noticeable effect on fuel economy. When used
on an SUV, these carriers sit in the vehicle's draft.
Volume and Weight Advantages
Because of LGA's capsular designs, its products offer high "space-to-weight"
ratios relative to other cargo carrying products currently on the market. The
Herman(R) SPT weighs in at 235 pounds empty and encloses approximately 86 cubic
feet and has a carrying capacity of 700 pounds. A standard "box" trailer with
similar storage capability typically weighs close to 1,000 pounds empty, meaning
that a fully loaded Herman(R) SPT weighs less than a comparable empty box
trailer. LGA's Remora(TM) line attaches to the strongest point on a vehicle, the
hitch receiver. LGA rates its Remora(TM) carriers for 300 pounds of cargo
carrying, which gives the owner of a standard SUV three times the weight
carrying ability of a typical roof top box.
Manufacturing and Development
Manufacturing
LGA's focus is on product and technology development. LGA's licensees are
responsible for manufacturing the designs. LGA does have numerous vendors it
utilizes to fabricate its products. LGA has had four different vendors produce
over 15,000 Silent Hitch Pins(TM) in Taiwan and India. LGA has had a four-year
relationship with Prodesign, LLC of Elkhart, Indiana. Prodesign fabricates LGA's
Herman(R) trailers, Remora SUV(TM), and Remora Mini(TM) capsules. Prodesign
"turn-key" manufactures these products to 100% finished goods and packages them
for shipment. Upon completing the products and packaging them, Prodesign
invoices LGA for its negotiated part cost. LGA then delivers orders with
shipping information to Prodesign for pick up by one of LGA's preferred
shippers.
8
LGA also has a relationship with Welded Products of Elkhart, Indiana for the
fabrication of its hitch carrier structural systems including TwinTube(TM).
Welded has completed numerous production runs over the last three years and
ships the systems to LGA in bulk form for final assembly and packaging.
LGA has manufacturers that contact it regularly to solicit contract
manufacturing business, but management is currently satisfied with its vendors
and does not anticipate changing these relationships in the foreseeable future.
Costs and efficiency are important factors, however, and LGA is always looking
to improve its performance in these areas.
LGA is actively engaged in specifying sources for all its assembly services, raw
materials and parts in order to ensure that its products meet its quality and
performance standards. All specified raw materials and parts or acceptable
substitutions are available from many suppliers, and LGA does not rely on any
one supplier the loss of which would cause any long term adverse consequences to
LGA. That being said, however, LGA has formed close working relationships with
its current suppliers, such as Bayer(R) Plastics and Prodesign.
Shipping
The shipping cost of LGA's products is reasonable considering some of the
products' sizes. LGA has shipped over 500 units from Elkhart to destinations
throughout the United States. LGA has had few freight claims for damaged goods
and believes it has the packaging adequate to properly protect the product.
Both Herman(R) and Remora(TM) products have modest final assembly requirements
for the customer or dealer to complete.
LGA utilizes the shipping services of Roadway and R&L Carriers among others.
Research and Development
LGA's expenditures for research and development have been $36,288 and $45,770
for the fiscal years ended June 30 2003 and 2004, respectively. LGA will
continue product development and invention work where a clear payoff is
anticipated. LGA's staff is considering numerous ways to branch and grow its
current products depending on market demand. LGA's staff is constantly working
on new product designs and improvements to protect and expand LGA's existing
intellectual property.
Regulation
LGA has adopted all applicable standards from United States National Highway
Transportation Safety Administration regulations and maintains adherence to
Society of Automotive Engineers guidelines and specifications. In addition, both
federal and state authorities regulate the manufacturers and sellers of
recreational and family cargo transports. LGA is a licensed vehicle manufacturer
in the State of Colorado and has obtained the state permits, licenses, and bonds
required to operate.
LGA's products have been independently tested for impact and temperature
extremes. LGA's Silent Hitch Pin(TM) and Remora(TM) Spine and Frame structural
systems have been independently tested for load carrying strength.
LGA has had Corporate and Product Liability insurance for the last four years
and has not had a product liability claim. Further, as LGA successfully licenses
its designs, generally the licensee will be responsible for carrying
manufacturer and product liability insurance.
LGA has registered with or obtained memberships, licenses, permits, or
certificates from the following organizations and agencies:
9
Society of Automotive Engineers (SAE);
National Highway Transportation Safety Administration (NHTSA);
Dealer Section of the Department of Motor Vehicles, State of Colorado;
Specialty Equipment Market Association (SEMA); and
Employees
LGA currently has three full-time employees including its officers, Marty
Williams and Sara Williams, and an office manager. LGA has one part-time
products engineer, Matthew Drabczyk, who is also a major LGA shareholder.
Item 2. Description of Property.
LGA currently leases 2,500 square feet of combined office and warehouse space at
its principal place of business in Colorado Springs, Colorado. LGA entered into
this lease in June 2004 and expects its facilities will be sufficient for the
three-year term of the lease.
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Tenet's common stock is currently thinly traded "over-the-counter" and is listed
in the Pink Sheets(R) published by the National Quotation Bureau, Inc. as well
as on the OTC Bulletin Board operated by the NASDAQ Stock Market, Inc. The
following table sets forth the high and low bid prices for Tenet's common stock
for each of the quarters ending on the indicated date adjusted for Tenets
reverse split of 1:20 that was effective October 22, 2003. Prices were obtained
from Yahoo.com's financial pages.
Low Bid High Bid
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2002 June 30 Not Available Not Available
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September 30 Not Available Not Available
------------ ----------------- ----------------------- ----------------------
December 31* .20 .20
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2003 March 31 .20 1.60
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June 30 .40 1.20
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December 31 .60 1.00
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2004 March 31 .40 .65
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June 30 .25 .50
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* Quotes not available prior to March 3, 2003.
The number of shareholders of record for Tenet's common stock as of June 16,
2004 was 331, which include depositories and broker/dealers who hold shares of
common stock in "nominee" or "street" names and did not include LGA's 17
shareholders.
10
Item 6. Management's Discussion and Analysis or Plan of Operation.
Results of Operations
Fiscal 2004 Compared with Fiscal 2003
ACTUAL REVENUES
FY 04 FY 03
Product sales and Royalty
Revenue 188,266 224,334
Cost of Revenues 80,085 131,340
SGA 428,332 458,239
DEV 45,770 36,228
Costs and Expenses 554,187 630,971
Operating Loss (365,921) (406,637)
During fiscal year 2004 the company had revenues of $188,266, which represented
a decrease of $36,068 or 12% over prior year revenues of $224,334. This decrease
is primarily attributable to LGA's decision in early 2002 to lower its selling
emphasis in the automotive accessory dealer sales channel. LGA made the decision
to lower its dealer initiative due to increasing account receivables from
dealers and sub-standard margin related to the support required by dealers for
the products LGA was selling during this time frame. Concurrent with pulling
back from the dealer market during this period of time, LGA developed new
technologies that from a pricing, shipping, value and feature perspective, fit
the dealer and retail distribution channels better than product lines offered in
early 2002. LGA is in the final stages of readying these additional value based
product lines for sale and expects to begin selling these lines, in addition to
our existing products, in the second half of fiscal 2005.
Cost of revenues declined 39% from $131,340 in 2003 to $80,085 in 2004. The 39%
decrease in cost of goods sold, relative to 12% decrease in sales, reflects both
the higher percentage of revenues generated from royalty income as a percentage
of total sales, and the lower cost of sales LGA incurred selling product direct
to the consumer, as compared to selling into the dealer sales channel.
11
LGA purposefully de-emphasized the dealer market beginning in 2002 in order to
conserve capital and redirect the Company's limited resources into product
development focused on designs that retail for under $500 and ship UPS or Fedex,
compared to our higher end products that ship LTL or Common Carrier.
LGA had several licensing opportunities and product development opportunities
emergent at that time that it has subsequently capitalized on. These include the
licensing of the Silent Hitch Pin, the development and licensing of the TwinTube
system, the winning of the GMC Professional Grade Challenge Award for the
TwinTube system in 2002 and the GearBed system in 2003, the development of the
SpiderGear system in 2003, the development of the GearDeck system in 2003 and
2004, the development of the Rapid Deployment Trailer in 2003, the development
of the GearCage system in 2003 and 2004, the development of the GearWagon Little
Giant Trailer System in 2003 and 2004, and the development of the Tentris system
in 2002,2003 and 2004.
In the opinion of LGA, these designs have potential to generate both sales
revenue and licensing revenue for LGA. LGA considers these designs to be
intellectual property and has taken action to protect these designs via the
patent process.
The gross margin on product sales increased to 37% in 2004 from 20% in 2003.
LGA's increase in gross margin reflects the result of the Company's decision to
lower its selling emphasis in the dealer channel during the periods covered by
this report. LGA's decision in early 2002 to focus more on direct sales, as a
way to increase margin, is reflected in the gross margin increase for this
period.
Including Royalty income, gross margin increased from 41% in 2003 to 57% in
2004. LGA desires to derive revenue from both product sales, including direct
and dealer sales and from licensing revenue attributable to the Company's
intellectual property portfolio. LGA has been successful at generating revenue
from both sources, but not to the degree, to date, that has led to ongoing
profitable operations.
LGA's sales revenue for 2002, 2003 and 2004 has been impacted by the lack of
capital available to execute a sales plan. LGA's plan in early 2002 to conserve
the limited capital available to the Company by focusing on higher margin direct
sales opportunities, and the further development of LGA's intellectual property
portfolio has resulted in growing opportunities for future product sales and
licensing revenues. There can be no assurance that meaningful revenue will
result from the products and technologies developed during this period of time.
SGA expenses decreased to $428,332 in 2004 as compared to $458,239 in 2003. SGA
expenses for 2004, include $170,689 in accrued interest expense for a series of
notes payable that, along with the accompanying accrued interest, was converted
into Tenet equity at June 30, 2004. Subsequent to the combination of Tenet and
LGA, the Company intends to begin growing its selling effort.
12
LGA's combination with Tenet has resulted in the conversion of all LGA
shareholder debt and the realization of up to approximately $600,000 in new
shareholder equity, of which LGA has booked $300,000 to date. With the
conversion of all LGA shareholder debt and the new equity, LGA's financial
profile has improved over the last year. LGA's improved capital structure has
allowed the Company to expended resources that better profile the organization
to sell product. In parallel, this capital has also allowed LGA to finish
several important product designs and begin reviews of this intellectual
property with potential licensees. It is likely that selling expenses for 2005
will increase relative to 2004.
LGA has a $250,000 equity commitment from an existing shareholder that will be
sufficient to meet our capital needs for a limited period of time. In order for
LGA to continue operating beyond the utilization of this capital, it will need
to increase revenues sufficiently so that the margin generated meets or exceeds
the Company's expenditures. Based on LGA's operating history, it is probable,
although not certain, that the Company will need to raise additional capital in
order to achieve and sustain profitable operations. LGA has a history of
attaining growth capital from three sources, 1) equity sales, 2) product margin
3) licensing revenue. LGA's preference among these three capital generating
choices is with the later two. LGA has opportunities, exclusive of equity sales,
to generate the capital required for growth from product margin and licensing
revenue and we intend to pursue these opportunities.
Product development expenses increased 21% to $45,770 in 2004 from $36,288 in
2003. An important element of LGA's business model is its ability to create
novel product designs that include patentable attributes. The process of
creating new intellectual property and improving existing LGA technology will
result in ongoing expenses for the Company.
Net income for the year was $495,709 or $0.14 per share as compared to
($407,204) or ($0.12) per share in 2003. LGA's 2004 net income is an accounting
anomaly created by the accounting treatment accorded the conversion of
$1,518,440 of convertible debt. Please see Financial Statements Note (2).
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position increased from $6,192 at year-end 2003 to $180,619
at year-end 2004. Because of the combination of Tenet and LGA, and the
conversion of LGA's outstanding debt into Tenet equity, LGA's near term cash
position has been improved.
LGA has plans to increase product sales by increasing the profile of the
Company's products with the public, retailers and dealers. Currently LGA sales
and promotion efforts are limited to editorial reviews by the media, our web
site, and customers that see our products on the road. LGA is currently
initiating meetings with recreational vehicle OEM's, dealers and distributors
for the purpose of adding our products to their sales programs. LGA will be
adding personal in Colorado Springs to support its selling effort.
13
The Company regularly evaluates its intellectual property portfolio in light of
market, product or potential licensing opportunities for its designs. LGA has
successfully licensed some of it's intellectual property. However, the royalties
derived from the licenses attained to date, although relatively significant for
LGA, have not on their own been sufficient for the Company to achieve ongoing
profitable operations. LGA is aware of opportunities to license additional
pieces of its intellectual property, but no assurances can be made as to whether
it will be successful converting these opportunities into meaningful revenue for
the Company.
The Company reported a working capital deficit of $168,013 as of June 30, 2004.
This deficit is primarily attributable to LGA's unearned royalty income that is
carried on the books as a liability and earned ratably over the life of the
technology license. De facto, the working capital deficit is also attributable
to LGA's limited working capital.
Operating activities used $185,043 of cash in 2004 as compared to using $269,406
in the corresponding period of the prior fiscal year.
While a portion of the current liabilities, approximately $81,739, is owed to
present officers and/or directors, there can be no assurances that these
officers/directors will not seek payment in the near term.
Inflation has not had a significant impact on the Company's operations.
14
Item 7. Financial Statements.
Index to Financial Statements
TENET INFORMATION SERVICES, INC.
(formerly Let's Go Aero, Inc.)
Page
-----
Report of Independent Auditors ........................................ F-2
Balance Sheet at June 30, 2004 ........................................ F-3
Statements of Operations, for the years ended
June 30, 2004 and 2003 ........................................... F-4
Statement of Changes in Shareholders' Deficit for the period from
July 1, 2002 through June 30, 2004 ............................... F-5
Statements of Cash Flows, for the years ended
June 30, 2004 and 2003 ........................................... F-6
Notes to financial statements ......................................... F-7
TENET INFORMATION SERVICES, INC
Reports of independent auditors ....................................... F-15
Consolidated balance sheet at June 29, 2004 ........................... F-17
Consolidated statements of operations for the years ended
June 29, 2004 and June 30, 2003 .................................. F-18
Consolidated statement of changes in shareholders' equity from
July 1, 2002 through June 29, 2004 ............................... F-19
Consolidated statements of cash flows for the years ended
June 29, 2004 and June 30, 2003 .................................. F-20
Notes to consolidated financial statements ............................ F-21
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS
Introduction .......................................................... F-27
Pro Forma Condensed Combined Statement of Operations
for the year ended June 30, 2004 (unaudited) ..................... F-28
Notes to Pro Forma Condensed Combined Financial Information (unaudited) F-29
F-1
Report of Independent Auditors
The Board of Directors and Shareholders
Tenet Information Systems, Inc.:
We have audited the accompanying balance sheet of Tenet Information Systems,
Inc. (formerly Lets Go Aero, Inc.) as of June 30, 2004, and the related
statements of operations, shareholders' deficit, and cash flows for each of the
years in the two-year period ended June 30, 2004. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Companies
Accounting Oversight Board. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tenet Information Systems, Inc.
(formerly Lets Go Aero, Inc.) as of June 30, 2004, and the results of its
operations and its cash flows for each of the years in the two-year period ended
June 30, 2004 in conformity with accounting principles generally accepted in the
United States.
/s/ Cordavano and Honeck, P.C.
------------------------------
Denver, Colorado
August 14, 2004
F-2
TENET INFORMATION SERVICES, INC.
(Formerly Let's Go Aero, Inc.)
Balance Sheet
June 30, 2004
Assets
Current assets:
Cash ......................................................... $ 180,619
Trade accounts receivable .................................... 24,370
Inventory, at the lowest of cost to market (Note 3) .......... 55,001
Note receivable, current portion (Note 3) .................... 8,206
Other current assets ......................................... 2,290
---------
Total current assets ........................... 270,484
Property and equipment, at cost,
net of accumulated depreciation (Note 3) ..................... 43,061
Intangible assets (Note 3) ....................................... 51,093
Note receivable, net of current portion (Note 3) ................. 12,946
Other assets ..................................................... 4,877
---------
Total assets ................................... $ 382,462
=========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable ............................................. $ 171,616
Accrued payroll .............................................. 81,739
Unearned revenue (Note 4) .................................... 175,000
Note payable, related party (Note 2) ......................... 10,142
---------
Total current liabilities ...................... 438,497
---------
Commitments and contingencies (Note 6) ........................... --
Shareholders' deficit (Note 5):
Preferred stock, $.01 par value; authorized 1,000,000 shares,
issued and outstanding, -0- shares ........................ --
Common stock, $.001 par value; authorized 100,000,000 shares,
issued and outstanding, 6,779,074 shares .................. 6,779
Additional paid-in capital ................................... --
Retained loss ................................................ (62,813)
---------
Total shareholders' deficit .................... (56,034)
---------
$ 382,464
=========
See accompanying notes to financial statements
F-3
TENET INFORMATION SERVICES, INC.
(Formerly Let's Go Aero, Inc.)
Statements of Operations
For the Years Ended
June 30,
--------------------------
2004 2003
----------- -----------
Sales and Revenue:
Product sales ..................................... $ 128,266 $ 164,334
Royalty revenue ................................... 60,000 60,000
----------- -----------
Total sales and revenue ............ 188,266 224,334
----------- -----------
Costs and expenses:
Costs of sales and revenue ........................ 80,085 131,340
Stock-based compensation (Note 5) ................. -- 5,104
Research and development .......................... 45,770 36,288
General and administrative ........................ 428,332 458,239
----------- -----------
Costs and expenses .............. 554,187 630,971
----------- -----------
Operating loss .................. (365,921) (406,637)
Other income (expense):
Other income ...................................... 53 8
Non-cash gain on debt conversion to equity (Note 5) 861,577 --
Net gain on the sale of property .................. -- 92
Other expense ..................................... -- (667)
----------- -----------
Net income (loss) .................. $ 495,709 $ (407,204)
=========== ===========
Pro forma adjustments (Note 1):
Officers/directors salaries ....................... -- --
Income taxes ...................................... -- --
----------- -----------
Pro forma net income (loss) ........ $ 495,709 $ (407,204)
=========== ===========
Basic and diluted income (loss) per share ............. $ 0.14 $ (0.12)
=========== ===========
Basic and diluted pro forma income (loss) per share ... $ 0.14 $ (0.12)
=========== ===========
Number of weighted average common shares
outstanding ....................................... 3,557,146 3,392,310
=========== ===========
See accompanying notes to financial statements
F-4
TENET INFORMATION SERVICES, INC.
(Formerly Let's Go Aero, Inc.)
Statement of Changes in Shareholders' Deficit
Additional
Common Stock Paid-in
------------------------- ----------- Retained
Shares Par Value Capital Deficit Total
----------- ----------- ----------- ----------- -----------
Balance at
July 1, 2002 ....................... * 3,383,968 $ 3,384 $ 724,732 $(1,779,505) $(1,051,389)
Sale of shares for cash ................ * 26,317 26 40,474 -- 40,500
Shares issued in exchange for
accrued interest ................... * 10,966 11 5,423 -- 5,434
Common stock options granted (Note 5) .. -- -- 5,104 -- 5,104
Net loss for the year .................. -- -- -- (407,204) (407,204)
----------- ----------- ----------- ----------- -----------
Balance at
June 30, 2003 ...................... * 3,421,251 3,421 775,733 (2,186,709) (1,407,555)
Sale of shares for cash ................ * 151,325 151 73,349 -- 73,500
Shares issued in exchange for
debt conversion (Note 5) ........... * 2,189,638 2,190 654,123 -- 656,313
Reverse acquisition of Tenet Information
Services, Inc. (Note 7) ................ 1,016,860 1,017 124,982 -- 125,999
Net income for the year ................ -- -- -- 495,709 495,709
S Corporation termination .............. -- -- (1,628,187) 1,628,187 --
----------- ----------- ----------- ----------- -----------
Balance at
June 30, 2004 ...................... 6,779,074 $ 6,779 $ -- $ (62,813) $ (56,034)
=========== =========== =========== =========== ===========
* Restated from 2,619 (See Note 1)
See accompanying notes to financial statements
F-5
TENET INFORMATION SERVICES, INC.
(Formerly Let's Go Aero, Inc.)
Statements of Cash Flows
For the Years Ended
June 30,
--------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net income (loss) ............................................... $ 495,709 $ (407,204)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization .............................. 22,492 23,713
Gain on debt conversion (Note 5) ........................... (861,577) 92
Stock issued for noncash consideration ..................... -- 10,544
Changes in assets and liabilities, net of effects of reverse
acquisition of Tenet Information Systems, Inc.:
Assets ................................................. (12,356) 121,896
Noncash accrued interest expense ....................... 170,689 (18,447)
----------- -----------
Net cash provided by (used in)
operating activities ........................... (185,043) (269,406)
----------- -----------
Cash flows from investing activities:
Purchase of equipment and other assets .......................... (28,124) (18,999)
Proceeds from sale of equipment ................................. -- 6,900
Cash acquired in acquisition of
Tenet Information Systems, Inc (Note 7) ....................... 164,094 --
----------- -----------
Net cash provided by (used in)
investing activities ........................... 135,970 (12,099)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt ................................... 150,000 185,267
Sale of common stock ............................................ 73,500 40,500
----------- -----------
Net cash provided by
financing activities ........................... 223,500 225,767
----------- -----------
Net change in cash ................................ 174,427 (55,738)
Cash, beginning of period ....................................... 6,192 61,930
----------- -----------
Cash, end of period ............................................. $ 180,619 $ 6,192
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Income taxes .................................................. $ -- $ --
=========== ===========
Interest ...................................................... $ -- $ --
=========== ===========
Noncash investing and financing transactions:
Acquisition of Tenet Information Systems, Inc.:
net assets (net of cash) ................................... $ (38,095) $ --
=========== ===========
Stock issued in exchange for long-term debt ................... $ 656,313 $ --
=========== ===========
Accrued interest added to loan principal ...................... $ 184,857 $ --
=========== ===========
Long-term debt converted to common stock ...................... $(1,518,470) $ --
=========== ===========
See accompanying notes to financial statements
F-6
TENET INFORMATION SYSTEMS, INC.
(Formerly Lets Go Aero, Inc.)
Notes to Financial Statements
(1) Organization and summary of significant accounting policies
Organization, basis of presentation and Liquidity
-------------------------------------------------
Lets Go Aero, Inc. ("We", "Us" or "Our") was incorporated in Colorado on April
14, 1998. We develop intellectual property for the automotive, recreation
vehicle and recreation industries. We also manufacture and distribute various
types of specialty trailers and cargo carrying enhancements as well as related
parts, accessories and services for the automobile, recreational vehicle and
recreational equipment industries. Specialty trailers are manufactured at our
outsourced facilities in Elkhart, Indiana while accessories are currently
manufactured in our outsourced facilities in Colorado Springs. We also sell our
products directly to end-user customers.
Inherent in our business are various risks and uncertainties, including our
limited operating history, historical operating losses and dependence upon
strategic alliances. The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
We have experienced negative cash flow from operations since our inception and
we have expended, and expect to continue to expend, substantial funds to
continue our development and marketing efforts. As a result, we had a net
capital deficiency at June 30, 2004. Based on our current operating plans,
management believes that cash at June 30, 2004, along with proceeds from future
revenues, futures sales of common stock and the cash received in our recent
recapitalization, will be sufficient to meet operating needs for the foreseeable
future. The actual funds that we will need to operate during this period will be
determined by many factors, some of which are beyond our control. Lower than
anticipated sales of our products or higher than anticipated expenses could
require us to need additional financing sooner than expected. There is no
assurance that we will be successful in selling additional shares of common
stock to the public. Our business plan projects profits in June 2005.
Effective June 30, 2004, we acquired Tenet Information Systems, Inc., a Utah
public shell company, in a reverse acquisition in order to access the capital
markets to fund our business plans. This acquisition also provided $125,999 in
net assets and $164,094 in cash.
In 2004, we changed our year-end from December 31.
Fair Values of Financial Instruments
------------------------------------
The carrying values of cash, accounts receivable, notes receivable, accounts
payable, notes payable and accrued liabilities approximate fair value due to (1)
the short-term maturities of these assets and liabilities or (2) their terms.
Financial Statement Estimates
-----------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
The more significant estimates are used for such items as: valuation of
inventory, depreciable lives of property and equipment, allowance for doubtful
accounts, and reserves for warranty. As better information becomes available or
as actual amounts are determinable, the recorded estimates are revised. Ultimate
results could differ from these estimates.
Concentrations
--------------
We purchase all of our plastic shells from one supplier. The purchases
represented approximately 46 % and 44 % of cost of sales for the years ended
June 30, 2004 and 2003, respectively. Although there are a limited number of
F-7
TENET INFORMATION SYSTEMS, INC.
(Formerly Lets Go Aero, Inc.)
Notes to Financial Statements
manufacturers of plastic shells, management believes that other suppliers could
provide similar shells on comparable terms. A change in suppliers, however,
could cause a delay in manufacturing and a possible loss of sales, which would
affect operating results adversely.
Receivables
-----------
Receivables are stated net of an allowance for doubtful accounts of $-0- at June
30, 2004. We believe that all receivables at June 30, 2004 are fully
collectible.
Inventories
-----------
Inventories are stated at the lower of cost, as determined on average cost
basis, or market and includes materials, labor and overhead costs. Raw materials
consist of the cost of materials required to produce trailers and accessories
and to support parts sales and service. Work in process consists of costs
related to materials, plastic shells, labor and overhead related to the
production process.
Prepaid expenses
----------------
Prepaid expenses primarily include the unamortized portion of annual casualty
and third party liability insurance premiums. These premiums are amortized to
expense over the insurance year.
Property and Equipment
----------------------
Property and equipment are stated at cost, while repair and maintenance items
are charged to expense as incurred. Depreciation is provided for financial
reporting purposes using straight-line and accelerated methods over estimated
useful lives of 3 to 7 years for machinery and equipment and 10 years for
furniture.
Certain tooling used to make our plastic shells is held for use at our
subcontractors' facilities in Elkhart, Indiana.
Intangible Assets
-----------------
We have patents issued and pending to protect our intellectual property. These
patents relate to how cargo can be attached and carried on a vehicle's hitch
receiver, frame, or body surface. Patents are amortized on a straight-line basis
and charged to amortization expense over the anticipated life of the patent.
Costs of patents pending are deferred until the patent is granted. We will not
begin amortization until the patent is granted.
Impairment of Long-Lived Assets
-------------------------------
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, we evaluate our
long-lived assets, including related intangibles, of identifiable business
activities for impairment when events or changes in circumstances indicate, in
management's judgment, that the carrying value of such assets may not be
recoverable. The determination of whether impairment has occurred is based on
management's estimate of undiscounted future cash flows attributable to the
assets as compared to the carrying value of the assets. If impairment has
occurred, estimating the fair value for the assets and recording a provision for
loss if the carrying value is greater than fair value determine the amount of
the impairment recognized. For assets identified to be disposed of in the
future, the carrying value of these assets is compared to the estimated fair
value less the cost to sell to determine if impairment is required. Until the
assets are disposed of, an estimate of the fair value is re-determined when
related events or circumstances change.
When determining whether impairment of one of our long-lived assets has
occurred, we must estimate the undiscounted cash flows attributable to the asset
or asset group. Our estimate of cash flows is based on assumptions that could
change in the future.
Any significant variance in any of the above assumptions or factors could
materially affect our cash flows, which could require us to record an impairment
of an asset. No impairment charges were recognized during each of the years
ended June 30, 2004 and 2003.
F-8
TENET INFORMATION SYSTEMS, INC.
(Formerly Lets Go Aero, Inc.)
Notes to Financial Statements
Revenue Recognition
-------------------
We recognize revenue from the sale of trailers and accessories when there is
persuasive evidence that title and risks of ownership are transferred to the
customer, which generally is upon shipment or customer pick-up. Accordingly, no
provision for sales allowances or returns is normally required except in unusual
circumstances.
Revenue from sales of parts is recognized when the part has been shipped.
Revenues related to shipping and deliveries are included as a component of net
sales and the related shipping costs are included as a component of cost of
sales.
Royalty income is recognized based on the terms specified in contractual
settlement agreements.
Product Warranty
----------------
Our products are covered by product warranties for one year after the date of
sale. At the time of sale, the Company recognizes estimated warranty costs,
based on prior history and expected future claims, by a charge to cost of sales
and records an accrued liability. The accrued liability is reduced as actual
warranty costs are paid and is evaluated periodically to validate previous
estimates and known requirements and adjusted as necessary.
Research and Development Expenses
---------------------------------
Research and development expenses were incurred in fiscal 2004 and 2003 and
totaled $45,000 and $36,288, respectively. R&D costs are expensed as incurred.
Income Taxes
------------
We account for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). SFAS
No. 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
In tax years prior to June 30, 2004, we elected to be taxed as an S corporation
on our federal and state income tax returns. In lieu of corporate income taxes,
the shareholders were taxed on their proportionate share of our earnings from
the effective date of the election, which was March 1998.
For periods prior to the revocation of our tax status, we have provided
unaudited pro forma income tax information in our statements of operations to
reflect as salaries distributions to officers/directors made while we were an S
corporation and to reflect an estimated tax provision. Note 8 is presented in
accordance with SFAS 109 as if we had been subject to Federal and state income
taxes during fiscal years 2004 and 2003.
Stock-based Compensation
------------------------
The Company accounts for all stock options under SFAS No. 123. However, as
permitted by SFAS No. 123, the Company accounts for stock options granted to
employees under the intrinsic method and stock options granted to non-employees
under the fair value method. Directors, acting in their capacity as directors,
are considered employees for this purpose. Under the intrinsic method, no
compensation expense is recorded if the option's price equals or exceeds the
fair value of the underlying stock. Under the fair value method, compensation
expense is recorded based on the fair value of the option. When the intrinsic
value method is elected, compensation expense is measured also under the fair
value method, but reported on a "pro forma" basis. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
F-9
TENET INFORMATION SYSTEMS, INC.
(Formerly Lets Go Aero, Inc.)
Notes to Financial Statements
The value of shares of stock issued for services to 3rd party vendors and
suppliers is computed based on the quoted market price of our common stock on
the dates the services were performed.
Pro Forma Adjustments
---------------------
The accompanying statements of operations include pro forma adjustments to
reflect as salaries distributions to officers/shareholders which were made while
we were an S corporation and to reflect an estimated provision for income taxes.
The effective income tax rate used on the pro forma adjustments is that
estimated had we been a C corporation during the periods presented.
Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per share are determined by dividing net income (loss) by
the weighted-average number of common shares outstanding during the year.
Diluted earnings (loss) per share are determined by dividing net income (loss)
by the weighted-average number of common shares and common stock equivalents
outstanding, increased by the assumed exercise of stock options convertible into
common stock, for which the effect of exercise using the treasury stock method
would be dilutive.
All common shares reflected in the accompanying financial statements have been
restated upon the exchange rates of common stock issued in connection with the
reverse acquisition of Tenet Information Systems, Inc.
New Accounting Pronouncements
-----------------------------
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (Interpretation No. 45). Interpretation
No. 45 clarifies the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. Interpretation No. 45 also requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing certain types of guarantees. Certain types of guarantees
are not subject to the initial recognition and measurement provisions of
Interpretation No. 45 but are subject to its disclosure requirements. The
initial recognition and initial measurement provisions of Interpretation No. 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, regardless of the guarantor's fiscal year-end. The
guarantor's previous accounting for guarantees issued prior to the date of the
initial application of Interpretation No. 45 shall not be revised or restated.
The disclosure requirements in Interpretation No. 45 are effective for financial
statements of interim or annual periods ended after December 15, 2002. We
applied the initial recognition and initial measurement provisions of
Interpretation No. 45 to guarantees issued or modified after December 31, 2002.
For more information on the Company's guarantees and the disclosure requirements
of Interpretation No. 45, as applicable to the Company, see Notes 2 and 8 to
these consolidated financial statements.
In December 2002, the FASB approved Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure- an
amendment of FASB Statement No. 123" (SFAS 148). SFAS No. 148 amends SFAS No.
123 to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is effective for
financial statements for fiscal years ending after December 15, 2002. We adopted
the transitional disclosure provisions of SFAS No. 148 for the year ended June
30, 2003.
F-10
TENET INFORMATION SYSTEMS, INC.
(Formerly Lets Go Aero, Inc.)
Notes to Financial Statements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within the scope
of SFAS No. 150 as a liability (or an asset in some circumstances). SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company will apply SFAS No. 150 to any
financial instruments entered into or modified after May 31, 2003. The
transition to SFAS No. 150 did not have a material effect on our Company's
financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), revised December 2003. FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated support from other parties. FIN 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. All
companies with variable interests in variable interest entities created after
January 31, 2003, shall apply the provisions of this Interpretation to those
entities immediately. We do not expect the impact of this new interpretation to
have a material impact on our Company's financial position or results of
operations because it does not have any such entities.
(2) Related Party Transactions
We have a note payable in the amount of $10,142 due to a former director at June
30, 2004. The note bears interest at 8% and is unsecured and due on demand.
During the year ended June 30, 2004, principal payments of $16,294 were made to
the former director. The note payable is reflected as note payable, related
party in the accompanying financial statements.
In June 2004, we issued 2,189,638 shares of our common stock to extinguish
convertible debt totaling $1,518,440. The convertible debt consisted of notes
payable to insiders and was converted at the rate of approximately 1.45 shares
of common stock for each $1.00 of notes payable. We recorded a gain on the
beneficial conversion in the accompanying financial statements totaling $861,577
with a corresponding credit to paid-in-capital.
(3) Balance Sheet Components
Inventory
---------
At June 30, 2004, inventory consisted of:
Raw materials........... $15,119
Finished goods.......... 39,882
-------
$55,001
=======
Property and Equipment
----------------------
At June 30, 2004, major classes of property and equipment were:
Furniture and fixtures ................. $ 20,433
Equipment .............................. 84,894
Tooling, held offsite .................. 8,361
---------
113,688
Less: accumulated depreciation (70,627)
---------
$ 43,061
=========
F-11
TENET INFORMATION SYSTEMS, INC.
(Formerly Lets Go Aero, Inc.)
Notes to Financial Statements
Intangible Assets
-----------------
At June 30, 2004, intangible assets consisted of:
Patents, net of $13,319 in accumulated amortization....... $39,579
Deferred patent application costs ........................ 11,513
-------
$51,092
=======
Note Receivable
---------------
At June 30, 2004, note receivable consisted of:
Unsecured note receivable from an individual, with interest at 8 percent, with
quarterly installments of $2,000, maturing
in February 2007 ................................ $ 21,152
Less: current portion .................................. (8,206)
--------
$ 12,946
========
(4) Unearned Revenue
In May 2002, we licensed certain intellectual property to Sport Rack
International/Valley Industries, Inc. for five years. We received an upfront
payment against future royalties of $300,000, which we deferred. For accounting
purposes, we reflect the payment in royalty income, pro-rata, over the life of
the licenses. In fiscal years 2004 and 2003, respectively, we recognized $60,000
and $60,000 in royalty revenue. The balance of unearned revenue was $175,000 as
of June 30, 2004.
(5) Shareholders' Deficit
Features of Preferred Stock
Our preferred stock may be issued from time-to-time in one or more series. Our
Board of Directors is authorized to (1) divide the preferred stock into series;
(2) establish the number of preferred shares in a series; and (3) fix and
determine the relative rights and preferences of any series of our preferred
stock.
Debt Conversion
---------------
On June 30, 2004, we issued 2,189,638 shares of our common stock to extinguish
debt totaling $1,518,440. The debt consisted of notes payable plus accrued
interest payable to insiders convertible into common stock at the rate of
approximately 1.45 shares for each $1.00 of notes payable. The quoted market
price of the common stock on the conversion date was $.30 per share or $656,892.
We recorded a gain on the beneficial conversion of $861,577.
Stock Options
-------------
In September 2002, we granted options to a consultant to purchase 53,935 shares
of its common stock for media consulting services. The options were vested and
exercisable as of the grant date and expire in September 2007. In March 2003, we
granted options to a consultant to purchase 30,203 shares of our common stock
for consulting services. The options were vested and exercisable as of the grant
date and expire in March 2008. In April 2003, we granted options to a consultant
to purchase 280,459 shares of our common stock for consulting services. These
options were vested and exercisable as of the grant date and expire in April
2008. We recorded $5,104 in stock-based compensation related to the option
grants.
The weighted average fair value of options granted during fiscal year 2003
estimated on the dates of grant using the Black-Scholes option-pricing model was
approximately $.01 per share. The fair value of the options granted is estimated
on the date of grant using the following assumptions: dividend yield of zero,
expected volatility of -0- percent, risk-free interest rate of 2 percent, and an
expected life of 2.5 years. No options were exercised during the year ended June
30, 2004.
The status of the Company's stock options are summarized as follows:
Weighted
Number Average
of Shares Exercise
Exercisable Price
--------- ---------
Outstanding at July 1, 2002 1,143,411 $ 0.70
Granted .................... 364,597 $ 0.70
Exercised .................. -- --
Canceled ................... -- --
--------- ---------
Outstanding at June 30, 2003 1,508,008 $ 0.70
Granted .................... -- --
Exercised .................. -- --
Canceled ................... -- --
--------- ---------
Outstanding at June 30, 2004 1,508,008 $ 0.70
========= =========
As of June 30, 2004, the quoted market price of the Company's common stock, as
determined by a national quotation system, was $0.30 per share.
(6) Commitments
We lease our office space under a non-cancelable operating lease. Future minimum
lease payments are as follows for the years ending June 30:
2005.......... $15,689
2006.......... 16,473
2007.......... 15,796
-------
$47,958
=======
We recorded rent expense in the amount of $25,144 and $20,697 for the years
ended June 30, 2004 and 2003, respectively.
(7) Reverse Acquisition
On June 30, 2004, Lets Go Aero, Inc. ("LGA") exchanged 100 percent of its
outstanding shares of common stock for 5,762,214 shares of the common stock of
Tenet Information Systems, Inc. ("TIS") in a reverse acquisition. This
acquisition has been treated as a recapitalization of LGA, a Colorado
corporation, with TIS the legal surviving entity. Since TIS had, prior to
recapitalization, minimal assets (consisting principally of cash and
receivables) and no operations, the recapitalization has been accounted for as
the sale of 1,016,860 shares of LGA common stock for the net assets of TIS.
Costs of the transaction have been charged to the period.
F-13
(8) S Corporation Termination
We terminated our S Corporation tax status on June 30, 2004 in conjunction with
debt conversion discussed in Note 5. At that date we had $1,691,000 in
undistributed losses. The accompanying financial statements include the transfer
of $1,628,189 from accumulated deficit to additional paid-in capital.
F-14
Report of Independent Auditors
To The Board of Directors of
Tenet Information Services, Inc:
We have audited the accompanying consolidated balance sheet of Tenet Information
Services, Inc. (a Utah corporation) and subsidiary as of June 29, 2004 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended June 29, 2004. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with auditing of the Public Company
Accounting Oversight Board. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tenet Information
Services, Inc. and subsidiary as of June 29, 2004, and the results of its
operations and its cash flows for the year ended June 29, 2004 in conformity
with accounting principles generally accepted in the United States.
/s/ Cordovano and Honeck, P.C.
------------------------------
Cordovano and Honeck, P.C.
Denver, Colorado
September 13, 2004
F-15
Report of Independent Certified Public Accountants
To The Board of Directors and Stockholders Tenet Information Services, Inc.
We have audited the accompanying consolidated balance sheet of Tenet Information
Services, Inc. (a Utah corporation) and subsidiary as of June 30, 2003 (not
separately included herein) and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years ended June 30,
2003 and 2002 (not separately included herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tenet Information
Services, Inc. as of June 30, 2003, and the results of their operations and
their cash flows for years ended June 30, 2003 and 2002 in conformity with
accounting principles generally accepted in the United States.
/s/ Hansen, Barnett & Maxwell
-----------------------------
Hansen, Barnett & Maxwell
Salt Lake City, Utah
September 5, 2003
F-16
Tenet Information Services, Inc.
Consolidated Balance Sheet
June 29, 2004
Assets
Current assets:
Cash and cash equivalents .................................... $ 164,094
Accounts and notes receivables:
Trade, net of allowance ................................... 9,850
Notes, current portion (Note 3) ........................... 8,206
-----------
Total current assets ........................... 182,150
Property and equipment, at cost .................................. 5,175
Less: accumulated depreciation ............................ (4,057)
-----------
1,118
Notes receivable, net of current portion (Note 3) ................ 12,946
Other assets ..................................................... 3,575
-----------
Total assets ..................................... $ 199,789
===========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable ............................................. $ 43,370
Accrued expenses ............................................. 20,278
Note payable, related party (Note 2) ......................... 10,142
-----------
Total liabilities .............................. 73,790
-----------
Commitments (Note 4) ............................................. --
Shareholders' equity (Note 6):
Preferred stock , $.01 par value; authorized 1,000,000 shares,
issued and outstanding -0- shares ......................... --
Common stock , $.001 par value; authorized 100,000,000 shares,
issued and outstanding 1,018,310 shares .................. 1,017
Additional paid-in capital ................................... 4,896,715
Accumulated deficit .......................................... (4,771,733)
-----------
Total shareholders' equity ..................... 125,999
-----------
$ 199,789
===========
See accompanying notes to consolidated financial statements
F-17
Tenet Information Services, Inc.
Consolidated Statements of Operations
For Years Ended
----------------------
June 29, June 30,
2004 2003
--------- ---------
Revenues ................................................ $ 74,139 $ 525,856
Cost of revenues ........................................ -- 189,756
--------- ---------
Gross profit ............................................ 74,139 336,100
Other operating expenses:
Selling, general and administrative ................. 214,571 220,387
Software development ................................ -- 119,984
--------- ---------
Loss from operations ..................... (140,432) (4,271)
Other income and expenses:
Interest income ..................................... 2,359 342
Interest expense .................................... (3,917) (17,706)
Gain from sale of operations (Note 3) ............... 308,559 --
Gain from extinguishment of debt (Note 5) ........... 19,288 --
Reimbursement of expenses ........................... 53,987 --
--------- ---------
Income before income taxes ............... 239,844 (21,635)
Income tax provision (Note 7) ....................... -- --
--------- ---------
Net income from continuing operations .... 239,844 (21,635)
Discontinued operations - profit from consulting division
(net of gain on sale of assets of $74,804) .......... -- 99,109
--------- ---------
Net income ............................... $ 239,844 $ 77,474
========= =========
Basic earnings per common share:
Income before discontinued operations ............... $ 0.25 $ (0.02)
========= =========
Discontinued operations ............................. $ -- $ 0.10
========= =========
Net income .......................................... $ 0.25 $ 0.08
========= =========
Weighted average number of common shares outstanding * .. 971,027 966,810
========= =========
* Restated 1 for 20 stock split. See Note 6
See accompanying notes to consolidated financial statements
F-18
Tenet Information Services, Inc.
Consolidated Statement of Changes in Shareholders' Equity
July 1, 2002 through June 29, 2004
Deficit
accumulated
Preferred Stock Common Stock Additional during
--------------------- ------------------- paid-in development
Shares Par Value Shares Par Value capital stage Total
----- ------------- --------- ------ ---------- ----------- ---------
Balance at
July 1, 2002 .......... -- $ --* 968,310 $ 967 $4,872,265 $(5,089,051) $(215,819)
Net income .................... -- -- -- -- -- 77,474 77,474
----- ------------- --------- ------ ---------- ----------- ---------
Balance at
June 30, 2003 .......... -- -- 968,310 967 4,872,265 (5,011,577) (138,345)
Stock issued as compensation on
June 8, 2004 (Note 1) ..... -- -- 50,000 50 24,450 -- 24,500
Net income .................... -- -- -- -- -- 239,844 239,844
----- ------------- --------- ------ ---------- ----------- ---------
Balance at
June 29, 2004 ............. -- $ -- 1,018,310 $1,017 $4,896,715 $(4,771,733) $ 125,999
===== ============= ========= ====== ========== =========== =========
* Restated 1 for 20 stock split. See Note 6.
See accompanying notes to consolidated financial statements
F-19
Tenet Information Services, Inc.
Consolidated Statements of Cash Flows
For Years Ended
-----------------------------
June 29, 2004 June 30, 2003
------------ ------------
Cash flows from operating activities:
Net loss ......................................... $ 239,844 $ 77,474
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization ................ 1,824 9,462
Provision for bad debt ....................... 1,611 --
Common stock issued for services ............. 24,500 --
Gain from sale of operations ................. (308,559) (74,804)
Gain from extinguishment of debt ............. (19,288) --
Changes in operating assets and liabilities:
Current assets ............................. 79,636 29,364
Current liabilities ........................ (212,308) (44,597)
------------ ------------
Net cash used in
operating activities .............. (192,740) (3,101)
Cash flows from investing activities:
Purchase of assets ............................... -- (4,234)
Proceeds from sale of assets ..................... 314,400 --
Proceeds from collections of loans ............... 4,548 --
------------ ------------
Net cash provided by
investing activities .............. 318,948 (4,234)
Cash flows from financing activities:
Payments to lines of credit, notes payable and
and current portion of long-term debt .......... (33,364) --
------------ ------------
Net cash used in
financing activities .............. (33,364) --
Net change in cash and
cash equivalents .................. 92,844 (7,335)
Cash and cash equivalents:
Beginning of period .............................. 71,250 78,585
------------ ------------
End of period .................................... $ 164,094 $ 71,250
============ ============
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest ....................................... $ 3,917 $ 5,669
============ ============
Income taxes ................................... $ -- $ --
============ ============
Note receivable from sale of consulting division $ -- $ 25,700
============ ============
Disposal of furniture, fixtures and equipment .. $ -- $ 94,824
============ ============
Noncash operating activities:
Extinguishment of debt ......................... $ 19,288 $ --
============ ============
See accompanying notes to consolidated financial statements
F-20
Tenet Information Services, Inc.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Organization
Tenet Information Services, Inc. ("Tenet"), a Utah corporation, designs and
markets a computer-based medical and health information system related primarily
to emergency departments (the "EDNet System"). During fiscal 1996, Tenet
expanded its operations by merging with National Microcomputer Corporation
("NMC") and acquiring certain assets of The International Healthcare Consulting
Group, Inc. ("HCG"). NMC designed and marketed the integrated information
management/patient tracking system for use in emergency departments of hospitals
and urgent care centers (the "EDNet System"). HCG has provided healthcare
institutions, mainly hospitals, with consulting services to assist the
institutions in achieving a more efficient, lower cost care delivery model while
maintaining the highest quality of care standards.
Tenet and its wholly owned subsidiary, NMC, (collectively, "the Company") sell
and lease computer software license rights to hospitals throughout the United
States. In addition, the Company sells maintenance contracts for these
information systems. Substantially all of the Company's revenues are generated
from hospitals and therefore, the Company's financial performance is partially
dependent upon the viability of the healthcare economic sector.
Tenet sold its consulting division on May 23, 2003 and its remaining operations
on October 22, 2003. (See Note 3.)
Basis of Presentation
The consolidated financial statements include the accounts of the Company's
majority-owned subsidiary after the elimination of all significant intercompany
accounts and transactions. The accompanying consolidated financial statements
for the year ended June 30, 2003 include reclassifications that were made to
conform to the current year presentation. Those reclassifications had no impact
on reported net income or stockholders' equity. The Company consolidates
entities when it has the ability to control the operating and financial
decisions and policies of that entity. The determination of ability to control
or exert significant influence over an entity involves the use of judgment of
the extent of the control or influence and that of the other equity owners or
participants of the entity.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities of
three months or less when acquired to be cash equivalents. There were no cash
equivalents at June 29, 2004.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
generally ranging from three to ten years. Maintenance and repairs are charged
to expense as incurred and major improvements or betterments are capitalized.
Gains or losses on sales or retirements are included in the statement of
operations in the year of disposition.
F-21
Tenet Information Services, Inc.
Notes to Consolidated Financial Statements
Software Development Costs
Costs incurred in creating computer software products are charged to operations
as software development expense prior to the development of a detailed program
design or a working model. After the detailed program design or working model is
established, costs of producing product masters are capitalized as software
development costs. The Company had no capitalized software costs at June 29,
2004.
Costs of maintenance and customer support are recognized as expense when the
related revenue is recognized or when those costs are incurred, whichever occurs
first.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
evaluates their long-lived assets, including related intangibles, of
identifiable business activities for impairment when events or changes in
circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. The determination of whether impairment has
occurred is based on management's estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of the assets. If
impairment has occurred, estimating the fair value for the assets and recording
a provision for loss if the carrying value is greater than fair value determine
the amount of the impairment recognized. For assets identified to be disposed of
in the future, the carrying value of these assets is compared to the estimated
fair value less the cost to sell to determine if impairment is required. Until
the assets are disposed of, an estimate of the fair value is re-determined when
related events or circumstances change. The Company had no impaired assets at
June 29, 2004.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance to the extent that uncertainty
exists as to whether the deferred tax assets will ultimately be realized.
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of Statement of
Position No. 91-1 Software Revenue Recognition as follows:
Revenues related to the EDNet System consist of sales of software licenses,
installation of information systems and related software customization and
enhancements. In addition, revenues are generated from annual software support
and maintenance. Installation revenues are recognized on the percentage
completion method measured by completion and acceptance of contracted
milestones.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, receivables, trade payables and notes
payable. The estimated fair value of financial instruments is not presented,
since in management's opinion, there is no material difference between carrying
amounts and estimated fair values of financial instruments as presented in the
accompanying consolidated balance sheet.
The Company has concentrated its credit risk for cash by maintaining deposits in
one financial institution, which may at times exceed amounts covered by
insurance provided by the U.S. Federal Deposit Insurance Corporation (FDIC). The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk in cash.
In the normal course of business, the Company extends credit to its customers.
The Company regularly reviews its accounts receivable and makes provisions for
potentially uncollectible balances.
F-22
Tenet Information Services, Inc.
Notes to Consolidated Financial Statements
Stock based Compensation
The Company accounts for its stock options issued to directors, officers and
employees under Accounting Principles Board Opinion No. 25 and related
interpretations ("APB 25"). Under APB 25, compensation expense is recognized if
an option's exercise price on the measurement date is below the fair value of
the Company's common stock. The Company accounts for options and warrants issued
to non-employees in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) which requires these options and warrants to be
accounted for at their fair value.
No stock-based employee compensation cost related to options is reflected in net
income, as all options had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and basic and diluted earnings per common share if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock Based Compensation, to stock-based employee
compensation:
For Years Ended
--------------------
June 29, June 30,
2004 2003
---------- -------
Net Income, as reported .................................... $ 241,255 $77,474
Adjust: Total stock-base employee compensation expense
determined under fair value based method of all awards,
including adjustments for forfeited options ........... -- 8,353
---------- -------
Pro Forma net income ....................................... $ 241,255 $85,827
========== =======
Basic and diluted earnings per common share as reported .... $ 0.25 $ --
========== =======
Basic and diluted earnings per common share pro forma ...... $ 0.25 $ --
========== =======
In June 2004, the board of directors approved the issuance of 50,000 shares of
the Company's common stock to two of its employee, as compensation. The
transaction was valued based on the quoted market price of the stock, which was
$0.49 per share. The Company has recorded stock-based compensation expense in
the amount of $24,500 in the accompanying consolidated financial statements.
Basic and Diluted Earnings Per Share
Basic earnings per common share is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential dilution
which could occur if all contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock.
Potentially issuable common shares which consist of stock options are excluded
from the calculations of diluted loss per common share because the effects are
anti-dilutive.
Warranty Cost
A one-year limited warranty from date of first use is provided on sales of
software licenses. The terms of the warranty are extended to all periods where
the System is covered by an applicable Support Agreement. Warranty costs have
not been material in any year presented; accordingly, these costs are expensed
when incurred.
(2) Related Party Transactions
The Company has a note payable in the amount of $10,142 due to an
officer/shareholder at June 29, 2004. The note bears interest at 8% and is
unsecured and due on demand. During the year ended June 29, 2004, principal
payments of $16,294 were made to the related party. The note payable is
reflected as note payable, related party in the accompanying consolidated
financial statements.
F-23
(3) Disposition of Assets
Sale of Consulting Division
On May 23, 2003, the Company sold all the assets of the Company's consulting
division to a shareholder and former employee of the Company. The sale included
all office and computer equipment associated with the consulting division, which
had a net book value of $4,926, and the right to pursue work with the Company's
consulting division clients. In exchange for the purchase of the consulting
division, the Company received a unsecured note receivable for $25,700, to be
paid quarterly at 8% interest for the next three years and nine months or
fifteen payments and assumed liabilities totaling $54,030. As of June 29, 2004,
the outstanding balance of the notes receivable is $21,152.
The sale resulted in the recognition of a $74,804 gain. The consolidated
financial statements present the results from the consulting division as
discontinued operations. During the year ended June 30, 2003 the consulting
division had revenues of $353,899 and income from operations of $24,305.
Sale of Remaining Operations
The Company entered into an asset purchase agreement with ClinicalVentures,
L.L.C. ("CVLLC"), an unrelated third party, on July 29, 2003 to sell
substantially all assets related to its EDNet product line, which represented
substantially all of its assets remaining after the sale of the consulting
division for $339,000. After the sale of assets closed on October 22, 2003 the
Company no longer had any business operations. As part of the sale, (1) CVLLC
assumed the obligation to support all ongoing maintenance contracts currently in
force with EDNet clients; (2) purchased all of the office and computer equipment
associated with the EDNet product line; and (3) acquired the right to pursue
work with the Company's EDNet product line clients. The Company recorded a gain
of $308,559 on the sale, which is included in other income in the accompanying
consolidated financial statements.
In conjunction with the asset purchase agreement, the Company and CVLLC executed
a software license agreement pursuant to which CVLLC obtained a non-exclusive
right and license to use the Company's EDNet and ARCNet tracking software
products. The license agreement allows ClinicalVentures to distribute the
software for a period of five years. In exchange, CVLLC agreed to pay 5% of the
initial software license fees received during the five-year period with respect
to new sales or licenses of the EDNet and ARCNet tracking products up to an
aggregate of $90,000.
(4) Commitments
The Company occupies its facilities under an operating lease that expires in
November 2004. Lease expense for fiscal 2004 and 2003 was $ 22,681 and $29,852,
respectively.
(5) Gain on Debt Extinguishments
As of June 30, 2003, the Company had sales tax liability in the amount of
$19,288 related to Hawaii excise tax, incurred ten years ago. The excise tax has
been repealed by the State of Hawaii and management believes that the statute of
limitations of collecting this liability has expired. The liability was written
off and $19,288 was recognized as gain from debt extinguishments.
In accordance with SFAS 145, the gain from debt extinguishments did not meet the
conditions for being classified as an extraordinary item and therefore was
included in continuing operations.
F-24
Tenet Information Services, Inc.
Notes to Consolidated Financial Statements
(6) Capital Stock
Reverse Stock Split
At the special shareholder meeting on October 22, 2003, the shareholders
approved a 1 for 20 reverse stock split of the Company's common stock and common
stock options. As a result of the reverse split, the Company has 966,756
outstanding shares of stock, after adjustments for fractional shares. The
accompanying consolidated financial statements are retroactively stated to
reflect the transaction.
(7) Income Taxes
A reconciliation of U.S. statutory federal income tax rate to the effective rate
follows for the year ended June 29, 2004.
U.S. Statutory federal rate.......................... 15.00%
State income tax rate................................ 5.00%
Deferred revenue recognized
as revenue in the current period............... -6.00%
Net operating loss for which tax benefit
is currently available......................... -14.00%
---------
0.00%
=========
At June 29, 2004, the Company had a net operating loss carry forward for federal
income tax purposes of approximately $4,576,675, which was fully allowed for in
the valuation allowance of $4,576,675. The valuation allowance offset the net
deferred asset for which there is no assurance of recovery.
As of June 29, 2004, the Company had research and development and investment tax
credit carry forwards of approximately $18,711, which were fully allowed for in
the valuation allowance of $18,711.
Due to the reverse acquisition that occurred on June 30, 2004, management
believes the Company has undergone an "ownership change" as defined by Section
382 of the Internal Revenue Code. Accordingly, the utilization of a portion of
the net operating loss carry forwards may be limited. Due to this limitation,
and the uncertainty regarding the ultimate utilization of the net operating loss
carry forward and tax credits, no tax benefit for losses has been provided by
the Company in the accompanying financial statements. The net operating loss
carry forwards and tax credits will expire through fiscal year 2016 and 2006,
respectively.
(8) Stock Option Plan
The Company has adopted an incentive stock option plan and a nonqualified stock
option plan. Stock options for an aggregate of 600,000 shares of common stock
may be granted under these plans. Stock options under both option plans may be
granted at a price per share not less than 100 percent of the fair market value
of the common stock, as determined at the date of grant. Employees vest in the
right to exercise their options from the first anniversary date following the
date of grant to the fifth anniversary date following the date of grant. The
options expire five years from the vesting date. Incentive stock options are
forfeited unless exercised within zero to three months following termination of
employment or twelve months if termination is due to death or disability.
During fiscal year ended June 2004 and June 2003, the Board of Directors did not
authorized the issuance of any stock options outside of the Incentive Stock
Option Plan to employees of the Company.
A summary of the status of the Company's options outstanding as of June 29, 2004
and June 30, 2003, and changes during the years then ended is presented as
follows:
F-25
Tenet Information Services, Inc.
Notes to Consolidated Financial Statements
Weighted average
Number of shares exercise price
------------ -----------
Outstanding at July 1, 2002................ 605,000 $ 0.10
Granted............................. - $ 0.10
Forfeited .......................... (180,000) $ 0.10
------------ -----------
Outstanding at June 30, 2003............... 425,000 $ 0.10
Granted ............................ - $ 0.10
Forfeited .......................... - $ 0.10
Cancelled .......................... (425,000) $
------------ -----------
Outstanding at June 29, 2004............... - $ 0.00
============ ===========
Options exercisable at:
June 29, 2004...................... - $ 0.00
============ ===========
(9) Subsequent Events
Merger
Effective, June 30, 2004, Let's Go Aero, Inc. (LGA) exchanged 100 percent of its
outstanding shares of common stock for 5,762,219 shares of the common stock of
the Company. This acquisition has been treated as a reverse acquisition whereby
LGA is considered the surviving entity. Costs of the transactions have been
charged to the period. All options to purchase stock under the stock option
plans were cancelled.
Lease Cancellation
On July 25, 2004, the Company cancelled its operating lease for its facilities
and was released from all future liabilities.
F-26
TENET INFORMATION SYSTEMS, INC.
(formerly Lets Go Aero, Inc.)
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 2004
The following unaudited pro forma condensed combined statement of operations for
the year ended June 30, 2004 (the "pro forma combined financial statements")
gives effect to the merger of Lets Go Aero, Inc. ("LGA") and Tenet Information
Systems, Inc. ("TIS")
The unaudited pro forma condensed combined statement of operations are presented
as if the merger occurred at the beginning of the period presented.
The unaudited pro forma condensed combined financial information should be read
in conjunction with the notes to unaudited pro forma condensed combined
financial information and the separate audited financial statements and notes
thereto of each of the companies included in the pro forma as of their balance
sheet dates and for the year ended June 30, 2004 for LGA and June 29, 2004 for
TIS.
The unaudited Pro Forma Combined Financial Statements are based upon historical
financial statements of LGA and TIS.
The Pro Forma Combined Statements of Operations are not necessarily indicative
of the results of operations that actually would have been achieved had the
acquisition been consummated as of the dates indicated, or that may be achieved
in the future. Furthermore, the Pro Forma Combined Financial Statements do not
reflect changes that may occur as the result of post-combination activities and
other matters.
F-27
PRO FORMA CONDENSED COMBINED
Statement of Operations
For the Year Ended June 30, 2004
Pro Forma
Adjustments
Increase
Pro Forma
LGA TIS (Decrease) Combined
----------- ----------- ----------- -----------
Revenues ........................................ $ 188,266 $ 74,139 $ -- $ 262,405
Cost of revenues ................................ (80,085) -- -- (80,085)
----------- ----------- ----------- -----------
108,181 74,139 -- 182,320
Costs and expenses:
Selling, general and administrative ........ 428,332 160,584 -- 588,916
Research and development ................... 45,770 -- -- 45,770
----------- ----------- ----------- -----------
Total operating expenses ................ 474,102 160,584 -- 634,686
Operating loss .......................... (365,921) (86,445) -- (452,366)
Other income and (expense):
Other income (expense), net ................ 53 (1,558) -- (1,505)
Gain from sale of operations ............... -- 308,559 (308,559) --
Gain from extinguishment of debt ........... -- 19,288 -- 19,288
Gain from conversion of debt ............... 861,577 -- (861,577) --
----------- ----------- ----------- -----------
Loss before income taxes ................ 495,709 239,844 (1,170,136) (434,583)
Provision for income taxes (benefit) ............ -- -- -- --
----------- ----------- ----------- -----------
Net income .............................. $ 495,709 $ 239,844 $(1,170,136) $ (434,583)
=========== =========== =========== ===========
Net loss per share:
Basic ...................................... $ 0.14 $ 0.25 $ (0.26) $ (0.10)
=========== =========== =========== ===========
Shares used for computing net loss per share 3,557,146 971,027 4,528,173 4,528,173
=========== =========== =========== ===========
See note to unaudited pro forma condensed financial statements
F-28
TENET INFORMATION SYSTEMS, INC.
(formerly Lets Go Aero, Inc.)
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 2004
Reverse Acquisition
-------------------
On June 30, 2004, LGA exchanged 100 percent of its outstanding shares of common
stock for 5,762,219 shares of the common stock of TIS. This acquisition has been
treated as recapitalization of LGA, a Colorado corporation, with TIS the legal
surviving entity. Since TIS, prior to the recapitalization had minimal assets
(consisting of cash and receivables) and no operations, the recapitalization has
been accounted for as the sale of 1,016,860 shares of LGA common stock for the
net assets of TIS. Costs of the transaction have been charged to the period.
As part of the reverse acquisition, holders of LGA debt totaling $1,518,440
converted their debt into 2,189,643 post-merger shares of common stock.
Accounting and Tax Year End Change
-----------------------------------
LGA changed its year-end from December 31 to June 30.
Assumptions
-----------
A) Adjustment to eliminate the gain on the sale of substantially all operations.
B) Adjustment to eliminate the gain on debt conversion.
F-29
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
As a consequence of the June 30, 2004, change in control of Tenet to the former
shareholders of LGA and the move of Tenet's principal office and business
operations to Colorado Springs, Colorado, described in the opening paragraphs of
this Form 10-KSB, Tenet's new Board of Directors approved of the dismissal of
its certifying accountant in Salt Lake City, Utah, and the change to LGA's
certifying accountant, Cordovano & Honeck, P.C., Denver, Colorado. The effective
date of the dismissal and the appointment of the new accountant was June 30,
2004.
Neither of the reports on the financial statements for the past two years
contained an adverse opinion or disclaimer of opinion, or was modified as to
uncertainty, or accounting principles.
There were no disagreements with the former accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the former accountant's
satisfaction, would have caused it to make reference to the subject matter of
the disagreement in connection with its report.
Neither the issuer (nor anyone on its behalf) consulted the new accountant
regarding the application of accounting principles to a specific completed or
contemplated transaction, or the type of audit opinion that might be rendered on
Tenet's financial statements.
This change was reported in Tenet's Form 8-K filed July 21, 2004 and the
dismissed accountant's reply letter is filed as an exhibit to the Form 8-K/A
filed September 21, 2004.
Item 8A. Controls and Procedures.
Tenet does not have formal disclosure controls and procedures (as defined in
Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of June 30, 2004.
Tenet's Chief Executive Officer and Treasurer have determined, however, that
Tenet's and LGA's informal controls and procedures were adequate and effective
to:
a. ensure that material information relating to Tenet and LGA was made known to
them by others within those entities, particularly during the period in which
this report was being prepared; and
b. provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
15
Tenet's management plans to review its controls and procedures with the aim
towards implementing more formal controls and procedures required by paragraph
(b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act during the first half
of fiscal year 2005.
Item 8B. Other Information.
None
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Directors serve terms of 1 year or until his or her successor has been elected
and qualified.
Name Age Position Director Since
----------------- ------- -------------------------- --------------
Marty Williams* 44 Chief Executive Officer, June 2004
President Director
----------------- ------- -------------------------- --------------
Sara Williams* 35 Secretary, Treasurer, June 2004
Director
----------------- ------- -------------------------- --------------
Eric Nickerson 53 Director June 1990
----------------- ------- -------------------------- --------------
* Marty Williams and Sara Williams are husband and wife.
MARTY WILLIAMS, Chief Executive Officer, President, Director. Mr. Williams was
appointed to his positions upon the acquisition of LGA by Tenet effective June
30, 2004. Mr. Willliams has been Chief Executive Officer, President and a
Director of LGA since its inception in 1998. At LGA he is responsible for
establishing and maintaining the corporate mission and culture. He is
responsible for product creation, strategic planning, and the entrepreneurial
spirit. He also directs and coordinates the LGA's financing to provide funding
for new and continuing operations. Mr. Williams' professional experience
includes many different areas in the securities industry where he applied his
knowledge of small business operations, finance, strategic development and
business modeling. As an independent broker at Schneider Securities, Inc.,
Denver, Colorado, from 1988 to 1991 and again from 1993 to 1999, Marty was
principally involved in development of private placement offerings for early
stage companies and the subsequent sales of those offerings. From 1991 to 1993
he was a stock broker with RAF Financial, Denver, Colorado. He has a Bachelor of
Science in Business Administration, University of South Dakota.
SARA WILLIAMS, Secretary, Treasurer, Director. Ms. Williams was appointed to her
positions upon the acquisition of LGA by Tenet effective June 30, 2004. Ms.
Williams has been Treasurer and a Director of LGA since its inception in 1998.
She has been Secretary of LGA since June 30, 2004. At LGA Ms. Williams manages
daily business flow, business development, product inquiries, marketing,
promotions, account management, dealer relations, sales and customer service,
order fulfillment, shipping and accounting. Mrs. Williams' professional
experience includes many areas in sales, advertising, software development,
operations, and product development. She has been involved in direct sales,
account management and start-up business management in the areas of print
advertising, new business development, customer relations, and marketing. At
Sunset Publishing Corporation, Menlo Park, California, as a Direct Sales
Representative from 1993 to 1995 and 1996 to 1998 , Mrs. Williams was
responsible for generating sales of new advertising programs and account
management. While working for Saligent, Inc., Colorado Spring, Colorado for a
short period in 1995, Mrs. Williams was occupied with inside sales management,
program development, supervision and training. She has a Bachelor of Arts in
Political Science, The Colorado College.
16
ERIC J. NICKERSON has served as a Director of Tenet since June of 1990 and as a
Director of LGA since April 2001. Mr. Nickerson was a member of the faculty of
the United States Military Academy at West Point, New York from 1989 to 1993. In
June 1993, Mr. Nickerson retired as a United States Air Force officer.
Currently, Mr. Nickerson is a private investor and directs personal accounts in
an investing partnership, Third Century II. Third Century II is a major
shareholder in Tenet.
Audit Committee
Tenet does not have an audit committee and neither Tenet nor LGA have a
financial expert on their respective Boards of Directors or as an employee.
Tenet's Board of Directors act as its audit committee.
Compliance With Section 16(a) of the Exchange Act
The following table sets forth information determined by Tenet with respect to
the indicated person's requirements to file Forms 3, 4 and 5 for Tenet's most
recent fiscal year.
Name Number of Number of Transactions Known Failures
Late Reports That Were Not Reported to File
------------------- ------------ ---------------------- --------------
Eric Nickerson(1) 4 4 4
------------------- ------------ ---------------------- --------------
Third Century II(2) 4 4 4
------------------- ------------ ---------------------- --------------
Floyd Murray(3) 1 0 0
------------------- ------------ ---------------------- --------------
Notes to Table
1. Eric Nickerson has filed no Forms 3, 4 or 5 at least since June 30, 2003. Mr.
Nickerson's beneficial ownership in Tenet changed as a result of the July 14,
2004 closing of the acquisition of LGA by Tenet which was effective June 30,
2004 and which would have required filing a Form 4. Form 8-K filed July 21, 2004
disclosed Mr. Nickerson's interest in Tenet. Mr. Nickerson did not file a Form 5
for the fiscal year ended June 30, 2003 and did not file a Form 5 for the fiscal
year ended June 30, 2004.
2. Third Century II has filed no Forms 3, 4 or 5 at least since June 30, 2003.
Third Century II's beneficial ownership in Tenet changed as a result of the July
14, 2004 closing of the acquisition of LGA by Tenet which was effective June 30,
2004 and which would have required filing a Form 4. Form 8-K filed July 21, 2004
disclosed Third Century II's interest in Tenet. Third Century II did not file a
Form 5 for the fiscal year ended June 30, 2003 and did not file a Form 5 for the
fiscal year ended June 30, 2004.
3. Floyd Murray acquired his interest as a result of the July 14, 2004 closing
of the acquisition of LGA by Tenet which was effective June 30, 2004. Form 8-K
filed July 21, 2004 disclosed Mr. Murray's interest in Tenet. His Form 3 was
filed September 20, 2004.
17
Item 10. Executive Compensation.
The following table sets forth information with respect to all officers of Tenet
and LGA who received $100,000 more of annual compensation for all services
rendered in all capacities in the three most recent fiscal years and for the CEO
regardless of compensation.
Name and Year Annual Compensation Long-Term Compensation
Principal Position
------------------- -------- ---------------------------------- ------------------------------------------------------
Awards Payouts All Other
Compensation
------------------- -------- ----------- --------- ------------ ----------------------------- ----------- ------------
Salary Bonus Other Restricted Securities LTIP
Annual Underlying
Compensation Stock Awards Options/ SARs Payouts
------------------- -------- ----------- --------- ------------ ------------- --------------- ----------- ------------
----------------------------------------------------------------------------------------------------------------------
LGA
----------------------------------------------------------------------------------------------------------------------
Marty Williams (1), 2004 48,000 0 0 0 64,722 0 0
CEO
------------------- -------- ----------- --------- ------------ ------------- --------------- ----------- ------------
2003 48,000 0 0 0 64,722 0 0
------------------- -------- ----------- --------- ------------ ------------- --------------- ----------- ------------
2002 36,000 0 0 0 64,721 0 0
------------------- -------- ----------- --------- ------------ ------------- --------------- ----------- ------------
----------------------------------------------------------------------------------------------------------------------
Tenet
----------------------------------------------------------------------------------------------------------------------
Jerald L. Nelson, 2004 0 0
Chairman of the
Board, President
(Resigned)
------------------- -------- ----------- --------- ------------ ------------- --------------- ----------- ------------
2003 7,365 0 0 0 0 0 0
------------------- -------- ----------- --------- ------------ ------------- --------------- ----------- ------------
2002 0 0 1,000 2,703 0 0 0
------------------- -------- ----------- --------- ------------ ------------- --------------- ----------- ------------
Note
(1). Marty Williams was CEO of LGA for the entire fiscal years 2002, 2003 and
2004. LGA was not a registered company during that period. Mr. Williams became
CEO of Tenet effective June 30, 2004, under the terms of the Acquisition
Agreement by which Tenet acquired LGA. LGA is a wholly owned subsidiary of LGA.
The following table contains information regarding individual grants of stock
options and freestanding SARs made during the last completed fiscal year to the
named executive officers.
Percent of Total
Number of Securities Options/SARs Granted
Underlying to Employees in
Name options/SARs Granted Fiscal Year Exercise or Base Price Expiration Date
------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Marty Williams (1), CEO 64,721 50% .70 3/31/2006
------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Note (1). Marty Williams became CEO of Tent effective June 30, 2004, under the
terms of the Acquisition Agreement by which Tenet acquired LGA. The options
described are options that were awarded by LGA and converted to options for
Tenet stock under the terms of the Acquisition Agreement.
Name Shares Acquired on Value Number of Securities Value of Unexercised
Exercise Realized Underlying Unexercised In-the-Money Options/SARs at
Optios/SARs at FY End FY End
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------- ----------- ------------------------------- ------------------------------
Marty Williams (1), CEO 0 0 194,165 / 0 0 / 0
------------------------- -------------------- ----------- ------------------------------- ------------------------------
Note (1). Marty Williams became CEO of Tent effective June 30, 2004, under the
terms of the Acquisition Agreement by which Tenet acquired LGA. The options
described are options that were awarded by LGA and converted to options for
Tenet stock under the terms of the Acquisition Agreement.
18
Director Compensation
Directors are currently not compensated as such for their services.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table is intended to provide information with respect to equity
compensation plans. Pursuant to the terms of the June 30, 2004 Acquisition
Agreement under which Tenet acquired LGA, Tenet is obligated to convert the
options that were outstanding under the LGA plans to comparable options for
Tenet securities. Tenet's Board of Directors, however, has not approved the
current draft of the replacement plan and, consequently, Tenet's security
holders have not been presented a plan for approval. Therefore, all outstanding
options are listed under the category of "Equity Compensation Plans Not Approved
by Security Holders." If and when the pending plan is approved by the Tenet
Board of Directors and the security holders, then shares listed under the
category of "Equity Compensation Plans Not Approved by Security Holders" may be
ultimately issued under that plan. Subsequent publications of the following
table will be adjusted accordingly.
The terms of the pending plan, including the number of share available under the
plan, are subject to change or rejection altogether. Therefore, it is premature
to describe any terms of the plan. It is, however, fair to say that the pending
plan, if approved, will likely be an incentive stock option plan qualified under
the Internal Revenue Code to issue incentive stock options as well as
non-qualified options. The Board of Directors intends to consider the pending
plan in a time such that, if it is approved by the Board, it would be
presentable for approval at the next meeting of Tenet's shareholders.
Number of Securities
Remaining Available for
Number of Securities to be Future Issuance Under
Issued Upon Exercise of Weighted Average Exercise Equity Compensation Plans
Outstanding Options, Price of Outstanding (Excluding Securities
Warrants and Rights Options, Warrants and Rights Reflected in Column (a))
------------------------------- ----------------------------- ----------------------------- -----------------------------
Plan Category a b c
------------------------------- ----------------------------- ----------------------------- -----------------------------
Equity Compensation Plans 0 0 0
Approved by Security Holders
------------------------------- ----------------------------- ----------------------------- -----------------------------
Equity Compensation Plans Not 1,508,008 (1) .70 0
Approved by Security Holders
------------------------------- ----------------------------- ----------------------------- -----------------------------
Total 1,508,008 .70 0
------------------------------- ----------------------------- ----------------------------- -----------------------------
Note
(1). See introductory paragraphs to the table, above.
The following table contains information as of June 30, 2004, summarizing the
beneficial ownership of Tenet common stock by (1) each person known to Tenet to
be the beneficial owner of more than 5% of its issued and outstanding common
stock, (2) Tenet's executive officers and directors individually, and (3) all
Tenet's executive officers and directors as a group. Except as stated in the
footnotes to the table, each of these persons exercises sole voting and
investment power over the shares of common stock listed for that person.
19
Percentage of
Name and Address of Beneficial Owner as Number of Tenet Outstanding
of June 30, 2004 Position Common Shares Held Shares Held
------------------------------------------- ----------------- -------------------- -------------------
Marty Williams (1, 2) President, 2,222,490 31.0
5565 Teakwood Terrace Chief Executive
Colorado Springs, CO 80918 Officer,
Director
------------------------------------------- ----------------- -------------------- -------------------
Sara Williams (1, 3) Secretary, 2,222,490 31.0
5565 Teakwood Terrace Treasurer,
Colorado Springs, C) 80918 Director
------------------------------------------- ----------------- -------------------- -------------------
Eric J. Nickerson (4) Director 1,988,854 28.3
1711 Chateau Ct.
Falston, MD 21047
------------------------------------------- ----------------- -------------------- -------------------
Floyd Murray NA 1,358,610 19.2
13020 Caraway Dr.
Sun City West, AZ 85375
------------------------------------------- ----------------- -------------------- -------------------
Matthew Tynan (5) NA 488,389 7.2
Tynan's VW
700 S. Havana
Denver, CO 80012
------------------------------------------- ----------------- -------------------- -------------------
Matthew Drabczyk (6) NA 453,051 6.5
Restaurant Interiors, Inc.
5530 Joliet St.
Denver, CO 80239
------------------------------------------- ----------------- -------------------- -------------------
Third Century II (7) NA 1,988,854 28.3
1711 Chateau Ct.
Falston, MD 21047
------------------------------------------- ----------------- -------------------- -------------------
All Officers and Directors 4,211,344 56.7
as a Group (3 Persons (8))
------------------------------------------- ----------------- -------------------- -------------------
Notes to Table:
(1) Sara Williams and Marty Williams are husband and wife.
(2) Includes 1,834,160 shares owned as joint tenant with Sara Williams, options
to acquire 194,165 shares and options to acquire 194,165 shares owned by
Sara Williams.
(3) Includes 1,834,160 shares owned as joint tenant with Marty Williams,
options to acquire 194,165 shares and options to acquire 194,165 shares
owned by Marty Williams.
(4) Includes 1,729,968 shares owned by Third Century II and options to acquire
258,886 shares owned by Third Century II. Mr. Nickerson is Senior Partner
of the investment company Third Century II. Mr. Nickerson disclaims
beneficial ownership of all of the shares and options owned by Third
Century II. Includes 245,000 shares of Tenet owned prior to Tenet's
acquisition of LGA.
(5) Includes options to acquire 30,204 shares.
(6) Includes options to acquire 194,165 shares.
(7) Includes 32,361 shares owned by Eric J. Nickerson.
(8) The Directors are Marty Williams, Sara Williams and Eric J. Nickerson and
includes the shares deemed directly or indirectly beneficially owned by
each of them.
20
Note: Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares subject to options, warrants and
convertible notes currently exercisable or convertible, or exercisable or
convertible within 60 days are deemed outstanding for computing the percentage
of the person or entity holding such securities, but are not outstanding for
computing the percentage of any other person or entity. Except as indicated by
footnote, and subject to community property laws where applicable, the persons
named in the table above have sole voting and investment power with respect to
all Shares shown as beneficially owned by them.
Item 12. Certain Relationships and Related Transactions.
Acquisition of LGA by Tenet
Mr. Eric Nickerson is a director of LGA and has been a Director of LGA since
2001. Mr. Nickerson is a Director of Tenet and has been a Director of Tenet
since 1990. Mr. Nickerson also is the manage of Third Century II, a private
investment company that prior to June 30, 2004, held promissory notes reflecting
principal and interest payable by LGA in the amount of $1,009,977.57. In
addition, Third Century II prior to June 30, 2004 was the holder of 245,000
shares of Tenet common stock. Finally, Mr. Nickerson prior to June 30, 2004,
owned 32,361 shares of LGA individually. All shares amount reflect post LGA
acquisition adjustments.
The transaction under which Tenet acquired LGA was proposed by Mr. Nickerson to
LGA's management. Under the terms of the Acquisition Agreement, Third Century
II's debt was converted to 1,484,968 shares of Tenet. Third Century II now owns
or may acquire 1,988,854 shares of Tenet, or 28.3% of Tenet's outstanding stock.
In considering the acquisition, Mr. Nickerson's opinions and desires held
substantial influence on the Boards of the two companies. Although Mr.
Nickerson's vote on the Board of Directors of both Tenet and LGA is recorded for
purposes of qualifying the respective Board's Consents to Action under the
Corporate laws of Utah for Tenet and Colorado for LGA, both Boards determined
that Mr. Nickerson's vote was not necessary for the approval of the Acquisition
Agreement.
In the course of the negotiation of the terms of the Acquisition Agreement, it
was obvious to all parties that Mr. Nickerson was under a material and
irreconcilable conflict of interest. Third Century II stood to gain from the
transaction through the conversion of a promissory note with doubtful
collectiblity into shares of stock of a company for which there is a public,
albeit thinly traded, market. Under the transaction, Mr. Nickerson was also able
to convert his investment in LGA shares into shares of a company with a public
market But these interests were no different than those of any other note holder
or shareholder of LGA.
Mr. Nickerson, however, was also a beneficial owner of Tenet shares through
Third Century II and a Director of Tenet before the acquisition of LGA by Tenet.
In his positions with the two companies he would not have been able to reconcile
his duty to pursue the best terms of the Acquisition Agreement for the
shareholders or note holders of LGA on the one hand against the terms favoring
the shareholders of Tenet on the other hand.
Although Mr. Nickerson's conflict of interest was recognized by the parties to
the transaction, the Directors without conflicts of interest unanimously agreed
to the terms of the Acquisition Agreement. In addition, as the transaction was
structured, each shareholder of LGA was given the right to reject the offer to
exchange his, her or its shares or notes for shares of Tenet.
21
Item 13. Exhibits.
2 - A Acquisition Agreement, Stock for Stock previously filed July 21, 2004
with Form 8-K
21 - A Subsidiaries of Registrant
31 - A Rule 13a-14(a)/15d-14(a) Certification - CEO
31 - B Rule 13a-14(a)/15d-14(a) Certification - CFO
32 - A Certification Pursuant To 18 U.S.C. Section. 1350 - CEO
32 - B Certification Pursuant To 18 U.S.C. Section. 1350 - CFO
Item 14. Principal Accountant Fees and Services.
Audit Fees
The aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for the audit of the Tenet's and
LGA's annual financial statements and review of financial statements included in
the registrant's Form 10-QSB or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years were $15,252 for 2003 and $25,472 for 2004.
Audit-Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountant that are reasonably related to the
performance of the audit or review of the registrant's financial statements and
are not reported under Item 9(e)(1) of Schedule 14A were $756 for 2003 and $426
for 2004.
Tax Fees
The aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning were $0 for 2003 and $0 for 2004.
All Other Fees
The aggregate fees billed in each of the last two fiscal years for products and
services provided by the principal accountant, other than the services reported
in Items 9(e)(1) through 9(e)(3) of Schedule 14A were $0 for 2003 and $0 for
2004.
Audit Committee Policies
Neither Tenet nor LGA has an audit committee. Such authority is exercised by the
full Boards of Directors of each company. Neither Board, however, currently has:
(i) Any pre-approval policies and procedures described in paragraph (c)(7)(i) of
Rule 2-01 of Regulation S-X; or (ii) approved any services described in each of
Items 9(e)(2) through 9(e)(4) of Schedule 14A that were subject to approval by
the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Tenet Information Services, Inc.
(Registrant)
By: /s/ Marty Williams
----------------------------------------------------------------
Marty Williams, Chief Executive Officer, President
Date: September 30, 2004
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Marty Williams
----------------------------------------------------------------
Marty Williams, Chief Executive Office, Director
Date: September 30, 2004
By: /s/ Sara Williams
----------------------------------------------------------------
Sara Williams, Treasurer (principal financial officer), Director
Date: September 30, 2004
By: /s/ Eric Nickerson
----------------------------------------------------------------
Eric Nickerson, Director
Date: September 30, 2004
22