SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
Date of Report (date of earliest event reported): March 24, 2000
TESSA COMPLETE HEALTH CARE, INC.
(Exact Name of Registrant as Specified in its Charter)
One South 443 Summit Avenue
Suite 203
Oakbrook Terrace, IL 60181
(Address of principal executive offices)
(630) 889-8811
Registrant's telephone number
ZABA INTERNATIONAL, INC.
5650 Greenwood Plaza Blvd, Suite 216
Englewood, Colorado 80111
(Former name and former address)
Georgia 0-21099 58-0975098
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.
incorporation)
<PAGE>
Item 7(a) and 7(b). Financial Statements and Pro Forma Financial
Statements
The audited financial statements of Tessa Complete Health Care, Inc. for
the fiscal years ended December 31, 1999 and 1998, and the pro forma financial
statements of the consolidated entities dated December 31, 1999 are attached
hereto.
Item 7(c). Exhibits.
Number Exhibit
- ------ -------
EX-27 Financial Data Schedule
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to its report to be signed on its
behalf by the undersigned hereunto duly authorized.
TESSA COMPETE HEALTH CARE, INC.
By: s/Robert C. Flippin
-----------------------
Robert C. Flippin, President
Date: May 3, 2000
3
<PAGE>
TESSA COMPLETE HEALTH CARE, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
with
INDEPENDENT AUDITORS' REPORT
YEARS ENDED DECEMBER 31, 1999 AND 1998
<PAGE>
CONTENTS
Page
Independent Auditors' Report 1
Consolidated balance sheets 2
Consolidated statements of operations 3
Consolidated statements of stockholders' equity (deficit) 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Tessa Complete Health Care, Inc.
and subsidiaries
Oakbrook Terrace, Illinois
We have audited the accompanying consolidated balance sheets of Tessa Complete
Health Care, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. 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 generally accepted auditing
standards. 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 consolidated financial position of Tessa Complete
Health Care, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has a working capital deficiency, a
stockholders' deficit and has suffered losses from operations that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
HORTON & COMPANY, L.L.C.
May 2, 2000
Wayne, New Jersey
1
<PAGE>
<TABLE>
TESSA COMPLETE HEALTH CARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
December 31,
------------
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash $ - $ 855,563
Accounts receivable, net of allowances of $3,047,921 in
1999 and 1998 3,109,051 3,640,795
----------- -----------
Total current assets 3,109,051 4,496,358
----------- -----------
Property and equipment, net 687,437 1,030,899
----------- -----------
Deferred charges and other assets 72,915 3,486,558
----------- -----------
$ 3,869,403 $ 9,013,815
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 1,379,620 $ 200,000
Current portion of long-term debt 39,681 68,046
Accounts payable 1,187,828 826,472
Accrued expenses 1,924,377 887,938
Related party payable 2,663,458 783,343
Stockholder loans payable 3,085,018 398,858
Deferred income taxes - 381,661
----------- -----------
Total current liabilities 10,279,982 3,546,318
----------- -----------
Long-term debt, net of current portion 94,344 134,972
----------- -----------
Stockholders' equity (deficit):
Common stock, $.02 par value; 50,000,000 shares authorized;
13,809,375 sharesissued and outstanding in 1999
11,033,695 shares issued and outstanding in 1998 275,846 220,674
Additional paid-in capital 7,802,153 3,621,415
Retained earnings (accumulated deficit) (14,582,922) 1,490,436
----------- -----------
(6,504,923) 5,332,525
----------- -----------
$ 3,869,403 $ 9,013,815
=========== ===========
See notes to consolidated financial statements
</TABLE>
2
<PAGE>
<TABLE>
TESSA COMPLETE HEALTH CARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------
1999 1998
------------ -----------
<S> <C> <C>
Revenues $ 14,635,555 $16,014,411
------------ -----------
Operating expenses:
Caregiver compensation and benefits 6,824,885 4,070,827
Other practice costs 852,657 683,670
Administrative compensation and benefits 6,053,462 4,824,275
Occupancy costs 1,636,756 1,229,965
Selling and administrative 4,014,356 2,575,375
Depreciation and amortization 1,342,174 926,441
------------ -----------
20,724,290 14,310,553
Income (loss) from operations (6,088,735) 1,703,858
------------ -----------
Other expense:
Reserve under asset sale agreement 5,400,000 -
Restructuring charges 2,586,307 -
Finance related charges 1,554,977 414,836
Stock-based compensation 825,000 -
------------ -----------
10,366,284 414,836
Income (loss) before income taxes (16,455,019) 1,289,022
Income taxes (benefit) (381,661) 386,707
------------ -----------
Net income (loss) $(16,073,358) $ 902,315
============ ===========
Earnings (loss) per share $ (1.23) $ 0.12
============ ===========
Weighted average shares outstanding 13,043,491 7,397,098
============ ===========
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
TESSA COMPLETE HEALTH CARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1999 and 1998
Additional
paid-in
Common Stock capital Retained
Shares Amount (discount) earnings
---------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Balances at January 1, 1998 3,760,500 $ 75,210 $ (71,010) $ 588,121
Stock issued to acquire physician practices
and related assets 7,199,335 143,987 3,620,052 -
Stock sold under Rule 504 73,860 1,477 72,373 -
Net income - - - 902,315
---------- -------- ---------- ------------
Balances at December 31, 1998 11,033,695 220,674 3,621,415 1,490,436
Stock issued to acquire physician practices
and related assets 100,000 2,000 98,000 -
Stock issued for employee compensation 486,415 9,293 920,025 -
Stock issued for services 800,932 16,112 1,314,480 -
Stock sold 1,388,333 27,767 1,848,233 -
Net loss - - - (16,073,358)
---------- -------- ---------- ------------
Balances at December 31, 1999 13,809,375 $275,846 $7,802,153 $(14,582,922)
========== ======== ========== ============
See notes to consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
TESSA COMPLETE HEALTH CARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(15,573,358) $ 902,315
------------ ------------
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,342,174 926,441
Restructing charges 2,086,307 -
Changes in assets and liabilities net of
effects from practice acquisitions:
(Increase) decrease in accounts receivable 531,744 45,210
(Increase) decrease in deferred charges and other assets 2,294,140 (2,943,852)
Increase (decrease) in accounts payable and accrued expenses 1,397,795 2,102,974
Increase (decrease) in related party payable 1,880,115 783,343
Increase (decrease) in deferred income taxes (381,661) 381,661
------------ ------------
Total adjustments 9,150,614 1,295,777
------------ ------------
Net cash used in operating activities (6,422,744) 2,198,092
------------ ------------
Cash flows from investing activities:
Capital expenditures (75,130) (463,517)
Payments for practice acquisitions - (512,361)
------------ ------------
Net cash used in investing activities (75,310) (975,878)
------------ ------------
Cash flows from financing activities:
Proceeds from financing agreements 1,179,620 9,020,000
Principal payments under loan agreements (68,993) (9,161,631)
Principal payments under capital lease obligations (30,476) (37,836)
Proceeds from stockholder payables 2,686,160 (284,972)
Proceeds from issuance of common stock 1,876,000 73,860
------------ ------------
Net cash provided by (used in) financing activities 5,642,311 (390,579)
------------ ------------
Net increase (decrease) in cash (855,563) 831,635
Cash at beginning of year 855,563 23,928
------------ ------------
Cash at end of year $ - $ 855,563
============ ============
See notes to consolidated financial statements
</TABLE>
5
<PAGE>
TESSA COMPLETE HEALTH CARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. Summary of significant accounting policies
This summary of significant accounting policies of Tessa Complete
Health Care, Inc. and subsidiaries (hereinafter "Tessa" or the
"Company") is presented to assist in understanding the consolidated
financial statements. The consolidated financial statements and notes
are representations of the Company's management, which is responsible
for their integrity and objectivity. These accounting policies conform
to generally accepted accounting principles and have been consistently
applied in the preparation of the consolidated financial statements.
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
History and business activity
Tessa Complete Health Care, Inc. is a physician practice management
company providing comprehensive management services under long-term
administrative service agreements to multi-disciplinary health care
clinics. Such clinics provide chiropractic, physical therapy,
neurological and other health care services to patients.
The Company was originally incorporated in the State of Delaware on
August 25, 1997. Effective December 31, 1997, the Company acquired
substantially all of the net assets of six health care clinics (the
"Clinics") in exchange for 1,841,000 shares of the Company's common
stock. Since all of the Clinics were controlled by the Company's
principal shareholder, the business combination was accounted for as a
recapitalization. As a result, the assets acquired and liabilities
assumed were recorded at their historical cost basis. The business
combination is treated as a non-cash transaction since all
consideration given was in the form of stock.
Effective February 13, 1998, the Company effected a business
combination whereby all 3,760,500 outstanding shares of the Company's
common stock were acquired by Structofab, Inc. ("Structofab") in
exchange for 3,760,500 shares of Structofab's common stock. As a result
of the transaction, Tessa became the wholly-owned subsidiary of
Structofab. However, the former stockholders of Tessa received shares
representing in excess of 90% of Structofab's common stock, thereby
effecting a change in control of Structofab. The business combination
has been accounted for as a reverse acquisition. Under the accounting
rules for a reverse acquisition, Tessa is considered to be the
accounting acquirer. As a result, historical financial information
presented for periods prior to the date of the transaction, will be
those of Tessa. However, the capital structure has been retroactively
restated to reflect the capital structure of Structofab and the number
of shares Structofab issued to effect the business combination.
6
<PAGE>
1. Summary of significant accounting policies (continued)
History and business activity (continued)
Structofab, Inc. (a Georgia corporation) subsequently changed its name
to Tessa Complete Health Care, Inc. and is a publicly-held company
whose stock is traded on the OTC Bulletin Board.
Practice acquisitions
Through May 31, 1998, the Company had effected the acquisitions of the
assets of 26 additional clinics. All such acquisitions have been
accounted as asset purchases. Total consideration includes cash
payments, notes, the assumption of specified liabilities, the estimated
value of 7,199,335 shares of common stock (including non-forfeitable
commitments by the Company to issue common stock at specified future
dates for no additional consideration) and related transaction costs.
As of December 31, 1998, the Company owned and operated a total of 32
clinics, of which three are located in California, two in Florida, four
in Illinois, four in Maryland, six in Ohio, eight in Oregon, three in
Washington, one in Kentucky and one in the District of Columbia.
As of December 31, 1999, the Company owned and operated a total of 21
clinics, of which three are located in California, two in Florida, two
in Illinois, four in Maryland, three in Ohio, Five in Oregon, one in
Kentucky and one in the District of Columbia.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could
differ from those estimates.
Concentration of credit risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash, accounts
receivable and loans receivable from physicians. The Company's policies
do not require collateral to support accounts receivable or loans
receivable from physicians. However, because of the diversity of
individual accounts which comprise the total balance, management does
not believe that the Company is subject to any significant credit risk.
The Company occasionally maintains cash balances with banks in excess
of limits insured by the Federal Deposit Insurance Corporation (FDIC).
At December 31, 1998, the Company's cash balances with one bank
exceeded the FDIC insured limit by approximately $628,000. The Company
has not experienced any losses in this account and believes it is not
exposed to any significant credit risk on cash.
7
<PAGE>
1. Summary of significant accounting policies (continued)
Property and equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is provided using accelerated and straight-line methods over
estimated useful lives of five to seven years for medical equipment and
for the office furniture and equipment and the lesser of ten years or
the remaining lease term for leasehold improvements.
Maintenance, repairs and renewals which neither materially add to the
value of property and equipment nor appreciable prolong its life are
charged to expense as incurred. Gains or losses on dispositions of
property and equipment are included in income.
Revenue recognition
Effective with the acquisition of the assets of the Clinics as
described above, the Company established long-term administrative
services agreements with affiliated physician groups. Substantially all
of the Company's revenues represent the contractual fees earned under
its long-term administrative services agreements with affiliated
physician groups. Under the agreements, the Company is contractually
responsible and at risk for the operating costs of the affiliated
physician groups, except for amounts retained by physicians. The
Company's revenues include the reimbursement of all affiliated
physician groups' operating costs and the fixed and variable
contractual management fees as defined in the administrative services
agreements. Contractual fees are accrued when collection is probable.
Medical service revenue for services to patients by the physician
groups affiliated with the Company is recorded when services are
rendered based on established or negotiated charges reduced by
contractual adjustments and allowances for doubtful accounts.
Differences between estimated contractual adjustments and final
settlements are reported in the period when final settlements are
determined.
Administrative services and transfer agreements
The Company has entered into administrative services agreements and
stock transfer restriction agreements (the "Transfer Agreements") with
affiliated physician groups ("Physician Groups") owned by one or more
physicians. The administrative services and Transfer Agreements may not
be terminated by the Physician Groups for any reason. The physician(s)
that own the Physician Groups are employees of the Physician Groups and
are solely responsible for the practice of medicine and delivery of
medical services. As described above, the revenues and expenses of the
Physician Groups are consolidated with the operations of the Company.
The administrative services contracts provide that the Company shall be
responsible for the general management and administration of the
day-to-day operations of the Physician Groups including, but not
limited to, business planning, financial management, bookkeeping,
accounting and data processing, as well as human resources management.
The administrative services agreements and transfer agreements provide
the Company with unilateral and perpetual control over the assets and
business operations of the Physician Groups.
8
<PAGE>
1. Summary of significant accounting policies (continued)
Fair value of financial instruments
The Company's receivables and payables are current and on normal terms
and, accordingly, are believed by management to approximate fair value.
Management also believes that notes payable, long-term debt and capital
lease obligations approximate fair value when current interest rates
for similar debt securities are applied.
Statements of cash flows
For the years ended December 31, 1999 and 1998, the Company acquired
physician practices and related assets and purchased equipment. The
non-cash investing and financing activities are summarized as follows:
<TABLE>
Year ended December 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Physician practices and related assets $ 200,000 $ 4,512,115
Common stock issued (200,000) (3,764,039)
Long-term debt financing - (235,715)
---------- -----------
Expenditures for physician practices and related assets $ - $ 512,361
========== ===========
Total common stock issued $4,235,892 $ 3,837,899
Common stock issued to acquire physician practices
and related assets (100,000) (3,764,039)
Stock issued for employee compensation (929,300) -
Stock issued for services (1,330,592) -
---------- -----------
Proceeds from issuance of common stock $1,876,000 $ 73,860
========== ===========
</TABLE>
Supplemental cash flow information is as follows:
Year ended December 31,
-----------------------
1999 1998
---------- ---------
Finance related charges $1,493,102 $ 320,823
========== =========
Income taxes paid $ - $ 5,046
========== =========
Reclassifications
Certain reclassifications have been made to the 1998 financial
statements in order to conform to the 1999 presentation.
9
<PAGE>
2. Restructuring
The financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has suffered losses from
operations and has a net capital deficiency that raises substantial
doubt about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company attributes much of the above mentioned losses and the
resulting capital deficiency to integration difficulties the Company
encountered during an expansion plan during fiscals 1998 and 1999 which
increased the number of Company-controlled clinics from 8 to 33 and
increased revenues from $2.1 million to $22 million for the fiscal
years 1997 through 1999. To help address the above issues, the Company
has undertaken plans that have initiated managerial, financial, and
operational restructurings.
With regard to managerial changes, Tessa has undergone changes which
have resulted in the resignations of Dr. Thomas Bolera as Chief
Executive Officer, Dr. Kim Christensen as an Officer and Director,
David Russell as Chief Financial Officer, Dr. Vaughn Dabbs as Director
and Dr. Dayna Bolla as Director. In connection with the above
resignations, Robert Flippin was appointed President, Chief Executive
Officer, and a Director of Tessa. Robert Vener and Dr. Mark Newman
were also appointed as Directors of Tessa.
As to financial restructurings, the Company has undertaken and executed
plans initiated subsequent to the fiscal year ended December 31, 1999
which have included: 1) the conversion of debt to equity; 2) the
conversion of debt to payment plans; 3) settlements of debt in exchange
for heavily discounted lump sum payments by the Company; and 4) raising
capital through the sale of common stock.
For operations, the Company has started a restructuring process that
has included: 1) the combination of geographically related clinics; 2)
the elimination and separation of some clinics which provided
inconsequential or negative cash flow; and 3) the introduction of an
incentive plan to optimize clinic profitability. There has also been
some opportunities which have not been acted upon due to the Company's
decision or inability to exercise purchase options on some clinics,
however the Company believes that it in the process of generating
sufficient revenue in addition to having plans in place to help address
cash flow issues that may arise in the near term.
There are no assurances that the Company's above-mentioned plans will
generate profits in the near future, or at all. The Company's success
is dependent upon its ability to develop profitable clinics and
clinical programs, such as sports medicine, exercise facility
partnerships and to acquire additional profitable practices/clinics. To
accomplish these goals, Tessa will/may require additional equity and/or
debt financing and its absence may require additional consolidation.
There is no assurance that the Company will be able to continue to
operate if additional acquisitions and corresponding revenues cannot be
generated.
10
<PAGE>
3. Property and equipment
Property and equipment consists of the following:
December 31,
------------
1999 1998
--------- ----------
Office furniture and equipment $ 413,686 $ 348,638
Medical equipment 834,534 862,578
Leasehold improvements 118,190 186,904
--------- ----------
1,366,410 1,398,120
Less accumulated depreciation 678,973 367,221
--------- ----------
$ 687,437 $1,030,899
========= ==========
Medical equipment includes equipment under capital leases of $143,290
as of December 31, 1999 and 1998. Accumulated depreciation on equipment
under capital leases was $115,448 and $67,689 as of December 31, 1999
and 1998, respectively.
4. Deferred charges and other assets
Deferred charges and other assets consist of the following:
December 31,
------------
1999 1998
------- ----------
Deferred acquisition costs, net $ - $3,061,749
Loans receivable from physicians - 401,008
Security deposits and other intangible assets 72,915 23,801
------- ----------
$72,915 $3,486,558
======= ==========
Deferred acquisition costs are stated at cost, net of accumulated
amortization. During 1999 and 1998, deferred acquisition costs were
being amortized on the straight-line method over a period of three to
five years. Accumulated amortization totalled $1,011,644 and $705,330
as of December 31, 1999 and 1998, respectively.
5. Notes payable - senior secured obligations
From February to November 1998, the Company's principal credit facility
was with National Equity Corp. ("NEC"). The credit facility consisted
of a revolving credit line allowing for borrowings up to $3 million and
provided for a lending rate of 15%. In connection with the NEC credit
facility, the Company agreed to have GST Receivables Management Inc.
("GST"), an affiliate of NEC, manage the Company's lockbox facility and
act as a collection agent for the Company. Under the GST Receivables
Management relationship, which is still in effect subsequent to fiscal
1999, GST received .05% of the face amount of billings processed for
the Company.
11
<PAGE>
5. Notes payable - senior secured obligations (continued)
The above mentioned line of credit with NEC was terminated during
November of 1998 upon Tessa entering into an Accounts Receivable
Purchase Agreement ("Purchase Agreement") with Dynacorp Financial
Strategies, Inc. ("Dynacorp"). The Purchase Agreement provides for
Tessa agreeing to sell and assign to Dynacorp Tessa's right, title and
interest in proposed accounts receivables by Tessa. Upon the purchase
of the proposed accounts receivable, Dynacorp agrees to advance Tessa
an amount up to 60% of the net collectible value of proposed accounts
receivables for an amount that was originally up to $5 million and
subsequently increased to $8.5 million. In the event that Dynacorp
collects an amount less than the amounts advanced by Dynacorp, the
Company is responsible to make up any difference between the amount
collected and the amount due. To secure the collection of the
receivables, Dynacorp has been provided security interest in all assets
of the Company and certain officers of the Company at the time of the
inception of the Dynacorp agreement have executed stock pledge
agreements. Conversely, in the event that Dyancorp collects an excess
of the amounts advanced by Dynacorp against the proposed accounts
receivable, Dynacorp is to return the excess amount back to Tessa.
In addition to the above, the Purchase Agreement provided for an
origination fee of $50,000 and monthly charges consisting of: 1) 4%
over the prime lending rate of amounts that are Purchased and not yet
collected by Dynacorp and 2) a service fee equaling .01% of the Net
Collectable Value, adjusted for actual collections. The service fee was
originally capped at $300,000 annually, and increased to a cap of
$400,000 during September of 1999.
The Purchase Agreement with Dynacorp initiated in November of 1998 was
originally reported as a revolving credit facility and as a note
payable to Dynacorp for the fiscal year ended December 31, 1998. The
arrangement with Dynacorp has been reclassified to reflect an accounts
receivable purchase and as such, accounts receivable which were
previously stated at $10,415,795 (net of allowances) will be reduced by
$6,775,000, and the Dynacorp note payable will be reduced to zero. For
the fiscal year ended December 31, 1999, the Company has designated
$13,600,000 of the accounts receivable that have been sold to Dynacorp
as reserved to offset the amounts advanced by Dynacorp and has recorded
a receivable for the difference the Dynacorp offset and the balance of
the accounts receivable at December 31, 1999.
For fiscal 1999, charges under the Dynacorp Accounts Receivable
Purchase Agreement amounted to $1,475,085 as compared to 1998 when
charges with Dynacorp were $134,962 and interest to NEC was 245,138.
12
<PAGE>
6. Notes payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---------- --------
<S> <C> <C>
Note payable to a finance company pursuant to a loan agreement dated
April 1999, which provides for borrowings up to $1,100,000. Under the
terms of the agreement, borrowings bear interest at 7 1/2 % with the
first interest payment due January 2000. Thereafter, interest payments
are due on a quarterly basis. The full principal amount and any unpaid
interest are payable in-full in April 2003. The lender has the option,
for a period of three years from the date of the loan agreement, to
convert the principal into 176,000 shares of the Company's common stock
at $6.25 per share. $1,100,000 $ -
Demand note payable to a finance company. Interest is at 15% with
interest only payable monthly. The note is secured by a second position
on the Company's receivables. 229,620 150,000
Note payable to a practitioner in yearly installments of $10,000 plus
interest at 12%, through February 2003. The note is secured by the
Company's assets, other than receivables. 50,000 50,000
---------- --------
$1,379,620 $200,000
========== ========
</TABLE>
7. Long-term debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
---------- --------
<S> <C> <C>
Notes payable to various banks in monthly installments of $3,337 in 1999
and $4,685 in 1998, including effective interest rates between 8.5% and
11.0%, through March 2003. These notes are secured by medical equipment. $ 115,036 $153,553
Capital lease obligations payable to various finance companies in
monthly installments of $1,011 in 1999 and $2,973 in 1998, including
effective interest rates between 9.8% and 23% through December 2001. The
leases are secured by medical equipment and are personally guaranteed by
various
physicians. 18,989 49,465
---------- --------
134,025 203,018
Less current portion 39,681 68,046
---------- --------
$ 94,344 $134,972
========== ========
</TABLE>
13
<PAGE>
7. Long-term debt (continued)
As of December 31, 1999, maturities of long-term debt are as follows:
Year ending December 31, 2001 $ 41,158
Year ending December 31, 2002 47,401
Year ending December 31, 2003 5,785
--------
$ 94,344
========
8. Stockholder payables
Stockholder payables consist of non-interest bearing amounts owing to
practitioners and management.
9. Commitments and contingencies
Lease agreements
The Company is obligated under various noncancelable operating leases.
The minimum future obligation under these agreements at December 31,
1999, is as follows:
Year ending
December 31,
------------
2000 $ 900,000
2001 700,000
2002 550,000
2003 350,000
2004 200,000
Thereafter 750,000
----------
$3,450,000
==========
Rent expense for the years ended December 31, 1999 and 1998, was
$1,424,693 and $1,013,228, respectively. Certain of the Company's
operating leases contain rent escalation clauses and renewal options as
defined in the respective agreements.
Lease agreements include operating leases for three buildings owned by
stockholders of the Company. Rent expense on these leases was $76,650
and $73,252 for the years ended December 31, 1999 and 1998,
respectively.
14
<PAGE>
9. Commitments and contingencies (continued)
Legal proceedings
The Company is the defendant in an action entitled Kathi Thelander v.
Spine & Rehabilitation Centers of Oregon, P.C., in the Circuit Court
for the County of Multnomah, State of Oregon, Civil Action No. 99 07
07399, alleging unlawful termination and breach of an employment
agreement between the plaintiff and defendant. Spine & Rehabilitation
Centers of Oregon, P.C. is a subsidiary of Tessa. Summary judgment was
entered on behalf of the plaintiff and against SRA Oregon in March
2000 in the amount of $162,313, plus $891 in costs and $7,440 in
attorneys' fees. The Company intends to appeal the judgment, but no
assurances can be provided that this judgment will be set aside.
The Company is also a defendant in an action entitled Vania Kaady v.
Spine & Rehabilitation Centers of Oregon, P.C., in the Circuit Court
of the County of Multnomah, State of Oregon, Civil Action No. 99 02
02066, alleging malpractice arising as a result of an automobile
accident and claiming damages in the amount of $200,000. The Company
is vigorously defending this action and believes this action is
without merit.
The Company has also been advised of a potential claim by Business
Software Alliance, who has alleged copyrighted product infringement for
illegal duplication of certain software. The Company is presently
investigating this matter by performing an internal audit of software
presently being utilized by the Company. If Business Software
Alliance's claim is filed against the Company and such claim is upheld,
the Company could be subject to a penalty of up to $100,000 per
copyrighted product infringement. The Company has accrued approximately
$100,000 to cover any potential liabilities.
The Company is party to certain other legal proceedings which have
arisen in the normal course of operating the Company's business and is
aware of other threatened or pending litigation. However, it is
believed that such legal proceedings to which the Company (or any of
its officers and directors in their capacities as such) is or may be a
party or to which the property of the Company may be or is subject
would not have a material adverse effect on the Company's business,
financial condition or results of operations.
Employment agreements
Effective January 2000, the Company entered into an employment
agreement with a new Chief Executive Officer ("CEO") and Director.
Under the terms of the agreement, the new CEO is to receive annual
compensation of $180,000. The agreement is for a one-year period
renewable daily. In the event of termination, the CEO is entitled to a
severance payment equal to one year's salary. In addition, the CEO
received 100,000 shares of unrestricted stock which was transferred
from the holdings of other senior Tessa employees. As discussed in Note
8, the CEO also received options to purchase 1,500,000 shares of the
Company's common stock at $1.00 per share. Such options become vested
upon the attainment of specified performance criteria.
15
<PAGE>
10. Stockholders' equity
Stock issuances
As described in Note 1, on February 13, 1998, the Company effected a
business combination whereby all 3,760,500 outstanding shares of common
stock were acquired by Structofab, Inc. ("Structofab") in exchange for
3,760,500 shares of Structofab's common stock. As a result, the capital
structure for all periods presented has been retroactively restated to
reflect the capital structure of Structofab.
During 1998, the Company issued 7,199,335 shares of its common stock in
connection with the acquisition of the assets of 26 health care
clinics. During 1999, the Company issued 100,000 shares of its common
stock in connection with the acquisition of the assets of a single
health care clinic.
In January 1999, the Company issued 300,000 shares of Common Stock to
Tina Alexander in connection with a promotional services contract for
1999. Also in March and June of 1999, the Company issued 17,600 shares
of Common Stock to employees for services rendered.
Also in January of 1999, the Company issued 36,665 shares of Common
Stock to a practitioner located in Ohio in connection with a separation
agreement between the Company and the practitioner.
During July of 1999, the Company issued 166,667 shares of Common Stock
in connection with a lease/purchase arrangement of three clinics in
Washington State. The Company never acquired the clinics, however the
initial agreement provided for the stock issuance, even in the event
the purchase option was never exercised.
During May of 1999, the Company issued 945,000 shares of Common Stock
for cash proceeds of $945,000. In addition, during September of 1999,
the Company issued 443,333 shares of Common Stock for cash proceeds of
$929,017.
In October of 1999, the Company issued 130,000 shares of Common Stock
in connection with a release and settlement agreement between the
Company and a practitioner in California.
16
<PAGE>
10. Stockholders' equity (continued)
Options and warrants
During 1999, the Company issued stock options to certain of its
directors, officers and employees under the Company's 1998 and 1999
Equity Incentive Plan. Options granted under the plan generally vest
upon issuance and expire 60 days following the employee's departure
from the Company. The following is a summary of option transactions
during the years ended December 31, 1999 and 1998.
Weighted
Number average
of shares exercise price
--------- --------------
Outstanding at January 1, 1998 - $ -
Granted under the 1997 Plan 450,000 $ 1.00
Granted under the 1998 Plan 500,000 $ 1.70
Exercised - $ -
Cancelled - $ -
--------- --------------
Outstanding at December 31, 1998 950,000 $ 1.37
Granted under the 1999 plan - $ -
Exercised - $ -
Cancelled - $ -
--------- --------------
Outstanding at December 31, 2000 950,000 $ 1.37
========= ==============
In addition, during January 2000, the Company's board of directors
authorized the issuance of 1,500,000 options under the 2000 Stock
Option Plan. All options were granted to the Company's new Chief
Executive Officer and Director. Such options have an exercise price of
$1.00 per share and become vested upon the attainment of specified
performance criteria.
In addition, the Company has issued a variety of options and warrants
to consultants and creditors as follows:
Weighted
Number average Expiration
Date of grant of shares exercise price date
----------------- --------- -------------- --------------
September 1997 250,000 $2.50 September 2000
May 1998 10,000 $0.10 July 1999
May 1998 40,000 $1.00 July 1999
November 1998 200,000 $2.50 November 2001
October 1998 60,000 $2.50 October 2003
November 1998 25,000 $2.50 November 2003
-------
585,000
=======
17
<PAGE>
10. Stockholders' equity (continued)
Options and warrants (continued)
Subsequent to December 1999, the Company entered into negotiations with
Medical Options of California, which contemplated the possible merger
of Medical Options into the Company. A merger between the Company and
Medical Options was not completed, however in connection with the
related negotiations, the Company issued options to purchase 8,359,786
shares of the Company's Common Stock at an exercise price of $1.00. The
term of the option is for 5 years.
11. Related party transactions
During 1999 and 1998, the Company operated under an agreement with
American Outsource Strategies ("AOS") a professional employer
organization. Under the terms of the agreement, AOS provided employee
leasing and payroll processing services. Payment to AOS for employee
leasing services included employee salaries, payroll taxes, benefits
and AOS's fees. AOS is 50% owned by two individuals who are the former
Chief Executive Officer and Chief Financial Officer of Tessa.
The former Chief Executive Officer is also a member of the Company's
Board of Directors. During 1998, Tessa leased substantially all of its
employees through AOS. Effective April 1999, Tessa began leasing only
its non-medical personnel. AOS has continued to provide
payroll-processing services for medical personnel who are now directly
employed by Tessa's affiliated physician groups. At December 31, 1999
and 1998, amounts owed to AOS are $2,663,458 and $783,343,
respectively.
12. Income taxes
The provision for income taxes is based on income recognized for
financial statement purposes and includes the effects of temporary
differences between such income and that recognized for tax return
purposes. The Company and its eligible subsidiaries file a consolidated
U.S. federal income tax return. Certain subsidiaries which are
consolidated for financial reporting are not eligible to be included in
the consolidated U.S. federal income tax return and separate provisions
for income taxes have been determined for these entities.
Deferred income taxes reflect temporary differences in reporting assets
and liabilities for financial accounting and income tax purposes. These
temporary differences arise from the use of the accrual method of
accounting for financial statements and the cash method for taxes and
from different depreciation methods used for financial and tax
purposes.
The effective tax rate is less than the statutory U.S. income tax rate
of 35% due to estimated benefits to be derived from the effect of
graduated statutory rates and income tax basis operating losses
incurred because of the temporary differences in recognizing revenues
and expenses for financial statement and income tax purposes.
18
<PAGE>
13. Subsequent events
Merger agreement
Effective March 24, 2000, pursuant to an Agreement and Plan of
Reorganization (the "Merger Agreement") between Zaba International,
Inc. ("Zaba"), a Colorado corporation, and Tessa, all outstanding
shares of common stock of Zaba were exchanged for 225,000 shares of
common stock of Tessa and $112,500 in cash in a transaction in which
Tessa was the surviving company.
Prior to the merger, Zaba had 2,407,166 shares of common stock
outstanding. Such shares were exchanged for 225,000 shares of common
stock of Tessa and cash consideration of $112,500. By virtue of the
merger, Tessa acquired 100% of the issued and outstanding common stock
of Zaba. Prior to the effectiveness of the Merger, Tessa had an
aggregate of 13,986,709 shares of common stock issued and outstanding.
Tessa has been a non-reporting, publicly-traded company with a portion
of its issued and outstanding common stock exempt from registration
under the Securities Act of 1933, as amended, pursuant to Rules 504 of
Regulation D, Rule 144 and Rule 701 of the General Rules and
Regulations of the Securities and Exchange Commission.
Tessa did not file a registration statement with the Securities and
Exchange Commission and prior to the Merger, had not been a reporting
company under the Securities Exchange Act of 1934. The NASD has
implemented a change in its rules requiring all companies trading
securities on the OTC Bulletin Board to become reporting companies
under the Securities Exchange Act of 1934, as amended.
The Company is required to become a reporting company by the close of
business on May 6, 2000 or no longer be listed on the OTC Bulletin
Board. Tessa had effected the merger with Zaba and had become a
successor issuer thereto in order to comply with the reporting company
requirements implemented by the NASD.
In order to consummate the above merger, two stockholders lent the
Company a total of $92,500. Such loans are expected to be satisfied
through the issuance of shares of the Company's common stock at $0.75
per share.
Sale of common stock
Subsequent to year end, the company conducted a private placement of
its common stock pursuant to Rule 504 under which it issued
approximately 1 million shares at a price of $1.00 per share.
19
<PAGE>
TESSA COMPLETE HEALTH CARE, INC.
AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(unaudited)
The following pro forma condensed consolidated financial statements have been
prepared to give effect to the merger with Zaba International, Inc. ("Zaba"), as
if the transaction had taken place at December 31, 1999 for the pro forma
condensed consolidated balance sheet, and at January 1, 1999 for the pro forma
condensed consolidated statements of operations for the year ended December 31,
1999.
The pro forma information is based on historical financial statements giving
effect to the transaction using the purchase method of accounting and the
assumptions and adjustments in the accompanying notes to the pro forma financial
statements.
The unaudited pro forma financial information is not necessarily indicative of
the actual results of operations or the financial position which would have been
attained had the acquisitions been consummated at either of the foregoing dates
or which may be attained in the future. The pro forma financial information
should be read in conjunction with the historical consolidated financial
statements of Tessa Complete Health Care, Inc. and subsidiaries.
<PAGE>
<TABLE>
TESSA COMPLETE HEALTH CARE, INC.
AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
December 31, 1999
<CAPTION>
Historical Financial Pro forma
Statements Pro forma Financial
Tessa Zaba Adjustments Statements
----------- ------- --------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ - $ 809 (a) (112,500) $ -
(b) 112,500
(c) (809)
Accounts receivable 3,109,051 - 3,109,051
----------- ------- -------------
Total current assets 3,109,051 809 3,109,051
----------- ------- -------------
Property and equipment, net 687,437 - 687,437
----------- ------- -------------
Other assets:
Deferred charges 72,915 - 72,915
Goodwill - - (a) 337,500 337,500
----------- ------- -------------
Total other assets 72,915 - 410,415
----------- ------- -------- -------------
Total assets $ 3,869,403 $ 809 $336,691 $ 4,206,903
=========== ======= ======== =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 1,379,620 $ - $ 1,379,620
Current portion of long-term debt 39,681 - 39,681
Accounts payable 1,187,828 11,855 (a) (11,855) 1,187,828
Accrued expenses 1,924,377 - 1,924,377
Related party payable 2,663,458 - 2,663,458
Stockholder payables 3,085,018 - (b) 112,500 1,197,518
----------- ------- -------------
Total current liabilities 10,279,982 11,855 10,392,482
----------- ------- -------------
Long-term debt, net of current portion 94,344 - 94,344
----------- ------- -------------
Shareholders' deficit:
Common stock 275,846 241 (a) 4,500 280,346
(d) (241)
Additional paid-in capital 7,802,153 61,632 (a) 220,500 8,022,653
(c) 11,046
(d) (72,678)
Accumulated deficit (14,582,922) (72,919)(d) 72,919 (14,582,922)
----------- ------- -------- -------------
Total shareholders' deficit (6,504,923) (11,046) (6,279,923)
----------- ------- -------- -------------
Total liabilities and
shareholders' deficit $ 3,869,403 $ 809 $336,691 $ 4,206,903
=========== ======= ======== =============
See notes to pro forma condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
TESSA COMPLETE HEALTH CARE, INC.
AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Year ended December 31, 1999
<CAPTION>
Historical Financial Pro forma
Statements Pro forma Financial
Tessa Zaba Adjustments Statements
------------ ------ ----------- ------------
<S> <C> <C> <C> <C>
Revenue $ 14,635,555 $ - $ 14,635,555
------------ ------ ------------
Expenses:
Caregiver compensation and benefits 6,824,885 - 6,824,885
Other practice costs 852,657 - 852,657
Administrative compensation and benefits 6,053,462 - 6,053,462
Occupancy costs 1,636,756 - 1,636,756
Selling and administrative 4,014,356 6,277 4,020,633
Depreciation and amortization 1,342,174 - (e) 33,750 1,375,924
------------ ------ ------------
20,724,290 6,277 20,764,317
------------ ------ ------------
Loss from operations (6,088,735) (6,277) (6,128,762)
------------ ------ ------------
Other expense:
Reserve under asset sale agreement 5,400,000 - 5,400,000
Restructuring charges 2,586,307 - 2,586,307
Finance related charges 1,554,977 - 1,554,977
Stock-based compensation 825,000 - 825,000
------------ ------ ------------
10,366,284 - 10,366,284
------------ ------ ------------
Loss before income taxes (16,455,019) (6,277) (16,495,046)
Income tax benefit 381,661 - 381,661
------------ ------ ------------
Net loss $(16,073,358) $(6,277) $(16,113,385)
============ ======= ============
Loss per share $ (1.23) $ (1.21)
============ ============
Weighted average shares outstanding 13,043,491 13,268,491
============ ============
See notes to pro forma condensed consolidated financial statements
</TABLE>
<PAGE>
TESSA COMPLETE HEALTH CARE, INC.
AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
(a) Reflects the issuance of 225,000 shares of Tessa's common stock plus
$112,500 in cash to effect the merger with Zaba. The share issuance has
been recorded at the fair value of Tessa's common stock on the date the
agreement was entered into. The value of the consideration given in
excess of the fair value of the net equity of Zaba is recorded as
goodwill.
(b) Reflects proceeds from stockholder loans to Tessa, which provided cash
required to effect merger with Zaba.
(c) Reflects assumption of net liabilities by stockholders of Zaba.
(d) Reflects elimination of capital structure of Zaba upon consolidation.
(e) Reflects the effect of amortization of goodwill recorded in connection
with the Zaba merger. Amortization is being recorded on the
straight-line basis over a 10-year period.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 6,156,972
<ALLOWANCES> 3,047,921
<INVENTORY> 0
<CURRENT-ASSETS> 3,109,051
<PP&E> 1,366,410
<DEPRECIATION> (678,973)
<TOTAL-ASSETS> 3,869,403
<CURRENT-LIABILITIES> 10,279,982
<BONDS> 1,513,645
0
0
<COMMON> 275,846
<OTHER-SE> (6,780,769)
<TOTAL-LIABILITY-AND-EQUITY> (6,504,923)
<SALES> 0
<TOTAL-REVENUES> 14,635,555
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 31,090,574
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (16,455,019)
<INCOME-TAX> (381,661)
<INCOME-CONTINUING> (16,073,358)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,073,358)
<EPS-BASIC> (1.23)
<EPS-DILUTED> (1.23)
</TABLE>
