<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1997
REGISTRATION NO. 333-18291
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------------
COMPLETE WELLNESS CENTERS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8099 52-1910135
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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725 INDEPENDENCE AVE., S.E., WASHINGTON, D.C. 20003 (202) 543-6800
(Address and telephone number of principal executive offices)
------------------------------------
E. EUGENE SHARER, PRESIDENT AND CHIEF OPERATING OFFICER
725 INDEPENDENCE AVE., S.E., WASHINGTON, D.C. 20003 (202) 543-6800
(Name, address and telephone number of agent for service)
------------------------------------
Copies to:
Anthony Cipiti, Jr., Esq.
Storch & Brenner
1001 Connecticut Ave., N.W.
Washington, D.C. 20036-5504
202-452-0900
Lawrence B. Fisher, Esq.
Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue
New York, New York 10103-0001
212-506-5000
------------------------------------
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis, pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Units comprised of Common Stock, par
value $.0001665 per share and
Redeemable Common Stock Purchase
Warrants, each exercisable for one
share of Common Stock............... 1,150,000(2) $8.10 $ 9,315,000 $ 2,822.73
Common Stock, par value $.0001665 per
share............................... 1,150,000(3) -- -- $ 0
Redeemable Common Stock Purchase
Warrants, each exercisable for one
share of Common Stock............... 1,150,000(4) -- -- $ 0
Common Stock issuable upon exercise of
Redeemable Warrants................. 1,150,000(5) $9.60 $11,040,000 $ 3,345.45
Common Stock Purchase Warrants, each
exercisable for one share of Common
Stock............................... 183,333(6) $.003 $ 550 $ .17
Common Stock issuable upon exercise of
Common Stock Purchase Warrants...... 183,333(7) $6.00 $ 1,100,000 $ 333.33
Total................................. $ 6,501.68(8)
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Includes 150,000 units which the Underwriters have the option to purchase
over-allotments, if any.
(3) Includes 150,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(4) Includes 150,000 Redeemable Warrants which the Underwriters have the option
to purchase to cover over-allotments, if any.
(5) Pursuant to Rule 416 under the Securities Act of 1933, there are also being
registered such additional securities as may become issuable pursuant to the
antidilution provisions of the Redeemable Warrants.
(6) Consists of Common Stock Purchase Warrants being registered on behalf of
certain security holders of the Registrant.
(7) Consists of Common Stock issuable upon exercise of Common Stock Purchase
Warrants being registered on behalf of certain security holders of the
Registrant.
(8) Previously paid.
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 5, 1997
Prospectus
COMPLETE WELLNESS CENTERS, INC.
1,000,000 SHARES OF COMMON STOCK AND
1,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
------------------------------------
Complete Wellness Centers, Inc., a Delaware corporation (the "Company"),
hereby offers (the "Offering") 1,000,000 shares (the "Shares") of common stock,
par value $.0001665 per share (the "Common Stock"), and 1,000,000 Redeemable
Common Stock Purchase Warrants (the "Warrants"). The Shares and the Warrants are
sometimes hereinafter together referred to as the "Securities." Until the
completion of this Offering, the Shares and the Warrants offered hereby may only
be purchased together on the basis of one Share and one Warrant, but will trade
separately immediately after the Offering. It is currently anticipated that the
initial public offering prices of the Shares and the Warrants will be between
$6.00 and $8.00 per Share and $.10 per Warrant, respectively. Each Warrant
entitles the registered holder thereof to purchase one share of Common Stock at
an initial exercise price of $ per share [120% of the initial public
offering price per share of Common Stock], subject to adjustment, at any time
commencing , 1997 [six months after the date of this Prospectus] until
, 2002 [five years after the date of this Prospectus]. Commencing
, 1998 [18 months after the date of this Prospectus], the Warrants are
subject to redemption by the Company, in whole but not in part, at $.10 per
Warrant on 30 days' prior written notice provided that the average closing bid
price of the Common Stock as reported on the Nasdaq SmallCap Market ("Nasdaq
SCM") equals or exceeds $ per share [160% of the initial public
offering price per share of Common Stock] (subject to adjustment under certain
circumstances) for any 20 trading days within a period of 30 consecutive trading
days ending on the fifth trading day prior to the date of the notice of
redemption. See "Description of Securities -- Warrants."
(cover continued on page 3)
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 9 AND "DILUTION."
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share........................................ $ $ $
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Per Warrant...................................... $ $ $
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Total(3)......................................... $ $ $
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</TABLE>
(1) Does not include additional compensation payable to National Securities
Corporation, the representative (the "Representative") of the several
Underwriters, in the form of a non-accountable expense allowance. In
addition, see "Underwriting" for information concerning indemnification and
contribution arrangements with the Underwriters and other compensation
payable to the Representative.
(2) Before deducting estimated expenses of $525,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Representative an option, exercisable within
45 days after the date of this Prospectus, to purchase up to an aggregate of
150,000 additional shares of Common Stock and/or up to 150,000 additional
Warrants upon the same terms and conditions as set forth above, solely to
cover over-allotments, if any (the "Over-allotment Option"). If such
Over-allotment Option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------------------
The Securities are being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to approval of certain legal matters by their counsel and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify this Offering and to reject any order in whole or in part. It is expected
that delivery of the Securities will be made against payment at the offices of
National Securities Corporation, Seattle, Washington, on or about ,
1997.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is , 1997
<PAGE> 3
COMPLETE WELLNESS CENTERS, INC.
(COMPLETE WELLNESS CENTER USA MAP)
------------------------------------
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
certified public accountants after the end of each fiscal year, and make
available such other periodic reports as the Company may deem to be appropriate
or as may be required by law.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND/OR THE WARRANTS OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 4
(cover continued from front cover page)
Prior to this Offering, there has been no public market for the Securities
and there can be no assurance that such a market will develop after the
completion of this Offering or, if developed, that it will be sustained. For
information regarding the factors considered in determining the initial public
offering prices of the Shares and Warrants and the terms of the Warrants, see
"Risk Factors" and "Underwriting." Application has been made to include the
Shares and the Warrants for quotation on Nasdaq SCM under the symbols "CMWL" and
"CMWLW," respectively.
This Prospectus also relates to the registration by the Company, at its
expense, for the account of various security holders who provided bridge
financing (the "Bridge Financing") to the Company (collectively, the "Selling
Security Holders") of an aggregate of 183,333 warrants to purchase shares of
Common Stock at an exercise price of $.003 per share (the "Bridge Warrants") and
183,333 shares of Common Stock underlying the Bridge Warrants (assuming an
initial public offering price of $6.00 per share). The Selling Security Holders
have agreed with the Company not to effect any sales of the Common Stock
issuable upon exercise of the Bridge Warrants until 90 days after the date of
this Prospectus without the consent of the Representative. The Company will not
receive any proceeds from any of the securities offered for sale by the Selling
Security Holders although it will receive proceeds from the exercise of the
Bridge Warrants. All of the securities offered for sale by the Selling Security
Holders are hereinafter referred to as the "Selling Security Holders'
Securities." See "Selling Security Holders."
The sale of the Selling Security Holders' Securities may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through the writing of options on the Selling Security
Holders' Securities, through a combination of such methods of sale, or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If any Selling
Security Holder sells his, her or its Securities, or options thereon, pursuant
to this Prospectus at a fixed price or at a negotiated price which is, in either
case, other than the prevailing market price or in a block transaction to a
purchaser who resells, or if any Selling Security Holder pays compensation to a
broker-dealer that is other than the usual and customary discounts, concessions
or commissions, or if there are any arrangements either individually or in the
aggregate that would constitute a distribution of the Selling Security Holders'
Securities, a post-effective amendment to the Registration Statement of which
this Prospectus is a part, would need to be filed and declared effective by the
Securities and Exchange Commission (the "Commission") before such Selling
Security Holders could make such sale, pay such compensation, or make such a
distribution. The Company is under no obligation to file a post-effective
amendment to the Registration Statement of which this Prospectus is a part under
such circumstances.
3
<PAGE> 5
[THIS PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated herein all
share and per share information in this Prospectus does not give effect to (i)
the issuance of 1,000,000 shares of Common Stock issuable upon exercise of the
Warrants, (ii) the exercise by the Representative of the Over-allotment Option,
(iii) the issuance upon exercise of warrants granted to the Representative (the
"Representative's Warrants") of up to 100,000 shares of Common Stock and 100,000
Warrants and the underlying 100,000 shares of Common Stock issuable upon
exercise of the Warrants contained in the Representative's Warrants, or (iv) the
conversion of 1,350 shares of Series A, 12% Cumulative Convertible Preferred
Stock of the Company into 145,800 shares of Common Stock upon consummation of
this Offering. See "Underwriting" and "Description of Securities -- Preferred
Stock." Unless otherwise indicated herein all share and per share information in
this Prospectus gives effect to (i) a 180-for-1 split of the Common Stock
effected in November 1995 and (ii) a 1-for-3 reverse split of the Common Stock
effected in November 1996. Unless the context otherwise requires, the "Company"
refers to Complete Wellness Centers, Inc. and its subsidiaries. This Prospectus
contains forward-looking statements which involve certain risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
The Company develops multi-disciplinary medical centers ("Integrated
Medical Centers") and furnishes certain support services to such facilities. The
Integrated Medical Centers combine, in one practice, at the same location,
traditional health care providers, such as physicians and physical therapists,
and alternative health care providers, such as chiropractors, acupuncturists and
massage therapists. The Company's objective is to become a nationally recognized
developer and manager of Integrated Medical Centers. At January 31, 1997, the
Company was managing 7 Integrated Medical Centers in the states of Florida,
Virginia and Illinois and had 48 agreements with chiropractors to develop and
manage 59 Integrated Medical Centers in 11 states.
The Company develops Integrated Medical Centers generally through
affiliations with chiropractors (the "Affiliated Chiropractors") and their
existing chiropractic practices. Management endeavors to affiliate with a
chiropractor who has an established chiropractic practice in a convenient
location and who is an individual who has demonstrated the entrepreneurial
skills to build a practice. The existing practice is used as a base for the
development of an Integrated Medical Center. Typically, the Company establishes
a new Integrated Medical Center by forming a medical corporation ("Medcorp"),
which is a general business corporation wholly-owned by the Company or a
professional corporation that is physician-owned, depending upon applicable
state law. In some cases, one Medcorp encompasses two or more Integrated Medical
Centers. The Affiliated Chiropractor establishes a management corporation
("Admincorp") which contracts with the Company to provide day-to-day management
of the Integrated Medical Center.
The Company itself is not authorized or qualified to engage in any activity
which may be construed or be deemed to constitute the practice of medicine but
is an independent supplier of non-medical services only. The physicians and
chiropractors are responsible for all aspects of the practice of medicine and
chiropractic care and the delivery of medical and chiropractic services (subject
to certain business guidelines determined in conjunction with the Company).
Management believes that the growing popularity and acceptance of
alternative medicine, also referred to as complementary medicine, has
contributed to the Company's growth. In 1993, the New England Journal of
Medicine reported that the use of alternative medicine in 1990 amounted to
approximately $13.7 billion. In October 1996, The Wall Street Journal reported
that the alternative medical therapy market is approximately $50 billion. By
integrating alternative medicine with traditional medicine, the Company is
providing a choice for the consumer in one location as well as the opportunity
to choose complementary treatments overseen by a medical doctor, which the
Company believes alleviates some of the concerns of patients and third party
payors.
5
<PAGE> 7
The Company's operating strategy is to (i) provide consumers the
opportunity to obtain, and the convenience of obtaining, under the supervision
of a medical doctor, complementary traditional and alternative medical
treatments in one location, (ii) facilitate the efficient provision of high
quality patient care through the use of credentialing standards and standardized
protocols, (iii) establish Integrated Medical Centers in local and regional
clusters for purposes of obtaining managed care contracts, (iv) assist in
marketing the Integrated Medical Centers regionally and nationally on a
coordinated basis and furnish them management, marketing, financing and other
advice and support, and (v) achieve operating efficiencies and economies of
scale through the implementation of an upgraded management information system,
the rotation of health care practitioners among Integrated Medical Centers,
increased purchasing power with suppliers, and standardized protocols,
administrative systems, and procedures.
The Company's expansion strategy is to develop additional Integrated
Medical Centers in regional groups or clusters. The Company plans to continue to
develop Integrated Medical Centers through affiliations with chiropractors and
their existing chiropractic practices and intends to begin development of
Integrated Medical Centers in connection with strategic alliances with health
clubs, corporations, government offices or other organizations, in which cases
the Integrated Medical Centers would be developed in locations such as a health
club or office building. The Company regularly explores new opportunities
related to integrated medical services and may in the future negotiate
arrangements with or acquire businesses ancillary to the provision of integrated
medical services such as services relating to medical diagnostics or billing
systems. As of the date of this Prospectus, the Company has no understandings,
commitments or agreements with respect to any acquisitions.
THE OFFERING
Securities Offered......... 1,000,000 shares of Common Stock and 1,000,000
Warrants. See "Description of Securities."
Securities Registered for
the Selling Security
Holders.................. An aggregate of 183,333 Bridge Warrants and 183,333
shares of Common Stock issuable upon exercise of
the Bridge Warrants (assuming an initial public
offering price of $6.00) are being registered
hereby and may be sold by the Selling Security
Holders, although the Selling Security Holders have
agreed with the Company not to effect any sales of
the Common Stock issuable upon exercise of the
Bridge Warrants until 90 days from the date of this
Prospectus without the consent of the
Representative. None of the Selling Security
Holders' Securities are being underwritten in this
Offering and the Company will not receive any
proceeds from their sale although it will receive
the exercise price of $.003 per share in the event
that any Bridge Warrants are exercised. See
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Selling
Security Holders."
Terms of Warrants.......... Each Warrant entitles the holder thereof to
purchase, at any time commencing , 1997
[six months after the date of this Prospectus], one
share of Common Stock at a price of $ per
share [120% of the initial public offering price
per share of Common Stock], subject to adjustment.
Commencing , 1998 [18 months after the
date of this Prospectus], the Warrants are subject
to redemption by the Company, in whole but not in
part, at $.10 per Warrant on 30 days' prior written
notice provided that the average closing bid price
of the Common Stock as reported on Nasdaq SCM
equals or exceeds $ per share [160% of the
initial public offering price per share of Common
Stock], subject to adjustment, for any 20 trading
days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date
of the notice of redemption. See "Description of
Securities."
6
<PAGE> 8
Common Stock Outstanding:
Prior to the
Offering(1)................ 714,967 shares
After the
Offering(1)(2)............. 1,860,767 shares
Use of Proceeds............ Repayment of indebtedness incurred in connection
with the Bridge Financing; fund development of
additional Integrated Medical Centers; repayment of
certain other debt, accrued expenses and accrued
payroll; and working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors and
Dilution................... An investment in the Securities offered hereby
involves a high degree of risk and immediate and
substantial dilution to the purchasers in this
Offering. See "Risk Factors" and "Dilution."
Proposed Nasdaq SCM
Symbols:(3)
Common Stock............. CMWL
Warrants................. CMWLW
- ---------------
(1) Does not include (i) 351,166 shares issuable upon exercise of outstanding
options under the Company's 1994 Stock Option Plan (at a weighted average
exercise price of $.60 per share) and 11,167 shares reserved for issuance
upon exercise of options available for grant under such plan, of which
options for 11,000 shares will be granted to a consultant to the Company
upon consummation of the Offering at an exercise price equal to 75% of the
initial public offering per share in the Offering; (ii) 200,000 shares
reserved for issuance upon the exercise of options that may be granted under
the Company's 1996 Stock Option Plan, of which 24,000 will be granted after
completion of the Offering at an exercise price per share equal to the
initial public offering price per share of Common Stock; (iii) 100,000
shares reserved for issuance upon exercise of options that may be granted
under the Company's 1996 Restricted Stock Option Plan for Health Care
Professionals; (iv) 13,243 shares issuable upon exercise of certain
outstanding warrants that the Company issued in connection with a financing
in November 1995 at an exercise price of $.003 per share; (v) up to 183,333
shares (assuming an initial public offering price of $6.00 per share)
issuable upon exercise of the Bridge Warrants; and (vi) up to 3,333 shares
(assuming an initial public offering price of $6.00 per share) issuable upon
exercise of outstanding warrants (the "Broker-Dealer Bridge Warrants")
issued to a broker-dealer who acted as a placement agent for a portion of
the Bridge Financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Management -- Stock Option Plans."
(2) Gives effect to the conversion of 1,350 shares of Series A, 12% Cumulative
Convertible Preferred Stock of the Company (the "Series A Preferred Stock")
into 145,800 shares of Common Stock upon consummation of the Offering. See
"Description of Securities -- Preferred Stock."
(3) Application has been made for listing of the Common Stock and the Warrants
on Nasdaq SCM. See "Risk Factors -- No Assurance of Nasdaq SCM Listing; Risk
of Low-Priced Securities; Risk of Application of Penny Stock Rules."
7
<PAGE> 9
SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NOVEMBER 17,
1994 NINE MONTHS ENDED
(INCEPTION) YEAR ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1995 1996
--------------- ------------ -------- ---------
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STATEMENT OF OPERATIONS DATA:
Operating revenue:
Patient revenue........................ $ -- $ 22,114 $ 8,618 $ 869,122
Management services income............. -- -- -- 4,160
------- --------- -------- ---------
Total revenue............................ -- 22,114 8,618 873,282
======= ========= ======== =========
Operating expenses:
Salary and consulting costs............ 1,400 93,131 59,283 249,293
Management fees........................ 29,669 4,146 438,948
Rent................................... 4,501 400 160,988
Advertising and marketing.............. 25,821 11,909 36,828
General and administration............. 253,024 28,818 607,770
Depreciation and amortization.......... 6,490 1,623 24,598
--------- -------- ---------
Total operating expenses................. 1,400 412,636 106,179 1,518,425
------- --------- -------- ---------
Operating deficit........................ (1,400) (390,522) (97,561) (645,143)
Net interest income (expense)............ 176 483 (19,566)
Minority interest........................ 194,457 2,927 143,759
------- --------- -------- ---------
Net loss................................. $(1,400) $ (195,889) $(94,151) $(520,950)
======= ========= ======== =========
Pro forma net loss per share(1).......... $ (0.26) $ (0.43)
========= =========
Pro forma weighted average number of
common and common equivalent shares
outstanding(1)......................... 753,924 1,225,633
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................................... $(434,041) $4,297,009
Total assets...................................................... 1,549,912 4,944,912
Total liabilities................................................. 1,791,855 430,815
Minority interest................................................. 326,793 326,793
Stockholders' equity (deficit).................................... (568,736) 4,209,304
</TABLE>
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(1) See Note 10 to the Consolidated Financial Statements.
(2) Adjusted to give effect to the sale of the Securities offered hereby (at an
assumed initial public offering price of $6.00 per Share and $.10 per
Warrant) and the initial application of the net proceeds therefrom. See "Use
of Proceeds."
8
<PAGE> 10
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk and should be made only by investors who can afford the loss of their
entire investment. Prospective investors should carefully review and consider
the following risks as well as the other information set forth in this
Prospectus.
Limited Operating History; History of Losses; No Assurance of
Profitability. The Company commenced operations in January 1995 and began
managing its first Integrated Medical Center in September 1995. The Company has
a limited operating history upon which prospective investors can judge the
Company's performance. At September 30, 1996, the Company had an accumulated
deficit of $718,239 and a working capital deficit of $434,031. There can be no
assurance that the Company will ever be profitable. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation."
Risks Related to Expansion Strategy. The Company has expanded from
managing one Integrated Medical Center at December 31, 1995 to 7 Integrated
Medical Centers at January 31, 1997. In addition, the Company intends to develop
approximately 63 additional Integrated Medical Centers (including the 59 for
which it had agreements with chiropractors at January 31, 1997) within the 12
months after the date of this Prospectus. The Company's growth will depend upon
a number of factors, including: (i) the Company's ability to identify and
affiliate with suitable, well-located chiropractors and their existing
chiropractic practices; (ii) whether new Integrated Medical Centers will be
opened in accordance with the Company's plans; (iii) the Company's ability to
adequately train Affiliated Chiropractors and their office staff on the
operation and administration of Integrated Medical Centers and the Company's
management information system; (iv) the Company's continued ability to attract
and retain medical doctors and other traditional health care providers for
employment at the Integrated Medical Centers; (v) the ability of the Company to
support and manage Integrated Medical Centers effectively; (vi) whether
anticipated performance levels at Integrated Medical Centers will be achieved;
and (vii) regulatory constraints. There can be no assurance that the Company's
expansion strategy will be successful or that modifications to the Company's
expansion strategy will not be required. Any significant delay in the opening of
new Integrated Medical Centers or the failure of new Integrated Medical Centers
to achieve anticipated performance levels could adversely affect the Company. In
pursuing its expansion strategy, the Company intends to expand its presence into
new geographic markets. In entering a new geographic market, the Company will be
required to comply with laws and regulations of jurisdictions that differ from
those applicable to the Company's current operations, deal with different payors
as well as face competitors with greater knowledge of such markets than the
Company. There can be no assurance that the Company will be able to effectively
establish a presence in any new market. The Company's strategy also involves
growth through acquisitions of complementary businesses in order to enhance the
services offered by its Integrated Medical Centers. The Company will be subject
to various risks associated with an acquisition growth strategy, including the
risk that the Company will be unable to identify and recruit suitable
acquisition candidates in the future or to absorb and manage the acquisitions.
See "Business -- Expansion Strategy" and "Business -- Government Regulation."
Possible Need for Additional Financing. The Company is dependent upon the
net proceeds of this Offering for the continued implementation of its operating
and expansion strategies. Although the Company believes that the net proceeds of
this Offering together with cash from operations will be sufficient to satisfy
its cash requirements for at least 12 months following the date of this
Prospectus (exclusive of applying any such funds to the acquisition of other
businesses) there is no assurance that additional funds will not be needed.
Factors that may require the Company to seek additional financing include the
development of a larger number of Integrated Medical Centers than now
anticipated, a higher average cost to develop additional Integrated Medical
Centers than that which has been the case to date, and the acquisition of other
businesses all or part of the payment for which is in cash. If the Company
requires additional financing, it may raise capital through the issuance of
equity securities and/or the incurrence of debt. If additional capital is raised
through the issuance of equity securities, dilution to the Company's
stockholders may result. If additional capital is raised through the incurrence
of debt, the Company likely would become subject to restrictions on its
operations and finances. There can be no assurance that the Company will be able
to raise additional capital when needed on satisfactory terms or at all. If the
Company is unable to secure additional sources of financing on terms and
conditions acceptable to the Company or at all, the Company's expansion strategy
could be
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materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 1 to the Consolidated Financial Statements.
Pledge of Assets; Loan Commitment. Substantially all of the Company's
assets are pledged as collateral for notes issued in connection with the Bridge
Financing. The Company has received a low interest rate loan commitment in the
amount of $45,000 to be used to defray its relocation costs resulting from the
leasing of executive offices in Montgomery County, Maryland. Such loan is to be
secured by the Company's capital assets. The loan commitment expires on March
31, 1997. See "Business -- Properties."
Possibility of Regulatory Challenge to the Affiliation
Relationships. Physician practice management companies ("PPMs") typically bill,
collect, disburse funds to, pay expenses (including their own fees) or otherwise
manage traditional physician or dental practices. The Company likewise
undertakes to perform these services, albeit for Integrated Medical Centers.
However, whereas PPMs may subcontract certain of their functions to third
parties unaffiliated with the practices they manage, the Company subcontracts
the day-to-day management of the Integrated Medical Centers to management
companies controlled by the Affiliated Chiropractors. These are persons who both
refer patients to the Integrated Medical Centers from their existing
chiropractic practices and are employed by the Medcorps at the Integrated
Medical Centers. The Company is unaware of any scrutiny by state or federal
health care enforcement officials of the structure of typical PPM-
provider-subcontractor relationships to date, and believes its Affiliated
Chiropractor relationships do not violate applicable federal or state health
care regulatory requirements. There can be no assurance, however, that health
care enforcement officials will not take a contrary view. Investigations or
prosecutions by such enforcement officials could have a material adverse effect
on the Company, even if the Company's Affiliated Chiropractor relationships were
subsequently determined lawful.
Reliance on Affiliated Chiropractors. The Company's revenue and cash flow
are dependent on the generation and collection of revenue by the Medcorps and
the efficient management of both the Medcorps and the Admincorps by the
Affiliated Chiropractors. The Admincorps both (i) employ the administrative
staff who perform the day-to-day administrative functions of the Integrated
Medical Centers, including functions related to the collection of revenue and
(ii) are responsible for many expenses required for the operation of the
Integrated Medical Centers, including, for example, office and many medical
supplies. The ability of the Admincorp to meet their financial obligations,
including their financial obligations to the Company (from which the Company
ultimately derives income), likewise depends on the collection of revenue by the
Medcorp and efficient management of both the Medcorp, and the Admincorp. During
start-up, the Admincorp must rely upon the capital invested in it by, or other
financial assistance from, the Affiliated Chiropractor or his existing
chiropractic practice in order to timely meet its financial obligations, such as
payroll. In some cases, due to delays in the submission of bills and collection
of revenue by the Medcorp, the start-up phase has been extended and, in such
cases as well as in some cases where the start-up phase has not been extended,
the Admincorp has had to rely upon financial assistance from the Affiliated
Chiropractor or the Affiliated Chiropractor's existing chiropractic practice
longer than anticipated. The Company has not previously obtained financial
information or performed credit checks on Affiliated Chiropractors or, where
organized as separate legal entities, their existing chiropractic practices. It
intends to begin doing so, however, prior to entering into other agreements with
chiropractors to develop new Integrated Medical Centers. In addition, the
revenues flowing to the Affiliated Chiropractors' existing chiropractic
practices, or to the Affiliated Chiropractors through their existing practices,
diminish over time, in some cases, substantially and rapidly. Thus, the
Affiliated Chiropractor's ability to provide additional financial assistance to
the Admincorp may diminish. Accordingly, there can be no assurance that any such
affiliation with a chiropractor will result in a successful relationship.
The Company's agreements with Affiliated Chiropractors and entities
controlled by them relating to the operation and management of the Integrated
Medical Centers are generally for initial terms of five years, although some are
for ten years. They may be renewed in five year increments, up to four times, by
mutual consent. An Affiliated Chiropractor may, through his Admincorp, terminate
such an agreement if the Company materially breaches it and, if the breach is
correctable, the Company fails to cure the breach within ten days after written
notification. A number of the agreements, including agreements with respect to
at least four of the seven operating Integrated Medical Centers, are also
terminable by the Affiliated Chiropractors if,
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<PAGE> 12
for example, the combined revenues of the Integrated Medical Center and existing
chiropractic practice during the first year after the start-up phase do not
exceed 110% of the revenues of the Affiliated Chiropractors' existing
chiropractic practice for the one year period preceding the date the Affiliated
Chiropractor agreed in writing to develop the Integrated Medical Center in
conjunction with the Company. The start-up phase is generally three months
following integration, which is the date on which a medical doctor first sees a
patient for the Integrated Medical Center ("Integration Date"). The loss of a
substantial number of such agreements, or the loss of a substantial number of
Affiliated Chiropractors, would have a material adverse effect on the Company.
See "Business-Agreements With Affiliated Chiropractors and Other Licensed
Practitioners."
Dependence On Third Party Reimbursement. Substantially all revenue of the
Medcorps, on which the Company's income is dependent, derives from commercial
health insurance, state workers' compensation programs, and other third party
payors. Following the Company's specific approval, the Medcorps may also treat
patients covered under federal and state funded health care programs. All of
these providers and programs are regulated at the state or federal level. There
are increasing and significant public and private sector pressures to contain
health care costs and to restrict reimbursement rates for medical services. For
example, it has been widely reported that the Medicare program is expected to
run short of funds early in the next century. Accordingly, Congress, in its
fiscal year 1996 budget legislation, called for and considered severe reductions
in both the Medicare and Medicaid programs. Although a budget accord was not
reached in the last session, Congress is expected to again consider legislation
in its 1997 and 1998 sessions that would propose significant reductions to the
Medicare and Medicaid programs. Several states have taken measures to reduce the
reimbursement rates paid to health care providers in their states. The Company
believes that additional states will implement reductions from time to time.
Reductions in Medicare and Medicaid rates often lead to reductions in the
reimbursement rates of other third party payors as well. Thus, changes in the
level of support by federal and state governments of health care services, the
methods by which health care services may be delivered, and the prices of such
services may all have a material impact on revenue of the Medcorps, which in
turn could have a material adverse effect on the Company.
Third party payors are generally not familiar with reimbursing for
traditional and alternative health care services, such as chiropractic, in the
same medical practice. The third party payors may disagree with the descriptions
or coding of a bill for medical services, or may contest a code or description
under a lesser (e.g., chiropractic) fee schedule. Such disagreements on billing
code or description of professional services, particularly where the third party
payor is a federal or state funded health care program, can result in lesser
reimbursement, which can have a material adverse effect on the Medcorps and
ultimately on the Company. Persistent disagreements or alleged "upcoding" can
result in allegations of fraud or false billing, both of which constitute
felonies. Such an allegation, if proven, can result in forfeitures of payment,
civil money penalties, civil fines, suspensions, or disbarment from
participating in federal or state funded health care programs, and have a
material adverse effect on the Company. Investigation and prosecutions for
fraudulent or false billing can have a material adverse effect on the Company,
even where such allegations are disproven. See "-- Government Regulation,"
"Business -- Government Regulation" and "Business -- Third Party Reimbursement."
Inability to Collect or Delay in Collecting Management Fees. The Company's
income may be adversely affected by the uncollectibility of the Medcorps'
medical fees from third party payors (including workers' compensation insurers,
no-fault insurance carriers, no-fault payment pools, Medicare and commercial
insurers) or by delay in the submission of claims, a problem experienced by
certain Integrated Medical Centers, and the long collection cycles for such
receivables. Many third party payors, particularly insurance carriers covering
automobile no-fault and workers' compensation claims refuse, as a matter of
business practice, to pay claims unless submitted to arbitration. Further,
third-party payors may reject medical claims if, in their judgment, the
procedures performed were not medically necessary or if the charges exceed such
payor's allowable fee standards. In addition, some receivables may not be
collected because of omissions or errors in timely completion of the required
claim forms. The inability of the Medcorps to collect their receivables could
materially adversely affect the Company. See "Business -- Third Party
Reimbursement."
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Risks Associated with Managed Care Contracts. An increasing percentage of
patients are coming under the control of managed care entities. The Company
believes that its success will, in part, depend upon the Company's ability to
negotiate, on behalf of the Medcorps, favorable managed care contracts with
health maintenance organizations ("HMOs") and other private third party payors.
Such contracts often shift much of the financial risk of providing care from the
payor to the provider by requiring the provider to furnish all or a portion of
its services in exchange for a fixed, or "capitated," fee per member patient,
per month, regardless of the level of such patients' utilization rates and,
sometimes in the case of primary care physicians, to accept financial risk for
health care services not normally furnished by such physicians (e.g., specialty
physician or hospital services). The Company intends to negotiate capitated
agreements with managed care organizations. The Company has begun preliminary
discussions with one managed care concern, but has not approached or discussed
the possibility of obtaining a managed care contract for any of the Integrated
Medical Centers with any other managed care concern. Some managed care
agreements also offer "shared risk" provisions under which providers and
provider practice management concerns can earn additional compensation based on
the utilization of services by members, but may be required to bear a portion of
any loss in connection with such "shared-risk" provisions. Any such losses could
have a material adverse effect on the Company. In order for capitated contracts,
especially any with "shared-risk" provisions to be profitable for the Company,
the Company must effectively monitor the utilization of its services delivered
to members of the managed care organization who are patients of the Integrated
Medical Centers and, to the extent the Integrated Medical Centers are
responsible for overall patient care, monitor the utilization of specialist
physicians or hospitals, negotiate favorable rates with such other providers,
and obtain, on favorable terms, stoploss protection limiting its per enrollee
exposure above specified thresholds. The Company does not currently have a
utilization management program, but has commenced preliminary discussions with a
software vendor regarding the potential use of its program for that purpose.
Further, certain of the Company's operating strategies (e.g., having all
treatments supervised by a physician) are intended to attract managed care
contracts for the Integrated Medical Centers. Third party payors are not,
however, generally familiar with traditional and alternative health services
being provided within the same medical practice and may have concerns about
contracting with such practices. For this and other reasons, there can be no
assurance that the Company will be able to negotiate satisfactory managed care
contracts for the Integrated Medical Centers. Nor can there be any assurance
that any managed care contracts it enters into on behalf of the Integrated
Medical Centers will not adversely affect the Integrated Medical Centers or the
Company.
Health Care Reform. Although Congress failed to pass comprehensive health
care reform legislation in 1996, the Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care delivery
and payment systems and may in the future propose and adopt legislation
effecting fundamental changes in the health care delivery system. Also, Congress
is expected to consider major reductions in the rate of increase of Medicare and
Medicaid spending as part of efforts to balance the budget of the United States.
The Company cannot predict the ultimate timing, scope or effect of any
legislation concerning health care reform, including legislation affecting the
Medicare and Medicaid programs. Any proposed federal legislation, if adopted,
could result in significant changes in the availability, delivery, pricing and
payment for health care services and products. Various states also have
undertaken or are considering significant health care reform initiatives.
Although it is not possible to predict whether any health care reform
legislation will be adopted or, if adopted, the exact manner and the extent to
which the Company will be affected, it is likely that the Company will be
affected in some fashion, and there can be no assurance that any health care
reform legislation, if and when adopted, will not have a material adverse effect
on the Company.
Dependence Upon Key Personnel. The Company is dependent upon the active
participation of its executive officers, particularly the Company's founder,
Chairman and Chief Executive Officer, C. Thomas McMillen, and E. Eugene Sharer,
its President, Chief Operating Officer, and Chief Financial Officer. The loss to
the Company of the services of Mr. McMillen or Mr. Sharer could have a material
adverse effect upon the Company. The Company has an employment contract with
each of these executive officers extending through March 31, 1999. See
"Management -- Employment Agreements." The Company has applied for "key-man"
life insurance policies on the lives of Messrs. McMillen and Sharer providing
benefits to the Company of $1
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million upon the death of each of Mr. McMillen or Mr. Sharer. Nevertheless, the
loss of either person, or the inability to attract other qualified employees,
could have a material adverse effect on the Company.
Professional Liability. The Medcorps employ health care practitioners at
the Integrated Medical Centers for the delivery of health care services to the
public. They are thus exposed to the risk of professional liability claims. The
Company does not itself provide such services or control the provision of health
care services by the Integrated Medical Centers' practitioners or their
compliance with regulatory and other requirements in that regard. The Company
might nevertheless be held liable for medical negligence on their part.
The Company has obtained an insurance policy that, subject to certain
conditions, provides both it and its subsidiaries medical malpractice insurance
and managed care errors and omissions insurance retroactive to the Integration
Dates of the Company's current Integrated Medical Centers and one former
Integrated Medical Center. The policy provides coverage for $1,000,000 per claim
per Integrated Medical Center, subject to an aggregate limit of $3,000,000 per
Integrated Medical Center per year. The policy will also cover the Company with
respect to Integrated Medical Centers as they are opened. There is no deductible
under the policy.
The foregoing policy is a "claims made" policy. Thus, it provides coverage
for covered claims made during the policy's term but not for losses occurring
during the policy's term for which a claim is made subsequent to the expiration
of the term. Further, the policy remains contingent on, among other things, the
Company paying the initial premium of approximately $40,000 by March 10, 1997.
As to future Integrated Medical Centers, the Company must submit an application
and pay the premium with respect thereto within two weeks and 30 days of the
desired effective date of coverage, respectively. The policy is also subject to
bi-annual audits of patient visits.
There can be no assurance, however, that the Company, its employees, or the
licensed health care practitioners employed at or associated with the Integrated
Medical Centers will not be subject to claims in amounts that exceed the
coverage limits under the policy or that such coverage will be available when
needed. Further, there can be no assurance that professional liability insurance
will continue to be available to the Company in the future at adequate levels or
at an acceptable cost to the Company. A successful claim against the Company in
excess of the Company's insurance coverage could have a material adverse effect
upon the Company's business. Claims against the Company, regardless of their
merits or eventual outcome, also may have an adverse effect upon the Company.
See "Business -- Professional Liability."
Government Regulation. Federal and state laws extensively regulate the
relationships among providers of health care services, physicians and other
clinicians. These laws include federal fraud and abuse provisions. Such
provisions prohibit the solicitation, receipt, payment, or offering of any
direct or indirect remuneration for the referral of patients for which
reimbursement is made under any federal or state funded health care program or
for the recommending, leasing, arranging, ordering or providing of services
covered by such programs. States have similar laws that apply to patients
covered by private and government programs. Federal fraud and abuse laws also
impose restrictions on physicians' referrals for designated health services
covered under a federal or state funded health care program to entities with
which they have financial relationships. Various states, such as Illinois,
Maryland and Florida, among others, have adopted similar laws that cover
patients in private programs as well as government programs. There can be no
assurance that the federal and state governments will not consider additional
prohibitions on physician ownership, directly or indirectly, of facilities to
which they refer patients, which could adversely affect the Company. Violations
of these laws may result in substantial civil or criminal penalties for
individuals or entities, including large civil money penalties and exclusion
from participation in the Medicare and Medicaid programs. Such exclusion, if
applied to the Company's Integrated Medical Centers, could result in significant
loss of reimbursement and could have a material adverse effect on the Company.
See "Business -- Government Regulation."
Federal law also prohibits conduct that may be or result in price-fixing or
other anticompetitive conduct. Moreover, the Company may in the future contract
with licensed insurance companies and/or HMO's. Certain of such contracts may
require the Medcorps on behalf of which the Company contracts to assume risk in
connection with providing health care services under capitation arrangements. To
the extent that the Company or the Medcorps may be in the business of insurance
as a result of entering into such arrangements,
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they may be subject to a variety of regulatory and licensing requirements
applicable to insurance companies or HMOs. There can be no assurance that the
Company or the Medcorps will not be adversely affected by such regulations.
Moreover, the laws of many states prohibit physicians from sharing
professional fees, or "splitting fees," with anyone other than a member of the
same profession. These laws and their interpretations vary from state to state
and are enforced by the courts and by regulatory authorities with broad
discretion. Expansion of the operations of the Company to certain jurisdictions
may require structural and organizational modifications of the Company's form of
relationship with Integrated Medical Centers, which could have an adverse effect
on the Company. Although the Company believes its operations as currently
conducted are in material compliance with existing applicable laws, there can be
no assurance that review of the Company's business by courts or regulatory
authorities will not result in a determination that could adversely affect the
operations of the Company or that the health care regulatory environment will
not change so as to restrict the Company's existing operations or its expansion.
State Laws Regarding Prohibition of Corporate Practice of Medicine. The
Medcorps are formed as general business corporations wholly-owned by the Company
in states (such as Florida and Virginia) in which general business corporations
are permitted to own medical practices. The Integrated Medical Centers are
formed as professional corporations owned by one or more medical doctors
licensed to practice medicine under applicable state law, in states (such as
Illinois) that prohibit the corporate practice of medicine. Corporations such as
the Company are not permitted under certain state laws to practice medicine or
exercise control over the medical judgments or decisions of practitioners.
Corporate practice of medicine laws and their interpretations vary from state to
state and are enforced by the courts and by regulatory authorities with broad
discretion. The Company believes that it performs only non-medical
administrative services, does not represent to the public or its clients that it
offers medical services and does not exercise influence or control over the
practice of medicine by the practitioners with whom it contracts. Expansion of
the operations of the Company to certain jurisdictions may require structural
and organizational modifications of the Company's form of relationship with
practitioners in order to comply with corporate practice of medicine laws, which
could have an adverse effect on the Company. Although the Company believes its
operations as currently conducted are in material compliance with existing
applicable laws, there can be no assurance that the Company's structure will not
be challenged as constituting the unlicensed practice of medicine or that the
enforceability of the agreements underlying this structure will not be limited.
If such a challenge were made successfully in any state, the Company could be
subject to civil and criminal penalties under such state's law and could be
required to restructure its contractual arrangements in that state. Such results
or the inability to successfully restructure its contractual arrangements could
have a material adverse effect upon the Company.
Repayment of Debt; Discretion in Use of Proceeds. Approximately $1,436,000
or 30.0% of the estimated net proceeds of the Offering will be used to repay
debt. Approximately $1,336,000 or 28.0% of the estimated net proceeds of the
Offering have been allocated to working capital and general corporate purposes.
Accordingly, management will have broad discretion as to the application of such
net proceeds. See "Use of Proceeds."
Competition. The managed health care industry, including the provider
practice management industry, is highly competitive. The Company competes with
other companies for physicians and other practitioners of health care services
as well as for patients. The Company competes not only with national and
regional provider practice management companies, but also with local providers,
many of which are trying to combine their own services with those of other
providers into delivery networks. Certain of the companies are significantly
larger, provide a wider variety of services, have greater financial and other
resources, have greater experience furnishing provider practice management
services, and have longer established relationships with buyers of these
services, than the Company, and provide at least some of the services provided
by the Company. In addition, companies with greater resources than the Company
that are not presently engaged in the provision of integrated provider practice
management services could decide to enter the business and engage in activities
similar to those in which the Company engages. There can be no assurance that
the Company will be able to compete effectively. See "Business -- Competition."
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Loans to Integrated Medical Centers. The Company is required under the
terms of its management agreements to make loans to certain of the Medcorps in
amounts up to $40,000. The failure of a substantial number of the Medcorps to
repay such loans, to the extent taken, could have a material adverse effect on
the Company's financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Control by Existing Stockholders. Following the closing of the Offering,
the Company's executive officers and directors will control or own approximately
26.9% (25.0% if the Over-allotment Option is fully exercised) of the outstanding
shares of Common Stock. As a result, such persons may be able to determine the
election of all of the Company's directors and the outcome of all issues
submitted to the Company's stockholders. Furthermore, such concentration of
ownership could limit the price that certain investors might be willing to pay
in the future for shares of Common Stock, and could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. See "Principal
Stockholders."
Portions of Offering Proceeds Benefiting Management. Net proceeds to the
Company from the sale of the Securities offered hereby will be used to pay
accrued salaries of certain officers in an aggregate amount of $131,500, and
accrued equipment lease payments to McMillen and Company, Inc., a corporation
controlled by C. Thomas McMillen, the Company's Chairman and Chief Executive
Officer, in the amount of $6,000. See "Use of Proceeds" and
"Management -- Employment Agreements."
Shares Eligible For Future Sale. Of the 1,860,767 shares of Common Stock
and 1,000,000 Warrants to be outstanding upon completion of this Offering after
giving effect to the conversion of the 1,350 shares of Series A Preferred Stock
into 145,800 shares of Common Stock upon consummation of this Offering, the
1,000,000 shares of Common Stock and the 1,000,000 Warrants (1,150,000 shares of
Common Stock and 1,150,000 Warrants if the Over-allotment Option is exercised in
full) will be immediately freely tradeable without restriction under the
Securities Act of 1933, as amended (the "Securities Act") except for any
securities purchased by an "affiliate" of the Company (as that term is defined
in the Securities Act), which securities will be subject to the resale
limitations of Rule 144 under the Securities Act. All of the remaining 860,767
shares of Common Stock outstanding are "restricted securities," as that term is
defined in Rule 144 under the Securities Act and may, under certain
circumstances, be sold without registration under the Securities Act. The sale,
or availability for sale, of substantial amounts of Common Stock in the public
market subsequent to this Offering pursuant to Rule 144 or otherwise could
materially adversely affect the market price of the Common Stock and could
impair the Company's ability to raise additional capital through the sale of its
equity securities or debt financing.
Notwithstanding the foregoing, each officer and director of the Company,
substantially all holders of the shares of Common Stock and all holders of any
options, warrants or other securities convertible, exercisable or exchangeable
for shares of Common Stock have agreed not to, directly or indirectly, offer,
sell, transfer, pledge, assign, hypothecate or otherwise encumber or dispose of
any of the Company's securities, whether or not presently owned, for a period of
13 months after the date of this Prospectus without the prior written consent of
the Representative. After such 13-month period, 713,100 of such shares of Common
Stock may be sold in accordance with Rule 144. The foregoing restriction does
not apply to the Bridge Warrants and the shares of Common Stock underlying such
Bridge Warrants registered pursuant hereto for the account of the Selling
Security Holders. The Selling Security Holders have agreed with the Company not
to effect any sales of the Common Stock issuable upon exercise of the Bridge
Warrants until 90 days after the date of this Prospectus without the consent of
the Representative. See "Shares Eligible for Future Sale."
Limitation of Directors' Liability. The Company's Certificate of
Incorporation and By-laws provide that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of the fiduciary duty of care as a director, subject to certain
limitations imposed by the Delaware General Corporation Law. Thus, under certain
circumstances, neither the Company nor its stockholders will be able to recover
damages even if the directors take actions which harm the Company. See
"Management -- Limitation of Directors' and Officers' Liability and
Indemnification."
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Absence of Dividends. The Company has paid no cash dividends on its Common
Stock since its inception and does not plan to pay cash dividends on the Common
Stock in the foreseeable future. The Company anticipates that future earnings
will be retained to finance future operations and expansion. See "Dividend
Policy."
No Prior Public Market; Arbitrary Determination of Public Offering Prices;
Possible Volatility of Common Stock and Warrant Market Prices. Prior to this
Offering, there has been no public market for the Common Stock or Warrants and
there can be no assurance that an active public market for the Common Stock or
the Warrants will develop or, if developed, be sustained after this Offering.
The initial public offering prices of the Securities and the terms of the
Warrants were arbitrarily determined by negotiations between the Company and the
Representative, and do not necessarily bear any relationship to the Company's
assets, book value, results of operations, or any other generally accepted
criteria of value. From time to time after this Offering, there may be
significant volatility in the market price of the Common Stock and the Warrants.
Quarterly operating results of the Company, changes in general conditions in the
economy or the health care industry, or other developments affecting the
Company, could cause the market price of the Common Stock and the Warrants to
fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and have often been unrelated to the operating
performance of these companies. Concern about the potential effects of health
care reform measures has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of the Common Stock and the Warrants following this Offering. See
"Underwriting."
Immediate and Substantial Dilution. The purchasers of the shares of Common
Stock offered by the Company hereby will experience immediate and substantial
dilution in the net tangible book value of the shares of Common Stock from the
initial public offering price in the amount of $3.74 per share, or approximately
62.3% per share. The present stockholders of the Company have acquired their
respective equity interests at costs substantially below the initial public
offering price of the shares of Common Stock. Accordingly, to the extent that
the Company incurs losses, the public investors will bear a disproportionate
risk of such losses. See "Dilution."
Speculative Nature of the Warrants; Possible Redemption of Warrants. The
Warrants do not confer any rights of Common Stock ownership on their holders,
such as voting rights or the right to receive dividends, but rather merely
represent the right to acquire shares of Common Stock at a fixed price for a
limited period of time. Specifically, commencing , 1997 [six months
after the date of this Prospectus], holders of the Warrants may exercise their
right to acquire Common Stock and pay an exercise price of $ per share
[120% of the initial offering price per share of Common Stock], subject to
adjustment upon the occurrence of certain dilutive events, until ,
2002 [five years after the date of this Prospectus], after which date any
unexercised warrants will expire and have no further value. Moreover, following
the completion of this Offering, the market value of the Warrants will be
uncertain and there can be no assurance that the market value of the Warrants
will equal or exceed their initial public offering price. There can be no
assurance that the market price of the Common Stock will ever equal or exceed
the exercise price of the Warrants and, consequently, whether it will ever be
profitable for holders of the Warrants to exercise the Warrants.
Commencing , 1998 [18 months after the date of this Prospectus],
the Warrants will be subject to redemption at $.10 per Warrant on 30 days' prior
written notice provided that the average closing bid price of the Common Stock
as reported on Nasdaq SCM equals or exceeds $ per share [160% of the
initial public offering price per share] for any 20 trading days within a period
of 30 consecutive trading days ending on the fifth trading day prior to the date
of the notice of redemption. If the Warrants are redeemed, holders of the
Warrants will lose their rights to exercise the Warrants after the expiration of
the 30-day notice period. Upon receipt of a notice of redemption, holders would
be required to: (i) exercise the Warrants and pay the exercise price at a time
when it may be disadvantageous for them to do so, (ii) sell the Warrants at the
then-prevailing market price, if any, when they might otherwise wish to hold the
Warrants, or (iii) accept the redemption price, which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. In the event that holders of the Warrants elect not to exercise
their Warrants upon notice of redemption, the unexercised Warrants will be
redeemed prior to exercise, and the holders thereof will lose the
16
<PAGE> 18
benefit of the appreciated market price of the Warrants, if any, and/or the
difference between the market price of the underlying Common Stock as of such
date and the exercise price of such Warrants, as well as any possible future
price appreciation in the Common Stock. See "Description of
Securities -- Warrants."
Current Prospectus and State Blue Sky Registration Required to Exercise
Warrants. The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants and such shares have been registered, qualified or
deemed to be exempt under the securities or "blue sky" laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its best efforts to have all of the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there is no assurance that it will be able to do so.
The value of the Warrants may be greatly reduced if a current prospectus
covering the Common Stock issuable upon the exercise of the Warrants is not kept
effective or if such Common Stock is not qualified or exempt from qualification
in the states in which the holders of the Warrants reside. Until completion of
this Offering, the Common Stock and the Warrants may only be purchased together
on the basis of one share of Common Stock and one Warrant, but the Warrants will
be separately tradeable immediately after this Offering. Although the Securities
will not knowingly be sold to purchasers in jurisdictions in which the
Securities are not registered or otherwise qualified for sale, investors may
purchase the Warrants in the secondary market or may move to a jurisdiction in
which the shares underlying the Warrants are not registered or qualified during
the period that the Warrants are exercisable. In such event, the Company will be
unable to issue shares to those persons desiring to exercise their Warrants
unless and until the shares are qualified for sale in jurisdictions in which
such purchasers reside, or an exemption from such qualification exists in such
jurisdictions, and holders of the Warrants would have no choice but to attempt
to sell the Warrants in a jurisdiction where such sale is permissible or allow
them to expire unexercised. See "Description of Securities -- Warrants."
Representative's Potential Influence on the Market. A significant amount
of the Securities offered hereby may be sold to customers of the Representative.
Such customers subsequently may engage in transactions for the sale or purchase
of such Securities through or with the Representative. If it participates in the
market, as a market maker or otherwise, the Representative may exert a
dominating influence on the market, if one develops, for the Securities
described in this Prospectus. Such market making activity may be discontinued at
any time. The price and liquidity of the Common Stock and the Warrants may be
significantly affected by the degree, if any, of the Representative's
participation in such market. See "Underwriting."
Anti-Takeover Provisions; Preferred Stock. The Company's Board of
Directors has the authority to issue up to 2,000,000 shares of preferred stock
in one or more series and to determine the number of shares in each series, as
well as the designations, preferences, rights and qualifications or restrictions
of those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. The Company has issued 1,350 shares of Series A
Preferred Stock, which will convert automatically into 145,800 shares of Common
Stock upon consummation of this Offering. The Company has no present plans to
issue additional shares of preferred stock. In addition, the Company is subject
to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law. In general, this statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became interested stockholder, unless the business combination
is approved in a prescribed manner. See "Description of Securities."
No Assurance of Nasdaq SCM Listing; Risk of Low-Priced Securities; Risk of
Application of Penny Stock Rules. The Board of Governors of the National
Association of Securities Dealers, Inc. has established certain standards for
the initial listing and continued listing of a security on Nasdaq SCM. The
standards for initial listing require, among other things, that an issuer have
total assets of $4,000,000 and capital and surplus of at least $2,000,000; that
the minimum bid price for the listed securities be $3.00 per share; that the
minimum market value of the public float (the shares held by non-insiders) be at
least $2,000,000, and that
17
<PAGE> 19
there be at least two market makers for the issuer's securities. The maintenance
standards require, among other things, that an issuer have total assets of at
least $2,000,000 and capital and surplus of at least $1,000,000; that the
minimum bid price for the listed securities be $1.00 per share; that the minimum
market value of the "public float" be at least $1,000,000 and that there be at
least two market makers for the issuer's securities. A deficiency in either the
market value of the public float or the bid price maintenance standard will be
deemed to exist if the issuer fails the individual stated requirement for ten
consecutive trading days. If an issuer falls below the bid price maintenance
standard, it may remain on Nasdaq SCM if the market value of the public float is
at least $1,000,000 and the issuer has $2,000,000 in equity. Nasdaq SCM has
recently proposed new maintenance criteria which, if implemented, would
eliminate the exception to the $1.00 per share minimum bid price and require,
among other things, $2,000,000 in net tangible assets, $1,000,000 market value
of the public float and adherence to certain corporate governance provisions.
There can be no assurance that the Company will continue to satisfy the
requirements for maintaining a Nasdaq SCM listing. If the Company's securities
were to be excluded from Nasdaq SCM, it would adversely affect the prices of
such securities and the ability of holders to sell them, and the Company would
be required to comply with the initial listing requirements to be relisted on
Nasdaq SCM.
If the Company is unable to satisfy Nasdaq SCM's maintenance requirements
and the price per share were to drop below $5.00, then unless the Company
satisfied certain net asset tests, the Company's securities would become subject
to certain penny stock rules promulgated by the Commission. The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the Commission that provides information about penny stocks
and the nature and level of risks in the penny stock market. The broker-dealer
also must provide the customer with current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in the
transaction and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
such rules, the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock rules. If the Common
Stock becomes subject to the penny stock rules, investors in the Offering may
find it more difficult to sell their shares.
Risks Associated with Forward-Looking Statements Included in this
Prospectus. This Prospectus contains certain forward-looking statements
regarding the plans and objectives of management for future operations,
including plans and objectives relating to the development of Integrated Medical
Centers. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based on a successful execution of the Company's expansion
strategy and assumptions that the Integrated Medical Centers will be profitable,
that the health care industry will not change materially or adversely, and that
there will be no unanticipated material adverse change in the Company's
operations or business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Prospectus will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, particularly in view of the Company's early stage operations,
the inclusion of such information should not be regarded as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved.
18
<PAGE> 20
THE COMPANY
The Company develops multi-disciplinary medical centers ("Integrated
Medical Centers") and furnishes certain support services to such facilities. The
Integrated Medical Centers combine, in one practice at the same location,
traditional health care providers, such as physicians and physical therapists,
and alternative health care providers, such as chiropractors, acupuncturists and
massage therapists. The Company's objective is to become a nationally recognized
developer and manager of Integrated Medical Centers. At January 31, 1997, the
Company was managing 7 Integrated Medical Centers in the states of Florida,
Virginia and Illinois and had 48 agreements with chiropractors to develop and
manage 59 Integrated Medical Centers in 11 states.
The Company was incorporated in the State of Delaware in November 1994. The
Company's principal executive offices are located at 725 Independence Ave.,
S.E., Washington, DC 20003 and its telephone number is (202) 543-6800. The
Company's web site is: http://www.completewellness.com.
19
<PAGE> 21
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby (assuming an initial public offering price of $6.00 per Share and $.10
per Warrant), after deduction of underwriting discounts and other estimated
offering expenses, are estimated to be approximately $4,782,000 (approximately
$5,578,050 if the Over-allotment Option is exercised in full). The Company
intends to utilize such net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE
DOLLAR APPROXIMATE
AMOUNT(1) PERCENTAGE
----------- -----------
<S> <C> <C>
Repayment of the Bridge Financing notes(2)........................... $ 1,171,000 24.5%
Development of additional Integrated Medical Centers(3).............. $ 2,010,000 42.0%
Repayment of certain other debt(4)................................... $ 265,000 5.5%
Working capital and general corporate purposes(5).................... $ 1,336,000 28.0%
----------- -----
Total........................................................... $ 4,782,000 100.0%
=========== =====
</TABLE>
- ---------------
(1) The amount set forth with respect to each purpose represents the Company's
current estimate of the approximate amount of the net proceeds that will be
used for such purpose. However, the Company reserves the right to change the
amount of such net proceeds that will be used for any purpose to the extent
that management determines that such change is advisable. Consequently,
management of the Company will have broad discretion in determining the
manner in which the net proceeds of the Offering are applied.
(2) The notes issued in connection with the Bridge Financing (the "Bridge
Notes") are in the aggregate principal amount of $1.1 million, bear interest
at the rate of 12% per annum, and are payable upon the earlier of the
closing of the Offering or June 30, 1997. The net proceeds from the sale of
the Bridge Notes were used for the development of additional Integrated
Medical Centers, for the expenses of this Offering, and for working capital
and general corporate purposes. Through February 14, 1997, the amount of
accrued interest to be repaid is approximately $71,000. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(3) The Company intends to develop approximately 63 additional Integrated
Medical Centers (including the 59 for which it had agreements with
chiropractors as of January 31, 1997) within the 12 months after the date of
this Prospectus, of which one is expected to be developed in connection with
a strategic alliance. The average cost to the Company to develop an
Integrated Medical Center not connected with a strategic alliance is
approximately $30,000. This cost has consisted of approximately $10,000 for
the purchase of computer software, legal fees, professional credentialing,
training, an administrative starter kit, and travel and approximately
$20,000 (out of a possible $40,000) in the form of a loan. The loan may be
used for items such as professional salaries, computer hardware, signage,
and insurance. The Company believes that the average cost to the Company to
develop an Integrated Medical Center in connection with a strategic alliance
will be approximately $150,000. These funds are expected to be used for
leasehold improvements, equipment, professional salaries, information
systems, and working capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
(4) Consists of accrued payroll, accrued expenses, convertible note payable in
the principal amount of $25,000 (plus accrued interest), and certain other
indebtedness of the Company.
(5) The remaining portion of the net proceeds allocated to working capital will
be used by the Company to fund operations as required including amounts
required to pay officers' salaries, professional fees, office-related
expenses, costs associated with upgrading its management information system,
and other corporate expenses. The additional net proceeds received from the
exercise of the Overallotment Option, if any, will be used for working
capital and general corporate purposes.
The Company anticipates, based on current plans and assumptions relating to
its operations, that the net proceeds of the Offering, together with net cash
from operations, should be sufficient to satisfy the Company's cash requirements
for at least the 12 months after the date of this Prospectus. Proceeds not
immediately required for the purposes described above will be invested in
short-term, investment grade, interest-bearing government obligations.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth as of September 30, 1996 the capitalization
of the Company (i) on an actual basis and (ii) as adjusted to give effect to (a)
the sale by the Company of the Securities offered hereby (at an assumed initial
public offering price of $6.00 per Share and $.10 per Warrant) and the initial
application of the estimated net proceeds therefrom, and (b) the conversion of
1,350 shares of Series A Preferred Stock into 145,800 shares of Common Stock.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of Securities." This table should be read in conjunction with the
Consolidated Financial Statements and the notes thereto which are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------
ACTUAL AS ADJUSTED(1)
--------- ---------------
<S> <C> <C>
Short-term debt:
Note payable................................................... $ 730 $ 730
Bridge Notes................................................... 1,096,770 0
--------- ---------
Total short-term debt.................................. $1,097,500 $ 730
========= =========
Long-term debt:
Notes payable.................................................. $ 25,000 $ 0
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value per share; 2,000,000 shares
authorized of which 1,500 are designated Series A, 12%
Cumulative Convertible Preferred Stock; 1,350 shares issued and
outstanding, actual; 0 shares issued and outstanding, as
adjusted....................................................... $ 14 $ 0
Common stock, $.0001665 par value; 10,000,000 shares
authorized; 714,967 shares issued and outstanding, actual;
1,860,767 shares issued and outstanding, as adjusted........... 119 310
Additional capital............................................. 149,370 4,927,283
Accumulated deficit............................................ (718,239) (718,239)
--------- ---------
Total stockholders' equity (deficit)............................. $(568,736) $4,209,304
--------- ---------
Total capitalization............................................. $(543,736) $4,209,304
========= =========
</TABLE>
- ---------------
(1) Does not include (i) 351,166 shares issuable upon exercise of outstanding
options under the Company's 1994 Stock Option Plan and 11,167 shares
reserved for issuance upon exercise of options available for grant under
such plan, of which options for 11,000 shares will be granted to a
consultant to the Company upon consummation of the Offering; (ii) 200,000
shares reserved for issuance upon the exercise of options that may be
granted under the Company's 1996 Stock Option Plan, of which 24,000 will be
granted after completion of the Offering; (iii) 100,000 shares reserved for
issuance upon exercise of options that may be granted under the Company's
1996 Restricted Stock Option Plan for Health Care Professionals; (iv) 13,243
shares issuable upon exercise of certain outstanding warrants that the
Company issued in connection with a financing in November 1995; (v) up to
183,333 shares (assuming an initial public offering price of $6.00 per
share) issuable upon exercise of the Bridge Warrants; and (vi) up to 3,333
shares (assuming an initial public offering price of $6.00 per share)
issuable upon exercise of the Broker-Dealer Bridge Warrants. See
"Management -- Stock Option Plans" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
21
<PAGE> 23
DIVIDEND POLICY
The Company has never declared or paid dividends, and does not intend to
pay any dividends in the foreseeable future on shares of Common Stock. Earnings
of the Company, if any, are expected to be retained for use in expanding the
Company's business. The payment of dividends is within the discretion of the
Board of Directors of the Company and will depend upon the Company's earnings,
if any, capital requirements, financial condition and such other factors as are
considered to be relevant by the Board of Directors from time to time.
DILUTION
At September 30, 1996, the Company had a negative net tangible book value
of approximately $572,696 or $0.80 per share of Common Stock. Negative net
tangible book value per share is equal to the Company's total tangible assets
less its total liabilities and minority interest, divided by the total number of
shares of its Common Stock outstanding. After giving effect to (i) the
conversion of the 1,350 shares of Series A Preferred Stock into 145,800 shares
of Common Stock and (ii) the sale of the shares of Common Stock and Warrants
offered hereby at an assumed initial public offering price of $6.00 per share
and $.10 per Warrant and the initial application of the net proceeds therefrom
(after deducting estimated underwriting discounts and other expenses of the
Offering), the pro forma net tangible book value of the Company at September 30,
1996 would have been $4,209,304 or $2.26 per share of Common Stock, representing
an immediate dilution of $3.74 per share (or approximately 62.3%) to the new
investors, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................... $6.00
Negative net tangible book value per share prior to this Offering............. $(0.80)
Increase per share attributable to new investors and the conversion of the
Series A Preferred Stock.................................................... 3.06
------
Pro forma net tangible book value per share after this Offering............... 2.26
-----
Dilution per share to new investors........................................... $3.74
=====
</TABLE>
In the event the Over-allotment Option is exercised in full, the pro forma
net tangible book value as of September 30, 1996 would be $5,005,354, or $2.49
per share of Common Stock, which would result in immediate dilution in net
tangible book value to new investors of approximately $3.51 per share.
22
<PAGE> 24
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased from the Company, the total
consideration paid, and the average price per share paid by existing
stockholders and by new investors purchasing shares sold by the Company in the
Offering.
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
-------------------- --------------------- ---------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)......... 860,767 46.3% $ 138,461 2.3% $0.16
New Investors.................... 1,000,000 53.7% $6,000,000(2) 97.7% $6.00(2)
-------- ----- -------- -----
Total............................ 1,860,767 100.0% $6,138,461 100.0%
======== ===== ======== =====
</TABLE>
- ---------------
(1) Gives pro forma effect to the conversion of 1,350 shares of Series A
Preferred Stock into 145,800 shares of Common Stock upon consummation of the
Offering; and does not include (i) 351,166 shares issuable upon exercise of
outstanding options under the Company's 1994 Stock Option Plan and 11,167
shares reserved for issuance upon exercise of options available for grant
under such plan, of which options for 11,000 shares will be granted to a
consultant to the Company upon consummation of the Offering; (ii) 200,000
shares reserved for issuance upon the exercise of options that may be
granted under the Company's 1996 Stock Option Plan, of which 24,000 will be
granted after completion of the Offering; (iii) 100,000 shares reserved for
issuance upon exercise of options that may be granted under the Company's
1996 Restricted Stock Option Plan for Health Care Professionals; (iv) 13,243
shares issuable upon exercise of certain outstanding warrants that the
Company issued in connection with a financing in November 1995; (v) up to
183,333 shares (assuming an initial public offering price of $6.00 per
share) issuable upon exercise of the Bridge Warrants; and (vi) up to 3,333
shares (assuming an initial public offering price of $6.00 per share)
issuable upon exercise of the Broker-Dealer Bridge Warrants. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Management -- Stock Option
Plans" and "Description of Securities."
(2) Attributes no value to the Warrants.
23
<PAGE> 25
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
each of the periods indicated. The selected financial data of the Company for
the period November 17, 1994 (inception) to December 31, 1994 and the year ended
December 31, 1995 are derived from the Consolidated Financial Statements of the
Company which have been audited by Ernst & Young LLP, independent auditors. The
selected financial data for the nine-month periods ended September 30, 1995 and
1996 and as of September 30, 1996 were derived from the unaudited consolidated
financial statements of the Company. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. All of the information set forth below
should be read in conjunction with the Consolidated Financial Statements of the
Company and related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NOVEMBER 17,
1994 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1995 1996
------------- ------------ -------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue:
Patient revenue.......................... $ -- $ 22,114 $ 8,618 $ 869,122
Management services income............... -- -- -- 4,160
------- --------- -------- ---------
Total revenue.............................. -- 22,114 8,618 873,282
======= ========= ======== =========
Operating expenses:
Salary and consulting costs.............. 1,400 93,131 59,283 249,293
Management fees.......................... -- 29,669 4,146 438,948
Rent..................................... -- 4,501 400 160,988
Advertising and marketing................ -- 25,821 11,909 36,828
General and administrative............... -- 253,024 28,818 607,770
Depreciation and amortization............ -- 6,490 1,623 24,598
------- --------- -------- ---------
Total operating expenses................... 1,400 412,636 106,179 1,518,425
------- --------- -------- ---------
Operating deficit.......................... (1,400) (390,522) (97,561) (645,143)
Net interest income (expense).............. -- 176 483 (19,566)
Minority interest.......................... -- 194,457 2,927 143,759
------- --------- -------- ---------
Net loss................................... $(1,400) $ (195,889) $(94,151) $(520,950)
======= ========= ======== =========
Pro forma net loss per share(1)............ $ (0.26) $ (0.43)
========= =========
Pro forma weighted average number of common
and common equivalent shares
outstanding(1)........................... 753,924 1,225,633
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------
ACTUAL AS ADJUSTED(2)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................................ $(434,031) $4,297,009
Total assets..................................................... 1,549,912 4,944,913
Total liabilities................................................ 1,791,855 430,815
Minority interest................................................ 326,793 326,793
Stockholders' equity (deficit)................................... (568,736) 4,209,304
</TABLE>
- ---------------
(1) See Note 10 to the Consolidated Financial Statements.
(2) Adjusted to give effect to the sale of the Securities offered hereby (at an
assumed initial public offering price of $6.00 per Share and $.10 per
Warrant) and the initial application of the net proceeds therefrom. See "Use
of Proceeds."
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was established in November 1994. From its inception until
March 1995 the Company raised funds privately and developed the corporate
infrastructure, protocols, policies, and procedures required to commence its
plan to develop multi-disciplinary medical clinics.
In March 1995, the Company began implementing the initial stages of its
business plan. The Company formed Complete Wellness Centers, L.L.C. ("CWC LLC"),
a Delaware limited liability company, as a vehicle for raising capital needed to
open Integrated Medical Centers. The Company is the managing member of CWC LLC
and has a 1% equity interest. See "Certain Transactions." The Company has
obtained irrevocable and permanent voting proxies from the holders of a majority
of ownership interests in CWC LLC. The Company consolidates the financial
statements of CWC LLC in its financial statements.
Pursuant to an agreement entered into in July 1995, CWC LLC purchased
selected assets of a chiropractic practice for the purpose of establishing the
Company's first Integrated Medical Center in conjunction with a newly formed,
wholly-owned subsidiary of CWC LLC, Complete Wellness Center of Fredericksburg,
Inc. ("CWC Fredericksburg"). Operations began at CWC Fredericksburg on September
1, 1995. Revenue earned at CWC Fredericksburg through December 31, 1995 was
$22,114 and expenses for that period amounted to $44,232, net of interest income
of $86, resulting in a loss from operations of $22,118.
The Company began pursuing its primary development strategy in early 1996.
This strategy involves entering into an agreement with one or more chiropractors
and their existing chiropractic practices and Admincorps. The chiropractor or
existing chiropractic practice leases the office space and equipment utilized by
the existing chiropractic practice to the Company. The chiropractor then
incorporates the Admincorp, with which task the Company now assists, and causes
the Admincorp to ratify the agreement. In general, the Admincorp assumes
responsibility for the daily management functions of the Integrated Medical
Centers. The Company agrees to furnish the Admincorp certain services, such as
assistance with advertising, other practice development activities, and medical
doctor recruitment, to help the Admincorp perform such daily management
functions. The Company then forms the Medcorp and enters into a long-term
management agreement with the Medcorp to provide certain administrative and
management services. In addition, the Company subleases the existing
chiropractic practice's office space and equipment to the Medcorp. The Medcorp
employs the Affiliated Chiropractor(s) and one or more medical doctors.
Depending on the needs of the patient base, the Medcorp may also employ one or
more other traditional or alternative health care providers.
The Company charges the Medcorp management fees for the goods and services
it provides the Medcorp. Such fees are generally based on a periodic
determination of the fair market value of such goods and services. The Company
also subleases the office space and equipment to the Medcorp for estimated fair
market value. With respect to Integrated Medical Centers that serve patients
covered by any federal or state funded health care program and certain other
Integrated Medical Centers, the management fees are pre-set for one year for
flat dollar amounts that represent the fair market value of the goods and
services the Company directly furnishes the Medcorp and of the services the
Company indirectly furnishes the Medcorp through its arrangement with the
Admincorp. The Admincorp charges the Company a monthly fee equal to the sum of
the management fees and rent that the Company charges the Medcorp, less a
specified fixed amount, however, with respect to certain Integrated Medical
Centers. In general, the Company charges the Admincorp a collective marketing
fee of $200 per month beginning six months after the Integration Date and a
monthly integration fee that is, depending principally on the size of the
practice, 9% to 20% (if the initial term of the agreement is five years) or 10%
to 15% (if the initial term of the agreement is ten years) of the sum of (i) the
management fee and rent that the Company charges the Medcorp and (ii) the
Medcorp's permissible expenses, until the sum reaches $300,000 to $500,000 in
any one year, and 10% of the sum for the remainder of that year. With respect to
Integrated Medical Centers that serve patients covered by federal or state
funded health care programs and certain other Integrated Medical Centers, the
integration fees are instead for flat dollar amounts equal to estimated fair
market value, subject to a 15% cap. The Company also may charge certain
Admincorps an operations fee of $250 per month, subject in certain cases to
delayed or contingent
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effectiveness. If the agreement with the Admincorp is terminated, the Admincorp
is generally entitled to receive from the Company 80% of the accounts receivable
then due the Company from the Medcorp, less the balance then due the Company
from the Admincorp, subject to the Medcorp collecting on its accounts
receivable.
The Company's agreements with Affiliated Chiropractors and entities
controlled by them relating to the operation and management of the Integrated
Medical Centers are generally for initial terms of five or ten years. They may
be renewed in five year increments, up to four times, by mutual consent. An
Affiliated Chiropractor may terminate such an agreement if the Company
materially breaches it and, if the breach is correctable, the Company fails to
cure the breach within ten days after written notification. A number of the
agreements, including agreements with respect to at least four of the seven
existing Integrated Medical Centers, are also terminable by the Affiliated
Chiropractors if, for example, the combined revenues of the Integrated Medical
Center and existing chiropractic practice during the first year after a start-up
phase do not exceed 110% of the revenues of the Affiliated Chiropractor's
existing chiropractic practice for the one year preceding the date the
Affiliated Chiropractor agreed in writing to develop the Integrated Medical
Center in conjunction with the Company. The start-up phase is generally three
months following the Integration Date. The loss of a substantial number of such
agreements, or loss of a substantial number of Affiliated Chiropractors, would
have a material adverse effect on the Company. See "Business -- Agreements With
Affiliated Chiropractors and Other Licensed Practitioners."
The Company currently plans to use this model for Integrated Medical
Centers to be developed pursuant to its expansion strategy, including those in
connection with strategic alliances with health clubs, corporations, government
offices, or other organizations. In the case of a strategic alliance, however,
office space for the Integrated Medical Center would be leased or licensed from
the other party to the strategic alliance rather than from the Affiliated
Chiropractor or his existing chiropractic practice, and the equipment would be
purchased. In this regard, the Company entered into a master license agreement
with Bally Total Fitness Corporation in September 1996 to develop Integrated
Medical Centers within selected Bally Total Fitness Corporation health clubs
through the United States. The Company initially plans to develop an Integrated
Medical Center at a Bally Total Fitness Corporation in White Marsh, Maryland.
See "Business -- Expansion Strategy."
As of January 31, 1997, the Company was managing seven Integrated Medical
Centers. The Company ceased operating one Integrated Medical Center and plans to
dissolve the Medcorp after having terminated its agreement with the Affiliated
Chiropractor and Admincorp for material breach in late January, 1997. The
Company anticipates no material adverse financial effect as a result of such
termination. Of the remaining seven Integrated Medical Centers, six were
developed through CWC LLC prior to July 1996. In the future, the Company does
not plan to open any additional Integrated Medical Centers owned directly or
indirectly by CWC LLC, nor does it plan for CWC LLC to raise any additional
capital. See "Certain Transactions."
The Company recognizes all revenue and expenses of the Medcorps formed as
wholly-owned subsidiaries of the Company or CWC LLC. The financial results of
the Medcorp organized as a physician-owned professional corporation are not
consolidated in the Company's financial statements. Rather, the Company
recognizes only the fees derived by the Company from the Medcorp.
The Company integrated many of its existing Integrated Medical Centers
within a few weeks after the Affiliated Chiropractors entered into agreements
with the Company to develop such Integrated Medical Centers. The Company is now
taking approximately four months to integrate clinics due to the substantial
number of agreements it has pending with chiropractors to develop Integrated
Medical Centers.
The cost to the Company to develop an Integrated Medical Center not
connected with a strategic alliance has averaged $30,000. This cost has
consisted of approximately $10,000 for the purchase of such things as computer
software, legal fees, professional credentialing, training, an administrative
starter kit and travel, and approximately $20,000 (out of a possible $40,000) in
the form of a loan. The loan may be used for items such as professional
salaries, computer hardware, signage and insurance. The loans are evidenced by
promissory notes, bear interest at the rate of 10% per annum, are secured by the
assets of the Medcorps, are guaranteed by the Affiliated Chiropractors pursuant
to a separate guaranty, and are payable within five years. The Company
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believes that the average cost to the Company to develop an Integrated Medical
Center in connection with a strategic alliance will be approximately $150,000.
These funds are expected to be used for leasehold improvements, equipment,
professional salaries, information systems and working capital.
The Company may from time to time advance additional funds to the Medcorps
to fund working capital requirements, although it has not done so to date. If
the Company does make such an advance, the advance will bear interest (the
current rate being 10% per annum), will be secured by such collateral as the
Company deems appropriate, and will be repayable before the expiration of the
initial term of the management agreement with the Affiliated Chiropractor and
the Admincorp.
The Company intends to develop approximately 63 additional Integrated
Medical Centers (including the 59 for which it has agreements with chiropractors
as of January 31, 1997) within 12 months after the date of this Prospectus, of
which one is expected to be developed in connection with a strategic alliance.
However, there can be no assurance that the Company will develop the Integrated
Medical Centers with respect to which it had agreements with chiropractors as of
January 31, 1997, will be able to identify and recruit a sufficient number of
chiropractors, or will have access to a sufficient number of locations in
connection with a strategic alliance, or that the average cost to the Company to
develop Integrated Medical Centers will not be greater than those discussed
above.
The Integrated Medical Centers developed prior to the date of this
Prospectus were financed by the issuance of the Company's notes, shares of
Common Stock, and shares of preferred stock, and by the sale of membership
interests in CWC LLC. The Integrated Medical Centers intended to be developed
within 12 months after the date of this Prospectus are expected to be financed
by a portion of the net proceeds of the Offering. See "Use of Proceeds."
RESULTS OF OPERATIONS
Nine months ended September 30, 1996 compared to nine months ended September 30,
1995
Revenue. During the nine months ended September 30, 1996 and September 30,
1995, the Company had total revenue of $873,282 and $8,618, respectively. At
September 30, 1995, the Company managed only one Integrated Medical Center,
which began operations in September 1995. The increase of $864,664 was due
primarily to the addition of seven Integrated Medical Centers after September
1995. Two Integrated Medical Centers accounted for $655,228 of the $873,282 of
total revenue at September 30, 1996.
Salary and Consulting Costs. During the nine months ended September 30,
1996 and September 30, 1995, the Company incurred salary and consulting costs of
$249,293 and $59,283, respectively. The increase of $190,010 was due to an
increase of $171,787 in costs resulting from the hiring of additional employees,
an increase of $4,987 in compensation expense resulting from the grant of stock
options the fair market value of which exceeded their exercise price, and an
increase of $13,236 resulting from consulting fees in connection with the
development of corporate infrastructure and the operation of Integrated Medical
Centers.
Management Fees. During the nine months ended September 30, 1996 and
September 30, 1995, the Company incurred management fees of $438,948 and $4,146,
respectively. These are fees that are paid to the Affiliated Chiropractors'
management companies for managing the day-to-day operations of the Integrated
Medical Centers. The fees are paid when the accounts receivable of the Medcorps
are collected by the Medcorps. The increase of $434,802 was due primarily to the
addition of seven Integrated Medical Centers after September 1995.
Rent. During the nine months ended September 30, 1996 and September 30,
1995, the Company incurred rent expenses of $160,988 and $400, respectively.
Rent consists of amounts paid for office space and certain equipment by the
Company and the Medcorps. The increase of $160,588 was due primarily to the
addition of seven Integrated Medical Centers after September 1995.
Advertising and Marketing. During the nine months ended September 30, 1996
and September 30, 1995, the Company incurred advertising and marketing expenses
of $36,828 and $11,909, respectively. The
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increase of $24,919 was attributable primarily to additional national
advertising for marketing and recruitment purposes.
General and Administrative. During the nine months ended September 30,
1996 and September 30, 1995, the Company incurred general and administrative
expenses of $607,770 and $28,818, respectively. The increase of $578,952 was due
primarily to the addition of seven Integrated Medical Centers after September
1995 and consists of an increase of (i) $95,320 in accounting costs, (ii)
$73,963 in legal costs, (iii) $12,790 in employment agency fees, (iv) $311,879
in various costs, such as bad debt reserves, travel and entertainment,
telephone, and insurance, and (v) $85,000 in costs attributable to the Bridge
Financing and the Offering.
Depreciation and Amortization. During the nine months ended September 30,
1996 and September 30, 1995, the Company incurred depreciation and amortization
expense of $24,598 and $1,623, respectively. The increase of $22,975 resulted
from the addition of fixed assets, primarily computer equipment, which tend to
have depreciable lives of five years or less.
Net Interest Income (Expense). During the nine months ended September 30,
1996 and September 30, 1995, the Company had net interest expense of $19,566 and
net interest income of $483, respectively. The $20,049 increase in net interest
expense was attributable primarily to an increase of $21,700 in interest payable
on notes issued in connection with the Bridge Financing, an increase of $2,516
in interest payable on a note issued in connection with the acquisition of
assets for use at the first Integrated Medical Center developed by the Company,
and offset by an increase of $4,167 in interest income.
Year ended December 31, 1995 compared to year ended December 31, 1994
During the year ended December 31, 1994 the Company incurred a net loss of
$1,400. No revenues were generated during 1994. The Company was not formed until
November 1994, so a comparison with the year ended December 31, 1995 is not
meaningful. The Company began operations in January 1995 and opened its first
Integrated Medical Center in September 1995. During the year ended December 31,
1995 the Company had total revenue of $22,114. This revenue consisted of patient
revenue from one Integrated Medical Center, which began operations in September
1995. During the year ended December 31, 1995 the Company incurred salary and
consulting expenses of $93,131, management fees of $29,669, rent expense of
$4,501, advertising and marketing expenses of $25,821, general and
administrative expenses of $253,024, and depreciation and amortization expense
of $6,490. This resulted in a net loss of $195,889 after taking $194,457 of
minority interest into consideration.
SEASONALITY
The Company believes that the patient volumes at its Integrated Medical
Centers are not significantly affected by seasonality.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses, negative cash flow, a deficit in
working capital, and an accumulated deficit each month since its inception. For
the year ended December 31, 1995 and for the nine months ended September 30,
1996 the Company had incurred a net loss of $195,889 and of $520,950,
respectively. At September 30, 1996, the Company had a deficit in working
capital of $434,041, and an accumulated deficit of $718,239. Net cash used in
operations for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 was $252,114 and $704,652, respectively. Negative cash flow
for each period was attributable primarily to net losses in each of the periods
and increases in accounts receivable net of accounts payable and other current
liabilities. For the year ended December 31, 1995 and for the nine months ended
September 30, 1996, the Company used $38,814 and $184,362, respectively, for
purchases of equipment.
From November 1994 to September 1996 development costs, capital
expenditures and working capital needs of the Company have been financed through
the issuance of notes, shares of Common Stock, and shares of preferred stock of
the Company, and the sale of membership interests in CWC LLC.
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During 1995 the Company issued 1,350 shares of Series A Preferred Stock for
$100 per share. Each share of Series A Preferred Stock is convertible into 108
shares (an aggregate of 145,800 shares) of Common Stock upon the closing of a
public offering. The Company raised $135,000 as a result of this issuance. The
proceeds were used for working capital and general corporate purposes.
In November 1995, the Company issued $39,730 in aggregate principal amount
of promissory notes and warrants to purchase an aggregate of 13,243 shares of
Common Stock at an exercise price of $.003 per share. The warrants are
exercisable for a period of five years commencing November 1996. The notes have
been repaid or converted into membership interests in CWC LLC.
During 1995 and 1996, CWC LLC sold an aggregate of $665,000 of Class A
Units. The Company acquired 1% of the membership interests of CWC LLC. The net
equity of the other investors accounts for the minority interest shown in the
Company's consolidated financial statements. See "Certain Transactions."
In connection with the sale of the Class A Units, certain state
notification of sale requirements were not complied with on a timely basis. CWC
LLC offered to rescind the sale of membership interests to affected investors,
and all such investors rejected the offer. Exemption from registration under the
Securities Act of 1933, as amended, is claimed pursuant to Section 4(2) thereof.
In connection with the acquisition of assets used to establish CWC
Fredericksburg, CWC LLC issued a note in the principal amount of $25,000 that
bears interest at the rate of 8% per annum, is payable on July 17, 2000, is
secured by the assets of CWC Fredericksburg, and, at the option of the holder,
is convertible into membership interests of CWC LLC in certain circumstances.
The Company intends to use a portion of the net proceeds of the Offering to
repay the note plus accrued interest. See "Use of Proceeds."
In August 1996, the Company completed the Bridge Financing pursuant to
which it issued (i) an aggregate of $1.1 million principal amount of secured
promissory notes (the "Bridge Notes") that bear interest at the rate of 12% per
annum, are payable upon the earlier of the closing of the Offering or June 30,
1997, and are secured by substantially all of the Company's assets and (ii)
warrants entitling the holders to purchase that number of shares of Common Stock
determined by dividing the principal amount of the Bridge Notes by the price per
share of Common Stock offered hereby (the "Bridge Warrants"). The Company has
agreed that the Bridge Warrants and the shares of Common Stock issuable upon
exercise of the Bridge Warrants would be included in the registration statement
of which this Prospectus forms a part. Assuming a price per Share of $6.00 in
this Offering, a total of 183,333 shares of Common Stock will be issuable upon
exercise of the Bridge Warrants at an exercise price of $.003 per share. The
Company intends to use a portion of the proceeds of this Offering to repay the
entire principal amount of and accrued interest on the Bridge Notes. See "Use of
Proceeds." Proceeds of the Bridge Financing were used for the development of
additional Integrated Medical Centers, working capital, and general corporate
purposes, and certain costs attributable to the Offering. The Company also
issued a warrant to purchase up to 3,333 shares of Common Stock (assuming an
initial public offering price of $6.00 per share) to a broker-dealer who acted
as a placement agent for a portion of the Bridge Financing. The fair value of
the lender and broker/dealer warrants, $5,920, was recognized as a discount on
the loan of which $1,960 was amortized through September 30, 1996.
The Company intends to develop approximately 63 additional Integrated
Medical Centers (including the 59 it had agreements with chiropractors to
develop as of January 31, 1997) within 12 months after the date of this
Prospectus, including one in connection with a strategic alliance. The average
cost to the Company to develop an Integrated Medical Center not connected with a
strategic alliance is approximately $30,000. The Company believes the average
cost to the Company to develop an Integrated Medical Center in connection with a
strategic alliance will be approximately $150,000. There can be no assurance,
however, that the Company will develop the Integrated Medical Centers with
respect to which it had agreements with chiropractors as of January 31, 1997,
will be able to identify and recruit a sufficient number of chiropractors and
their existing chiropractic practices, that it will have access to a sufficient
number of locations in connection with a strategic alliance, or that the average
costs to the Company to develop Integrated Medical Centers will not be greater
than those mentioned above. The Company intends to finance its expansion
strategy with a portion of the net proceeds of this Offering. In addition, with
a portion of the net proceeds of this Offering, the Company intends to upgrade
its management information system. Management believes
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that the net proceeds of this Offering together with net cash from operations
will be sufficient to finance the Company's activities for at least 12 months
following the date of this Prospectus; however, there can be no assurance that
such net proceeds and cash from operations will be sufficient to finance the
Company's activities for such period. See "Risk Factors -- Possible Need for
Additional Financing," "Use of Proceeds," and "-- General."
After the completion of this Offering, the Company intends to lease
approximately 3,000 to 5,000 square feet of space for its executive offices in
Montgomery County, Maryland. The Company has received a low interest rate loan
commitment in the amount of $45,000 from the Montgomery County Economic
Development Fund in order to defray its relocation costs. The loan is to bear
interest at the rate of 7% per annum with a ten year amortization, with payment
deferred until December 31, 1997. The loan is to be secured by the Company's
capital assets. The loan will be converted to a grant if the Company generates
more than 50 jobs and establishes a new Integrated Medical Center in Montgomery
County by the end of 1997. The loan commitment expires on March 31, 1997. See
"Business -- Properties."
NET OPERATING LOSSES
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $643,000 which expire in 2010. A valuation allowance
of approximately $288,000 has been established to offset any benefit from the
net operating loss carryforward, as it cannot be determined when or if the
Company will be able to utilize the net operating losses. These carryforwards
may be significantly limited under the Internal Revenue Code of 1986, as
amended, as a result of ownership changes resulting from this Offering and other
equity offerings of the Company.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation, which provides an alternative
to APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for stock-based compensation issued to employees. The statement allows for a
fair value based method of accounting for employee stock options and similar
equity instruments. However, for companies that continue to account for
stock-based compensation arrangements under APB Opinion No. 25, Statement No.
123 requires disclosure of the pro forma effect on net income and earnings per
share of its fair value based accounting for those arrangements. These
disclosure requirements are effective for fiscal years beginning after December
15, 1995, or upon initial adoption of the statement, if earlier. The Company has
elected to continue to account for stock-based compensation arrangements under
APB Opinion No. 25, and accordingly recognizes compensation expense for the
stock option grants as the difference between the fair value and the exercise
price at the grant date but will provide the required pro forma disclosures in
the December 31, 1996 consolidated financial statements.
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BUSINESS
GENERAL
The Company develops multi-disciplinary medical centers ("Integrated
Medical Centers") and furnishes certain support services to such facilities. The
Integrated Medical Centers combine, in one practice, at the same location,
traditional health care providers, such as physicians and physical therapists,
and alternative health care providers, such as chiropractors, acupuncturists and
massage therapists. The Company's objective is to become a nationally recognized
developer and manager of Integrated Medical Centers. At January 31, 1997, the
Company was managing 7 Integrated Medical Centers in the states of Florida,
Virginia and Illinois and had 48 agreements with chiropractors to develop and
manage 59 Integrated Medical Centers in 11 states.
The Company develops Integrated Medical Centers generally through
affiliations with chiropractors (the "Affiliated Chiropractors") and their
existing chiropractic practices. Management endeavors to enter into an agreement
with a chiropractor who has an existing chiropractic practice in a convenient
location and who is an individual who has demonstrated the entrepreneurial
skills to build a practice. The existing practice is used as a base for the
development of an Integrated Medical Center. Typically, the Company establishes
a new Integrated Medical Center by forming a medical corporation ("Medcorp"),
which is a general business corporation wholly-owned by the Company or a
professional corporation that is physician-owned, depending upon applicable
state law. In some cases, one Medcorp encompasses two or more Integrated Medical
Centers. The Affiliated Chiropractor establishes an Admincorp which contracts
with the Company to provide day-to-day management of the Integrated Medical
Center.
The Company itself is not authorized or qualified to engage in any activity
which may be construed or be deemed to constitute the practice of medicine but
is an independent supplier of non-medical services only. The physicians and
chiropractors are responsible for all aspects of the practice of medicine and
chiropractic care and the delivery of medical and chiropractic services (subject
to certain business guidelines determined in conjunction with the Company.)
The total expenditures associated with the use of alternative medicine in
1990 amounted to approximately $13.7 billion, according to a report published by
the New England Journal of Medicine in 1993. In October 1996, The Wall Street
Journal reported that the alternative medical services market has grown to
approximately $50 billion. Management believes that the growing popularity and
acceptance of alternative medicine has contributed to the Company's growth. By
integrating alternative medicine with traditional medicine, the Company is
providing a choice for the consumer in one location as well as the opportunity
to choose complementary treatments overseen by a medical doctor, which the
Company believes alleviates some of the concerns of patients and third party
payors.
The Company's operating strategy is to (i) provide consumers the
opportunity to obtain, and the convenience of obtaining, under the supervision
of a medical doctor, complementary traditional and alternative medical
treatments in one location, (ii) facilitate the efficient provision of high
quality patient care through the use of credentialing standards and standardized
protocols, (iii) establish Integrated Medical Centers in local and regional
clusters for purposes of obtaining managed care contracts, (iv) assist in
marketing the Integrated Medical Centers regionally and nationally on a
coordinated basis and furnish them management, marketing, financing and other
advice and support, and (v) achieve operating efficiencies and economies of
scale through the implementation of an upgraded management information system,
the rotation of health care providers among Integrated Medical Centers,
increased purchasing power with suppliers, and standardized protocols,
administrative systems, and procedures.
The Company's expansion strategy is to develop additional Integrated
Medical Centers in local or regional groups or clusters. The Company plans to
continue to develop Integrated Medical Centers through affiliations with
chiropractors and their existing chiropractic practices and intends to begin
development of Integrated Medical Centers in connection with strategic alliances
with health clubs, corporations, government offices, or other organizations, in
which cases the Integrated Medical Centers would be developed in locations such
as a health club or office building. The Company regularly explores new
opportunities related to integrated medical services and intends to negotiate
arrangements with or acquire businesses that provide
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services ancillary to the provision of integrated medical services, such as
services relating to medical diagnostics or billing systems. As of the date of
this Prospectus, the Company has no understandings, commitments, or agreements
with respect to any acquisitions.
The Company itself is not authorized or qualified to engage in any activity
which may be construed or be deemed to constitute the practice of medicine but
is an independent supplier of non-medical services only. The physicians and
chiropractors are responsible for all aspects of the practice of medicine and
chiropractic and the delivery of medical and chiropractic services (subject to
certain business guidelines determined in conjunction with the Company),
including but not limited to diagnosis, treatment, referrals, quality assurance,
management, and therapy. In connection with any managed care contracts it may
arrange on behalf of the Integrated Medical Centers, the Company will need to
manage the Integrated Medical Centers' utilization of medical services to
patients. If under such contracts, the Integrated Medical Centers accept
responsibility for the treatment of their patients by specialists or at
hospitals, the Company will also manage the practitioners' referral patterns
with respect to specialty physician and hospital services. The Company will only
do so, however, for payment purposes and will not, through such process,
interfere with the professional judgment of a medical practitioner or prohibit a
practitioner from providing any medical services.
INDUSTRY BACKGROUND
The integration of traditional and alternative medicine is becoming more
popular in the United States. In 1992, Congress required the National Institutes
of Health to establish The Office of Alternative Medicine, the purpose of which
was and remains to facilitate the evaluation of alternative medicine treatments
to determine their effectiveness and help integrate them into traditional
medicine. More recently, the Trends Research Institute of Rhinebeck, New York
has identified the integration of traditional and alternative medicine as one of
the top ten trends of the coming decade.
This trend is being reflected by health care insurers and legislative
initiatives. A U.S. health insurance company offered coverage for alternative
medical treatment for the first time in 1992, and the Company believes that
presently at least 15 insurers cover various aspects of alternative medicine. On
January 1, 1996, Washington became the first state to require health insurers to
pay for alternative ways of treating illnesses. In addition, seven states have
passed medical access laws that prevent state medical boards from disciplining a
doctor solely because a treatment is considered unacceptable by the mainstream
medical community and, in 1995, Congress held hearings on a bill that would
allow a licensed health care practitioner to provide any method of treatment
requested by a patient, whether or not the treatment had been approved by the
U.S. Food and Drug Administration.
The Company believes that integrated medicine draws upon the strengths of
each discipline. For example, some of the strengths of traditional medicine are
its sophisticated ability to diagnose disease and its array of powerful drugs
and surgical procedures to treat emergency conditions and advanced stages of
illness. Alternative medicine emphasizes wellness and prevention and addresses
illness by identifying and trying to remove the causes, often found in the
patient's lifestyle habits. In addition, the Company believes that alternative
medicine is becoming more widely accepted by the medical community and the
insurance industry as a complement to traditional medicine because of the
growing realization of the quality of care given and its cost-effectiveness. The
Company has chosen chiropractic as the alternative medicine discipline that
serves as the base from which Integrated Medical Centers are developed. The
Company believes that chiropractic care is the largest component of alternative
medicine expenditures in the United States.
The Company has selected health clubs as the initial type of organization
with which to develop Integrated Medical Centers in connection with strategic
alliances. The Company believes that members of health clubs tend to be
interested in fitness and wellness, both of which are central themes of
alternative medicine. According to the International Health, Racquet and Sports
Club Association, there were approximately 13,300 health club facilities in the
United States in 1996.
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OPERATING STRATEGY
The objective of the Company's operating strategy is to facilitate the
provision of a high level of traditional and alternative medical care to
patients in a convenient, cost-effective manner. Key elements of the Company's
operating strategy are:
One Location. The Company seeks to provide consumers the opportunity to
obtain, and the convenience of obtaining, under the supervision of a medical
doctor, complementary traditional and alternative medical treatments in one
location. The Company believes that alternative medicine is growing in
popularity, and that supervision of treatment by a medical doctor may alleviate
some patient and third party payor concerns.
Furnish High Quality Care Efficiently. All health care services at an
Integrated Medical Center are provided by health care practitioners under the
supervision of a licensed medical doctor. The Company seeks qualified and
reputable medical doctors. The Company further seeks to facilitate the efficient
provision of high quality care through the use of credentialing and standardized
protocols. Additionally, in many states, only medical doctors are permitted to
order certain laboratory and radiological tests. The Company believes that
supervision by a medical doctor and a medical doctor's access to more
sophisticated diagnostic testing services will enhance the quality of patient
care.
Establish Networks of Integrated Medical Centers to Obtain Managed Care
Contracts. A key component of the Company's operating strategy is to attract
both health care practitioners and managed care payors. The Company seeks to
attract health care practitioners by, among other things, providing them greater
access to managed care contracts than they could attain independently and
relieving them of certain administrative responsibilities. The Company intends
for its local and regional clusters of Integrated Medical Centers to attract
managed care contractors by providing single, integrated points of market entry,
thereby enabling managed care payors to more efficiently contract for the
provision of health care services for patient populations. The Company has
recently begun to credential its licensed health care practitioners through a
credentialing concern accredited by the National Committee for Quality Assurance
(the "NCQA"), is drafting new and reviewing for improvement its standardized
protocols and plans to develop and implement a utilization management program,
all for the purpose of attracting managed care contracts.
Provide Advice and Assistance. Although it has not yet done so, the
Company intends to develop and implement advertising and marketing programs for
the Integrated Medical Centers primarily at the regional and national levels,
utilizing television, radio, and print advertising as well as internal marketing
promotions. The name of each Integrated Medical Center includes the words
"Complete Wellness Medical Center(SM)" or "Complete Wellness Center." Each
Integrated Medical Center displays signage bearing such words. The Company's
goal is to achieve "brand name" awareness of the Integrated Medical Centers.
There is no assurance, however, that the Company will be able to realize this
goal. Each Medcorp is required to pay a flat monthly fee to finance the
Company's advertising and marketing programs. An individual Integrated Medical
Center may also advertise its services locally, and the Company provides advice
in that regard upon request. The Company also agrees to furnish the Integrated
Medical Centers management services, financing and other advice and support. By
doing so, the Company seeks to relieve providers, to a limited extent, from
certain burdens of administering and managing a medical practice.
Achieve Operating Efficiencies and Economies of Scale. The Company intends
to organize its Integrated Medical Centers into regional groups or clusters to
serve employees and patients more effectively, to leverage management and other
resources, to increase purchasing power with suppliers, and to facilitate the
development of networks of affiliated physicians, chiropractors, and other
health care practitioners. The Company has rotated some physicians and intends
to rotate physicians and other health care practitioners among Integrated
Medical Centers. The Company believes that this will reduce the number of
practitioners otherwise needed, and thereby help contain salary costs. In
addition, the Company has adopted and is looking to improve and develop certain
standardized protocols, administrative systems, and procedures. The Company
intends to upgrade its management information system.
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EXPANSION STRATEGY
The Company plans to continue to develop Integrated Medical Centers
primarily by affiliating with chiropractors and their existing chiropractic
practices. Management endeavors to enter into agreements with chiropractors who
are located in convenient locations, and who have demonstrated the
entrepreneurial skills to build a practice. The Company believes that such
chiropractors will consider affiliation with Integrated Medical Centers to be
attractive because they may have greater access to managed care contracts in the
future through the Company and its network of Integrated Medical Centers, will
be relieved of certain administrative burdens, and may have the opportunity to
increase their practice income. An Integrated Medical Center is usually
established at the same location as the existing chiropractic practice, although
in some instances it might be established at a new location.
The Company also plans to develop Integrated Medical Centers in connection
with strategic alliances with health clubs, corporations, government offices, or
other organizations. In such cases, the Integrated Medical Center would be
established at a location (such as a health club or office building) provided,
leased or licensed to the Company by the other party to the strategic alliance.
The Company would in turn seek to affiliate with a chiropractor who has an
existing chiropractic practice located near the Integrated Medical Center. The
chiropractor would maintain his or her existing practice at its existing
location, but would arrange to see patients at the Integrated Medical Center as
well. If the Company were unable to affiliate with a chiropractor with an
existing practice located nearby, a chiropractor without an existing practice
would be hired to work on site at the Integrated Medical Center.
In this regard, in September 1996 the Company entered into a master license
agreement (the "License Agreement") with Bally Total Fitness Corporation
("Bally's"), with respect to the development of Integrated Medical Centers
within selected Bally's health clubs throughout the United States. Bally's
represents itself as the largest commercial operator of fitness centers in the
United States, with approximately 320 centers concentrated in 27 states and 4.2
million members. Pursuant to the License Agreement, the Company will pay Bally's
a license fee equal to the greater of $15 ($10 for the first year) per square
foot of the space used by the Integrated Medical Center or 12.5% of the fees the
Company receives for its services to each Integrated Medical Center the Company
develops at a Bally's Total Fitness Center. The initial term of the license
agreement is five years, with five one-year mutual renewals. Bally's may
terminate the agreement as to an Integrated Medical Center after September 16,
1998 absent the periodic payment of certain minimum license fees with respect to
that Integrated Medical Center. The first Integrated Medical Center to be
developed by the Company at a Bally's Total Fitness Center is expected to be
located in White Marsh, Maryland. If it meets the Company's expectations, the
Company expects to develop additional Integrated Medical Centers at other
Bally's Total Fitness Centers. In such event, the Company expects to select
Bally's Total Fitness Centers located near other Integrated Medical Centers.
Integrated Medical Centers developed pursuant to the License Agreement will not
treat patients covered by any federal or state funded health care program.
Additionally, in November 1996 the Company signed a non-binding letter of
intent with Complete Management, Inc. ("CMI"), pursuant to which it is
contemplated that the Company and CMI will form a joint venture to develop
Integrated Medical Centers at selected Bally's Total Fitness Centers or other
health clubs in the greater New York City metropolitan area. The letter of
intent contemplates that CMI, upon execution of a definitive joint venture
agreement, will be issued warrants to purchase 100,000 shares of the Company's
Common Stock at an exercise price equal to 120% of the initial public offering
price per share. The Company cannot predict whether the letter of intent will
lead to a definitive agreement or whether the terms of any such definitive
agreement will be the same as the terms contemplated by the letter of intent.
The letter of intent expires on February 28, 1997. New York health care
regulatory requirements are extremely restrictive and prohibit many arrangements
permitted in other states. For example, the provision of many services, such as
physical therapy and occupational therapy, may subject a facility to New York's
lengthy hospital licensing regulations. In addition, New York prohibits publicly
held companies from owning health care facilities, and further prohibits
companies from entering into management contracts with certain health care
facilities.
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The cost to the Company to develop an Integrated Medical Center not
connected with a strategic alliance has averaged $30,000. This cost has
consisted of approximately $10,000 for the purchase of such things as computer
software, legal fees, professional credentialing, training, an administrative
starter kit and travel, and approximately $20,000 (out of a possible $40,000) in
the form of a loan. The loan may be used for items such as professional
salaries, computer hardware, signage and insurance. The loans are evidenced by a
promissory note, bear interest at the rate of 10% per annum, are secured by the
assets of the Medcorps, are guaranteed by the Affiliated Chiropractor pursuant
to a separate guaranty, and are payable within five years. The Company believes
that the average cost to the Company to develop an Integrated Medical Center in
connection with a strategic alliance will be approximately $150,000. These funds
are expected to be used for leasehold improvements, equipment, professional
salaries, information systems, and working capital.
The Company anticipates that its Integrated Medical Centers will expand
their services in two phases. The first phase involves the medical treatment of,
principally, neuromusculoskeletal conditions and to a lesser extent, provision
of primary care services and wellness and weight loss programs to patients
referred to the Integrated Medical Center by the Affiliated Chiropractor for
reasons of medical necessity and, in the case of certain Integrated Medical
Centers, of any new patients to the facility. This is accomplished by utilizing
one or more part-time medical doctors and, depending on the market, other
providers such as a physical therapist or massage therapist. The second phase is
generally expected to begin after 12 to 24 months of operation, depending on an
Integrated Medical Center's financial results. It would involve utilizing one or
more medical doctors on a full time basis. Each operating Integrated Medical
Center is still in the first phase.
The Company intends to facilitate the growth of the Integrated Medical
Centers by arranging for the provision of ancillary services, such as medical
imaging, rehabilitation, diagnostics, and weight management either by contract
with third party providers or by acquisition of other businesses. The Company
believes that the ability to offer ancillary services will make the Integrated
Medical Centers more attractive to patients, health care practitioners, and
third party payors. The acquisition or other provision of certain of such other
services may, however, trigger additional licensing requirements. As of the date
of this Prospectus, the Company has no understandings, commitments, or
agreements with respect to any acquisitions.
The Company may from time to time take advantage of opportunities that are
related to the integration of traditional and alternative medicine that do not
fit into its expansion strategy. In this regard, in November 1996 the Company
entered into a management subcontract agreement (the "IPM Agreement") with
Integrated Physicians Management Co., LLC ("IPM") to manage for IPM nine medical
clinics integrated by IPM, subject to the approval of the clinics. The clinics
are located in Illinois (one), Nebraska (five), Wisconsin (two), and Texas
(one). In general, IPM's fees under its contracts with the medical clinics it
integrated are either 10% of a clinic's gross collections for all services or
20% of its gross collections for medical services only. The Company is to be
paid 80% of the fees IPM would have been paid in the absence of the IPM
Agreement. The Company will not be required to provide and will not provide
services to the clinics until the management agreements between IPM and the
clinics are deemed by the Company's special health care regulatory counsel to be
in compliance with applicable federal and state laws. The clinics are not
Integrated Medical Centers, and do not operate under the Complete Wellness
Medical Center(SM) name. The Company intends, however, to attempt to have them
become Integrated Medical Centers in the future. As of the date of this
Prospectus, one clinic had consented to the IPM Agreement. The others had not
yet made a decision.
To date, the Company has augmented the efforts of its management and staff
through consulting arrangements with various persons and entities. These
consultants have directed their efforts primarily toward identifying potential
chiropractors and chiropractic practices with which to affiliate and toward
providing assistance with the integration process. In November 1996, the Company
entered into a five year consulting agreement (the "Kats Agreement") with Kats
Management, LLC ("Kats Management"), a company under common control with IPM
that has represented to the Company that it provides management and consulting
services to over 600 chiropractic clinics. Under the Kats Agreement, Kats
Management agreed to advise and assist the Company in (i) identifying and
negotiating with chiropractors and their existing chiropractic practices with
which the Company might affiliate for the purpose of developing additional
Integrated Medical Centers and (ii) developing Integrated Medical Centers. The
Company agreed to pay Kats Management for
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each agreement entered into by the Company with a chiropractor identified by
Kats Management (i) a commission equal to 20% of the Company's integration fee
under such agreement during the initial term of the agreement (see
"-- Agreements With Affiliated Chiropractors and Other Licensed
Practitioners -- Integrated Medical Center Management and Security Agreement"),
(ii) a fixed fee not to exceed $350, and (iii) a bonus of $10,000 for each of
the first five such agreements and $5,000 for each of the next 25 such
agreements. In addition, the Company agreed to grant Kats Management, subject to
a vesting schedule, nonqualified options to purchase 11,000 shares of Common
Stock under the Company's 1994 Stock Option Plan at an exercise price equal to
75% of the initial public offering price per share. See "Management --
Employment Agreements." The Company has neither paid nor will pay the
percentage-based compensation under the Kats Agreement pending review of the
agreement with counsel. The Company expects to continue using consultants after
the consummation of this Offering. See "Certain Transactions."
THE COMPANY'S INTEGRATED MEDICAL CENTERS
Since the Company commenced operations in January 1995, it has developed
its current business primarily through the establishment of affiliations with
chiropractors and their existing chiropractic practices. As of January 31, 1997,
the Company was managing 7 Integrated Medical Centers. In addition, the Company
has entered into 48 agreements with chiropractors and their existing
chiropractic practices to develop an additional 59 Integrated Medical Centers,
and is planning to develop one Integrated Medical Center pursuant to the License
Agreement with Bally's in White Marsh, Maryland.
The Integrated Medical Centers occupy, on average, approximately 1,200 to
1,500 square feet of space, typically under a lease or sublease, in an office
building or shopping center. The Company expects that most Integrated Medical
Centers located in health clubs in connection with a strategic alliance will
occupy approximately 800 to 1,200 square feet of space. The Company prefers to
have locations at ground level to make the Integrated Medical Center as easily
accessible to patients as possible, but may not always be successful in securing
such locations. For Integrated Medical Centers developed in the same location as
an existing chiropractic practice, the Company may make suggestions concerning
office decor and layout, but does not seek to impose uniform design standards.
For Integrated Medical Centers developed in connection with a strategic
alliance, the Company expects to have a greater degree of uniformity in design
and layout, but must retain flexibility to work with the space which is
available. All Integrated Medical Centers operate under a name that includes the
words "Complete Wellness Medical Center,(SM)" or "Complete Wellness Center" and
have signage bearing such words.
The Company has applied for federal servicemark registration for the mark
"Complete Wellness Medical Center(SM)" as well as the mark "Complete Wellness
Centers(SM)". In November 1996, the Company received non-final office actions
from the Patent & Trademark Office ("PTO") noting certain objections to the
applications which must be resolved before the registrations will be issued.
Although the PTO initially refused registration of the marks on the Principal
Register on the grounds that the marks are "merely descriptive," it noted that
the Company may amend its applications to seek registration on the Supplemental
Register. The Company has until May 1997 to respond to these office actions. It
may present arguments to overcome the initial refusal to register the marks on
the Principal Register, or it may agree to amend the applications to the
Supplemental Register. No conflicting marks owned by other parties were cited by
the PTO against the applications as a bar to registration.
The Integrated Medical Centers co-exist with the Affiliated Chiropractor's
existing chiropractic practices, the two generally operating within and
throughout the same office space at the same time. New patients, patients who
have completed their prescribed treatments and who are thus in need of a review
of their status, and patients covered by Medicare or Medicaid are scheduled for
times when a medical doctor is scheduled to be present at the Integrated Medical
Center.
The medical doctors can generally use existing chiropractic equipment and
examination tables. Only minor equipment and supply adjustments and additions
are necessary for medical doctors to treat neuromuscular skeletal conditions.
Chiropractic offices are typically equipped with otoscopes, opthalmoscopes, and
blood pressure cuffs. Minor additions are mostly for nondurable goods such as
latex gloves, alcohol swabs and
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paper rolls. More equipment and supplies are required, however, for the
provision of general practitioner services. The Integrated Medical Center must
acquire, for example, an electrocardiogram machine and equipment for use in
drawing blood, exercise stress testing, and trigger point injections. When the
services of a physical therapist are added, it becomes necessary to add more
equipment, such as free weights, a hydrocolator (machine to heat hot packs), and
certain other staple items. Equipment acquired after the opening date of an
Integrated Medical Center is paid for by the Medcorp or the Admincorp, depending
on the type and use of equipment.
The type of ancillary staff added and type of equipment used can vary from
one Integrated Medical Center to another depending upon the patient base. If an
Integrated Medical Center is located in an area with large numbers of clerical
workers/typists, a common problem might be carpal tunnel syndrome. The
Integrated Medical Center might thus have equipment necessary to treat that
condition. If an Integrated Medical Center is located in an area with a high
concentration of senior citizens, a common problem might be stroke. The
Integrated Medical Center might thus provide the services of a neurologist
and/or of a physiatrist, a medical doctor with specialty training in physical
medicine, including rehabilitation for stroke victims.
The names and addresses of the seven Integrated Medical Centers in
operation are: (1) Complete Wellness Medical Center of S. Paula Drive, Dunedin,
Inc., 507 South Paula Drive, Dunedin, FL 34698; (2) Complete Wellness Medical
Center of 4th Street, St. Petersburg, Inc., 8730 4th Street, St. Petersburg, FL
33702; (3) Complete Wellness Medical Center of 4th Street, St. Petersburg, Inc.,
2817 West Virginia Avenue, Tampa, FL 33607; (4) Complete Wellness Medical Center
of East Main Street, Carbondale, P.C., 205 E. Main Street, Carbondale, IL 62901;
(5) Complete Wellness Medical Center of Centreville, Inc., 14215 E. Centreville
Square, Suite J, Centreville, VA 22020; (6) Complete Wellness Medical Center of
Dale City, Inc., 4205 Dale Blvd., Dale City, VA 22193; and (7) Complete Wellness
Medical Centers of Fredericksburg, Inc., 10740 Courthouse Road, Fredericksburg,
VA 22408.
SERVICES AND OPERATIONS
Recruiting and Training
The Company seeks new affiliations with chiropractors by referrals from
Affiliated Chiropractors and by advertising in trade magazines. It also conducts
mailings of its marketing information to chiropractors in specific geographic
regions in which it is interested in developing additional Integrated Medical
Centers. The Company acquires and maintains address lists of prospects for these
mailings, conducts information seminars for prospective affiliates, conducts
telemarketing efforts, and advertises through its Internet web site.
The Company gives Affiliated Chiropractors introductory materials regarding
its operations and the operation of an Integrated Medical Center. The Company
also credentials Affiliated Chiropractors to verify such things as their
education and professional licenses. The Company then requires each Affiliated
Chiropractor and certain other employees to attend two-day intensive integration
seminars, at which they are taught the basic principles behind managing a
multi-disciplinary health care clinic. Follow-up remote and, if necessary, on
site training is also provided, together with telephone support thereafter.
The Company also assists Affiliated Chiropractors with the recruitment of
medical doctors for the Integrated Medical Centers. The Company has, for
example, found several doctors for the Integrated Medical Centers through
advertisements placed by it. The recruitment and retention of medical doctors is
critical because the Integrated Medical Clinics cannot commence or continue
operations absent a medical doctor.
The Company generally self-credentialed the chiropractors and medical
doctors at the Integrated Medical Centers it is currently managing. The Company
is credentialing certain licensed health care practitioners for Integrated
Medical Centers scheduled for development with a non-NCQA accredited
credentialing concern with which it had an agreement for this purpose. The
Company's management believes that the credentialing procedures followed by such
non-accredited concern are sufficient. In anticipation of pursuing managed care
contracts, the Company has begun to credential and recredential through an NCQA
accredited credentialing concern all of the Integrated Medical Centers' licensed
(but not unlicensed) health
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care practitioners, except those licensed health care practitioners the Company
earlier began credentialing through the non-NCQA accredited concern.
Affiliated Chiropractors work under (i) employment agreements with the
Medcorps which generally provide for a base salary during the start-up period of
$1,000 per month and thereafter $4,000 per month and (ii) contractual
arrangements directly and/or indirectly through their existing chiropractic
practices, and through their management companies with the Company. The latter
reward them based upon their performance and the operating results of the
Integrated Medical Centers and their management companies, including collecting
on receivables and cost containment efforts. Medical doctors also work under
employment agreements, but on an hourly basis. In addition, the Company recently
adopted its 1996 Restricted Stock Option Plan for Health Care Professionals and
has reserved an aggregate of 100,000 shares of Common Stock for issuance
pursuant to the plan. No options have been granted under this plan thus far and
none may be issued unless and until the Company has determined that all
applicable federal and state laws have been satisfied. See "-- Government
Regulation -- Federal Medicare and Medicaid Related Regulation" and
"Management -- Stock Option Plans."
Management Information System
The Company currently utilizes servers based in Maryland which host a
billing, scheduling and patient record software package. The Company has begun
efforts to license and begin installing updated, more user friendly medical
office software. The Company believes it should also provide the capability to
electronically create and review patient records, monitor outcomes of patient
care, permit effective utilization management of health care services and allow
the Company to analyze the performance of each Integrated Medical Center.
Finally, the Company expects to begin implementing a networked structure
communicating through the Internet beginning in March, 1997.
Advertising and Marketing
In seeking to attract new patients to the Integrated Medical Centers, the
Company intends to advertise and market their services utilizing television,
radio, and print advertising, as well as internal marketing promotions such as
patient appreciation days. The Admincorps may elect to advertise the services of
the Integrated Medical Centers locally at the Admincorps' expense. Although the
Company intends to tailor its marketing efforts to the demands of a particular
market, in appropriate circumstances, it intends to focus its advertising and
marketing efforts at the national and regional (county, metropolitan area, or
state) levels. The Company will, upon request, help the Admincorps develop such
advertisements or review drafts of them as part of its services to the
Admincorps under the Company's agreements with them. The Company's regional and
national advertising and marketing will be paid for by a $200 per month
marketing fee that each Integrated Medical Center is required to pay, typically
beginning six months after the Integration Date. The fees are deposited by the
Company in a segregated account for use only for regional and national
advertising and marketing. The Company has not conducted any such regional or
national advertising and marketing prior to the date of this Prospectus.
THIRD PARTY REIMBURSEMENT
The Company's ability to collect its fees in a timely manner, or at all, is
affected by whether the Integrated Medical Center is reimbursed for its medical
services and the amount of reimbursement. The Company's own cash flow could be
adversely affected by the Integrated Medical Centers' long collection cycle from
various third party payors. Further, third party payors may reject the
Integrated Medical Centers' medical claims if, in their judgment, the procedures
performed were not medically necessary or if the charges exceeded such payors'
allowable fee standards. In addition, the reimbursement forms required by third
party payors for payment of medical claims are long, detailed and complex and
payments may be delayed or refused unless these forms are properly completed in
a timely manner. It is common practice for third party payors to initially
deny/reject the first submission of a medical claim. This does not mean that the
claim will not ultimately be paid. The Integrated Medical Centers normally would
re-submit the claim with such revised information as requested and/or forms and
documentation. Outstanding claims that continue to be disputed
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after one year or more could then be submitted to an arbitration process.
Normally, when final arbitration decisions are about to be rendered, the third
party payor will settle. Although the Integrated Medical Centers will take all
legally available steps, including legally prescribed arbitration, to collect
their receivables, there is a significant risk that some Integrated Medical
Centers' receivables may not be collected.
Third party payors are not generally familiar with reimbursing for
traditional and alternative health care services such as chiropractic in the
same medical practice. The third party payors may disagree with the descriptions
or coding of a bill for medical services, or may contest a code or description
under a lesser (e.g., chiropractic) fee schedule. Such disagreements on billing
code or description of professional services, particularly where the third party
payor is a federal or state funded health care program, can result in lesser
reimbursement, which can have a material adverse effect on the Integrated
Medical Center and ultimately on the Company. Persistent disagreements or
alleged "upcoding" can result in allegations of fraud or false billing, both of
which constitute felonies. Such an allegation, if proven, can result in
forfeitures of payment, civil money penalties, civil fines, suspensions, or
disbarment from participating in federal or state funded health care programs,
and have a material adverse effect on the Company. Investigation and
prosecutions for fraudulent or false billing can have a material adverse effect
on the Company, even where such allegations are disproven.
The health care industry is undergoing significant change as third party
payors increase their efforts to control the cost, use and delivery of health
care services. Several states have taken measures to reduce the reimbursement
rates paid to health care providers in their states. The Company believes that
additional reductions will be implemented from time to time. In addition,
reductions in Medicare rates often lead to reductions in the reimbursement rates
of other third party payors as well and the Company believes that such further
reductions are probable. Changes in Medicare reimbursement rates or other
changes in reimbursements by third party payors to Integrated Medical Centers
could have a material adverse affect on the Company.
AGREEMENTS WITH AFFILIATED CHIROPRACTORS AND OTHER LICENSED PRACTITIONERS
The Company first enters into an Integrated Medical Center Management and
Security Agreement ("IMCM&S Agreement") with the Affiliated Chiropractor in his
individual capacity and the Affiliated Chiropractor's existing chiropractic
practice (if a separate legal entity). The IMCM&S Agreement obligates the
Affiliated Chiropractor to incorporate the Admincorp and cause the Admincorp to
ratify the IMCM&S Agreement. The Company then establishes the Medcorp and enters
into a Management and Security Agreement (the "M&S Agreement") with the Medcorp,
pursuant to which the Company agrees to provide management services to the
Medcorp's Integrated Medical Center(s). The Company also enters into separate
office space and equipment subleases with the Medcorp, having leased the office
space and equipment in question from the Affiliated Chiropractor or his existing
chiropractic practice, as appropriate, pursuant to the terms of the IMCM&S
Agreement. The Medcorp employs the Affiliated Chiropractor(s) and one or more
medical doctors. Pending the completion of the various tasks that follow the
Affiliated Chiropractor entering into the IMCM&S Agreement, the Company
credentials the Affiliated Chiropractor, trains him and his office staff on the
operation of an Integrated Medical Center and otherwise helps the Affiliated
Chiropractor integrate by, among other things, helping him recruit a medical
doctor. The Integrated Medical Center cannot commence operation without a
medical doctor in its employ.
Management and Security Agreement
Under the M&S Agreement, the Company agrees to (i) manage certain
non-medical aspects of the Integrated Medical Center (including record keeping,
billing and collection, handling non-professional personnel, patient scheduling,
and continuing education), (ii) provide capital, facilities, equipment, computer
software and training, (iii) implement advertising and marketing programs, (iv)
arrange for certain legal and accounting services, and (v) assist in identifying
and recruiting medical doctors. The Company charges the Medcorp management fees
for the goods and services it provides the Medcorp. Such fees are generally
based on a periodic determination of the fair market value of such goods and
services. With respect to Integrated Medical Centers that serve patients covered
by any federal or state funded health care program and certain
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other Integrated Medical Centers, the management fees are pre-set for one year
for flat dollar amounts that represent the fair market value of the goods and
services the Company directly furnishes the Medcorp and of the services the
Company indirectly furnishes the Medcorp through its arrangement with the
Admincorp pursuant to the IMCM&S Agreement. The Company will retain an
independent third party to assist it in determining the fair market value of the
goods and services it provides Integrated Medical Centers that treat patients
covered by federal or state funded health programs and certain other Integrated
Medical Centers.
The costs to the Company to develop an Integrated Medical Center not
connected with a strategic alliance have averaged $30,000. These costs have
consisted of approximately $10,000 for the purchase of such things as computer
software, legal fees, professional credentialing, training, an administrative
starter kit and travel, and approximately $20,000 (out of a possible $40,000) in
the form of a loan. The loan may used for items such as professional salaries,
computer hardware, signage and insurance. The loans are evidenced by a
promissory note, bear interest at the rate of 10% per annum, are secured by the
assets of the Medcorps, are guaranteed by the Affiliated Chiropractor pursuant
to a separate guaranty, and are payable within five years. In addition, the
Company may make other advances to the Medcorp from time to time for working
capital purposes. If the Company were to make such an advance, it would bear
interest at the rate of 10% per annum and be secured by such collateral as the
Company in its discretion deemed appropriate. The Company expects that the M&S
Agreement for an Integrated Medical Center developed in connection with a
strategic alliance would require the Company to bear development costs which the
Company believes will approximate $150,000.
The M&S Agreements are for terms of 35 years and may be terminated by the
Company or by the Integrated Medical Center for a material breach by the other
party that remains uncorrected for more than ten days after notification or for
the dissolution, bankruptcy or insolvency of the other party. In addition, the
Company may terminate the M&S Agreement if the Integrated Medical Center fails
to meet material standards of managed care payors. Termination does not relieve
either party for any indebtedness incurred before the date of termination. The
M&S Agreements require that the Company enter into a separate management
agreement with the Admincorp pursuant to which the Admincorp assumes
responsibility for day-to-day administration of the Integrated Medical Center.
Integrated Medical Center Management and Security Agreement
Under the IMCM&S Agreement, the Company agrees to furnish the Admincorp, in
its discretion, such services as assistance with advertising and other practice
development activities, assistance in recruiting medical doctors and negotiating
employment contracts with them, credentialing, the negotiation of managed care
contracts, and legal support and documentation for the establishment of the
integrated practice. In general, the Admincorp assumes responsibility for the
daily management functions of the Integrated Medical Centers, such as record
keeping, billing and collection, supervision of personnel, facilities
management, purchasing, and scheduling. These services are provided in the
discretion and best judgment of the Admincorp, subject to operating protocols
and procedures established jointly by the Medcorp, the Company, and the
Admincorp. The Affiliated Chiropractor or the existing chiropractic practice, as
the case may be, also agrees to lease the office space and equipment utilized by
the existing chiropractic practice to the Company.
The Admincorp charges the Company a monthly fee equal to the sum of the
management fees and rent that the Company charges the Medcorp, less a specified
fixed amount, however, with respect to certain Integrated Medical Centers. In
general, the Company charges the Admincorp a collective marketing fee of $200
per month beginning six months after the Integration Date and a monthly
integration fee equal to, depending principally on the size of the practice, 9%
to 20% (if the initial term of the IMCM&S Agreement is five years) or 10% to 15%
(if the initial term is ten years) of the sum of (i) the management fee and rent
that the Company charges the Medcorp and (ii) the Medcorp's permissible
expenses, until the sum reaches $300,000 to $500,000 in any one year, and 10% of
the sum for the remainder of that year. With respect to Integrated Medical
Centers that serve patients covered by federal or state funded health care
programs and certain other Integrated Medical Centers, the integration fees are
instead for flat dollar amounts equal to estimated fair market value, subject to
a 15% cap. The Company also may charge many Admincorps an operations fee of $250
per month, subject in certain cases, however, to delayed or contingent
effectiveness.
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The IMCM&S Agreements are generally for initial terms of five years,
although some are for ten years. They may be renewed in five year increments, up
to four times, by mutual consent. An Affiliated Chiropractor may, through his
Admincorp, terminate the IMCM&S Agreement if the Company materially breaches it
and, if the breach is correctable, the Company fails to cure the breach within
ten days after written notification. A number of the IMCM&S Agreements,
including those with respect to at least four of the seven operating Integrated
Medical Centers, are also terminable by the Affiliated Chiropractor, if, for
example, the combined revenues of the Integrated Medical Center and existing
chiropractic practice during the 12 months following the start-up phase do not
exceed 110% of the revenues of the Affiliated Chiropractor's existing
chiropractic practice for the 12-month period preceding the date the Affiliated
Chiropractor signed the IMCM&S Agreement. The start-up phase is generally three
months following the Integration Date. The Company may terminate the IMCM&S
Agreement for a variety of reasons, including for material breach by the
Admincorp that, if correctable, remains uncorrected for more than ten days after
notification, misuse by the Admincorp of funds received by or on behalf of the
Company or the Medcorp, the dissolution, bankruptcy, or insolvency of the
Admincorp, the death of the Affiliated Chiropractor, the failure by the
Admincorp to maintain credentialing qualifications, to provide medical services
for ten consecutive days, or to meet material standards of managed care payors
or the provision of services for patients covered by a federal or state funded
health care program without the Company's prior written authorization.
Termination does not relieve any party for any indebtedness incurred before the
date of termination. Following termination of the IMCM&S Agreement, the
Admincorp is generally entitled to receive from the Company 80% of the accounts
receivable then due the Company from the Medcorp, less the balance then due the
Company from the Admincorp, subject to the Medcorp collecting on its accounts
receivable.
Employment Agreements With Affiliated Chiropractors
The Affiliated Chiropractors have entered into employment agreements with
the Medcorps, as required by the IMCM&S Agreement, pursuant to which they have
each agreed to work as a licensed chiropractor for a mutually agreed upon
salary. The salary is generally $1,000 per month during a designated, generally
3-month, start-up phase and $4,000 per month after the start-up phase. The
initial term of the employment agreement is five years. The agreement typically
renews automatically if the IMCM&S Agreement is renewed and terminates
automatically if the IMCM&S Agreement is terminated. The Affiliated Chiropractor
may terminate the employment agreement if the Medcorp materially breaches it
and, if the breach is correctable, does not remedy the breach within, in most
cases, ten days after notification. The Medcorp may terminate the employment
agreement for a variety of reasons, including a material breach by the
Affiliated Chiropractor that, if correctable, remains uncorrected for more than
ten days after notification, misuse by the Affiliated Chiropractor of funds
received by or on behalf of the Company or the Medcorp, the death, disability,
or incapacity of the Affiliated Chiropractor, the failure by the Affiliated
Chiropractor to meet material standards of managed care payors, or for "cause,"
defined as chronic dependency on drugs or alcohol, gross neglect or gross
misconduct, disqualification or revocation of license to practice chiropractic,
and inability to obtain malpractice insurance in amounts and with carriers
acceptable to the Medcorp. The Affiliated Chiropractor agrees to maintain in
confidence certain information regarding the Medcorp.
Employment Agreements With Medical Doctors and Other Health Care Practitioners
The Medcorps generally enter into employment agreements with the medical
doctors, but have not, subject to one exception, entered into employment
agreements with any of their health care practitioners other than medical
doctors or Affiliated Chiropractors. The medical doctors' employment agreements
provide that the medical doctors retain independent discretion and shall
exercise independent judgment concerning the treatment of patients and that the
Medcorp is responsible for the non-health care aspects of the practice. The
practitioner and the Medcorp agree upon a rate of compensation, which is
generally an hourly rate ranging from approximately $60-$100. The agreements are
for one year, with the first 90 to 180 days being a probationary period during
which the Integrated Medical Center may terminate the medical doctor's
employment for any reason. After the probationary period, the Medcorp may
terminate the agreement if the practitioner becomes disabled or for "cause,"
defined as including, for example, chronic dependency on drugs or alcohol, gross
neglect or gross misconduct, disqualification or revocation of his or her
license to practice
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<PAGE> 43
medicine, a material adverse change in the business or economic prospects of the
Medcorp as determined solely by the Medcorp, and cessation of the Medcorp's
business. In addition, either party may terminate the agreement by giving 30
days prior written notice to the other party. The agreements often provide that
the practitioner will not compete with or solicit patients of the Medcorp for
one or two years after termination of the agreement.
Formation of Medcorps
The Medcorps are formed as general business corporations wholly-owned by
the Company in states (such as Florida and Virginia) in which general business
corporations are permitted to conduct medical practices. The Medcorps are formed
as professional corporations owned by one or more medical doctors licensed to
practice medicine under applicable state law (each a "Qualified M.D."), in
states (such as Illinois) that prohibit the corporate practice of medicine. A
Qualified M.D. may, but need not, be an employee of the Company, a Medcorp
and/or an affiliate of the Company. A Qualified M.D. of a professional
corporation that treats patients covered by a federal or state funded health
care program, may not, however, refer patients to, influence the referral of
patients to, or furnish medical services on behalf of any Integrated Medical
Center. A Qualified M.D. may own stock in more than one Medcorp formed as a
professional corporation. Each Qualified M.D. enters into an agreement giving
the Company the right to direct the transfer of his or her stock in the Medcorp
to another Qualified M.D. at the Company's discretion, as well as a pre-signed
resignation as a director and officer of the professional corporation. See
"Certain Transactions." Qualified M.D.'s are paid fees by the Medcorps for
serving as officers or directors thereof. Qualified M.D.'s are also indemnified
for serving as officers or directors of the Medcorps.
GOVERNMENT REGULATION
Various state and federal laws regulate the relationship between providers
of health care services and physicians, and, as a business in the health care
industry, the Company is subject to these laws and regulations. The Company is
also subject to laws and regulations relating to business corporations in
general. Although many aspects of the Company's business operations have not
been the subject of state or federal regulatory interpretation, the Company
believes its operations are in material compliance with applicable laws. There
can be no assurance, however, that a review of the business practices of the
Company or its Integrated Medical Centers by courts or regulatory authorities
would not result in a determination that could adversely affect the operations
of the Company or the Integrated Medical Centers, or that the health care
regulatory environment will not change so as to restrict the Company's
operations or its ability to expand them. See "Risk Factors."
Licensure. Every state imposes licensing requirements on individual
physicians and on certain other types of health care providers and facilities.
Many states require regulatory approval, including licenses to render care or
certificates of need, before establishing certain types of heath care facilities
or offering services which entail the acquisition of expensive medical
equipment. While the performance of management services on behalf of a medical
practice does not currently require any regulatory approval, there can be no
assurance that such activities will not be subject to licensure in the future.
Corporate Practice of Medicine. The laws of many states prohibit business
corporations from engaging in the practice of medicine, such as through
employment arrangements with physicians. These laws vary from state to state and
are enforced by the state courts and regulatory authorities with broad
discretion. The Company does not employ physicians to practice medicine, does
not represent to the public that it offers medical services, and does not
control or interfere with the practice of medicine by physicians at the
Integrated Medical Centers. Integrated Medical Centers in states that prohibit
the corporate practice of medicine are organized as professional corporations or
other entities that are specifically authorized to employ physicians.
Accordingly, the Company believes that its operations do not violate applicable
state laws regulating the unlicensed practice of medicine by a business
corporation. However, because the laws governing the corporate practice of
medicine vary from state to state, any expansion of the operations of the
Company to a state with strict corporate practice of medicine laws may require
the Company to modify its operations with respect to one or more of such
practices, which may result in increased financial risk to the Company. Further,
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there can be no assurance that the Company's arrangements will not be
successfully challenged as constituting the unauthorized practice of medicine or
that certain provisions of the management services agreements or covenants not
to compete will be enforceable. See "Risk Factors -- State Laws Regarding
Prohibition of Corporate Practice of Medicine."
Fee-Splitting Prohibitions. The laws of some states (including Illinois)
prohibit physicians from splitting professional fees. These statutes are
sometimes quite broad and as a result prohibit otherwise legitimate business
arrangements. Others are more narrow. Florida, for example, prohibits only
fee-splitting arrangements that are based on referrals. Penalties for violating
these fee-splitting statutes or regulations may include revocation, suspension,
or probation of a physician's license, or other disciplinary action, as well as
monetary penalties. Alleged violations of the fee-splitting laws have also been
used successfully by physicians to void contracts as against public policy.
Pursuant to the terms of its M&S Agreements with the Medcorps, the Company
receives a management fee determined to represent the fair market value of the
goods and services it provides the Medcorp. In Illinois, such fees are for
specified dollar amounts and may not be changed more often than once annually.
See "-- Agreements With Affiliated Chiropractors and Other Licensed
Practitioners." Although the Company believes that its compensation arrangements
comply with applicable state fee-splitting laws, there can be no assurance that
these compensation arrangements will not be construed by state or judicial
authorities as being proscribed by such laws.
State Anti-kickback and Self-Referral Laws. A number of states in which
the Company conducts business or plans to conduct business (including Florida,
Illinois and Maryland) have enacted laws that prohibit the payment for referrals
and other types of kickback arrangements. Such state laws typically apply to all
patients regardless of their insurance coverage. In addition, a number of states
(including Florida, Illinois and Maryland) have enacted laws which to varying
degrees prohibit physician self-referrals. Illinois, for example, has a broad
self-referral law which regulates all health care workers (including
physicians), regardless of the patient's source of payment. Subject to certain
limited exceptions, the Illinois law prohibits referrals for health services
provided by or through licensed health care workers to an entity outside the
health care worker's office or group practice in which the health care worker is
an investor, unless the health care worker directly provides health services
within the entity and will be personally involved with the provision of care to
the referred patient. In April 1992, the State of Florida enacted a Patient
Self-Referral Act that severely restricts patient referrals for certain
services, prohibits markups of certain procedures and requires health care
providers to disclose ownership in businesses to which patients are referred.
The Company believes it is likely that more states will adopt similar
legislation. The Company believes that its operations comply with current
statutory provisions, although there can be no assurance that state
anti-kickback and self-referral laws will not be interpreted more broadly or
amended in the future to be more expansive. In addition, expansion of the
operations of the Company to certain jurisdictions may require it to comply with
such jurisdictions' regulations, which could lead to structural and
organizational modifications of the Company's form of relationships with managed
practices. Such changes, if any, could have an adverse effect on the Company.
State Regulation of Insurance Business and HMOs. Laws in all states
regulate the business of insurance and the operation of health maintenance
organizations, or HMOs. Many states also regulate the establishment and
operation of networks of health care providers. Many state insurance
commissioners have interpreted their states' insurance statutes to prohibit
entities from entering into risk-based managed care contracts unless there is an
entity licensed to engage in the business of insurance, such as an HMO, in the
chain of contracts. An entity not licensed to engage in the business of
insurance that contracts directly with a self-insured employer in such a state
may be deemed to be engaged in the unlicensed business of insurance. While these
laws do not generally apply to the hiring and contracting of physicians by other
health care providers, there can be no assurance that regulatory authorities of
the states in which the Company operates would not apply these laws to require
licensure of the Company's operations as an insurer, as an HMO, or as a provider
network. The Company believes that it is in compliance with these laws in the
states in which it does business, but there can be no assurance that future
interpretations of insurance and health care network laws by regulatory
authorities
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<PAGE> 45
in these states or in the states into which the Company may expand will not
require licensure or a restructuring of some or all of the Company's operations.
Federal Medicare and Medicaid Related Regulation. There are a number of
federal laws prohibiting certain activities and arrangements relating to
services or items which are reimbursable by federal or state funded health care
programs. Certain provisions of the Social Security Act, commonly referred to as
the "Anti-kickback Amendments," prohibit the offer, payment, solicitation or
receipt of any form of remuneration either in return for the referral of federal
or state health care reimbursement program patients or patient care
opportunities, or in return for the recommendation, arrangement, purchase, lease
or order of items or services that are covered by such federal or state health
care funded programs. The Anti-kickback Amendments are broad in scope and have
been broadly interpreted by courts in many jurisdictions. Read literally, the
statute places at risk many otherwise legitimate business arrangements,
potentially subjecting such arrangements to lengthy, expensive investigations
and prosecutions initiated by federal and state governmental officials.
In July 1991, in part to address concerns regarding the Anti-kickback
Amendments, the federal government published regulations that provide
exceptions, or "safe harbors," for certain transactions that will be deemed not
to violate the Anti-kickback Amendments. Among the safe harbors included in the
regulations were provisions relating to the sale of physician practices,
management and personal services agreements, and employee relationships.
Additional proposed safe harbors were published in September 1993 offering
protections under the Anti-kickback Amendments to eight new activities,
including referrals within group practices consisting of active investors.
Proposed amendments to clarify these safe harbors were published in July 1994.
If adopted, such amendments would cause substantive retroactive changes to the
1991 regulations. Violation of the Anti-kickback Amendments is a felony,
punishable by substantial civil fines and imprisonment for up to five years. In
addition, the Department of Health and Human Services may impose civil penalties
excluding violators from participation in federal or state funded health care
reimbursement programs. Although the Company believes that its current
operations are not in violation of the Anti-kickback Amendments, there can be no
assurance that regulatory authorities will not determine that the Company's
operations are in violation of the Anti-kickback Amendments.
Significant prohibitions against physician self-referrals for services
covered by Medicare and Medicaid programs were enacted by Congress in the
Omnibus Budget Reconciliation Act of 1993, subject to certain exceptions. These
prohibitions, commonly known as "Stark II," amended prior physician
self-referral legislation known as "Stark I" (which applied only to clinical
laboratory referrals) by significantly enlarging the list of services and
investment interests to which the referral prohibitions apply. Effective January
1, 1995 and subject to certain exceptions, Stark II prohibits a physician or a
member of his immediate family from referring Medicare or Medicaid patients to
any entity providing "designated health services" in which the physician has an
ownership or investment interest, or with which the physician has entered into a
compensation arrangement. The designated health services include the provision
of clinical laboratory services, radiology services, including magnetic
resonance imaging, computerized axial tarrography scans and ultrasound services,
radiation therapy services, physical and occupational therapy services, durable
medical equipment, parenteral and enteral nutrients, equipment and supplies,
orthotics and prosthetic devices and supplies, outpatient prescription drugs,
home health services and inpatient and outpatient hospital services. Certain
Integrated Medical Centers, including those that furnish services to federal
and/or state funded health care programs, provide or appear to provide some such
services, and other Integrated Medical Centers may do so in the future. The
penalties for violating Stark II include a prohibition on Medicaid and Medicare
reimbursement and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." A
physician's ownership of publicly traded securities of a corporation with equity
exceeding $75 million as of the end of its most recent fiscal year is not deemed
to constitute an ownership or investment interest in that corporation under
Stark II. The Company will not issue options under its 1996 Restricted Stock
Option Plan for Health Care Professionals until such time that it meets the $75
million safe harbor requirement. See "Management -- Stock Option Plans." The
Company believes that its operations and those of the Integrated Medical Centers
currently are not in violation of Stark I or Stark II; however, the Stark
legislation is broad and ambiguous. Interpretative regulations clarifying the
provisions of Stark I were issued on August 14, 1995. Stark II regulations have
yet to be proposed. While
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<PAGE> 46
the Company believes it is in compliance with the Stark legislation, future
regulations could require the Company to modify the form of its relationships
with the Integrated Medical Centers, at least those that provide designated
health services. Moreover, the violation of Stark I or II by any of the
Integrated Medical Centers could result in significant fines and loss of
reimbursement which would adversely affect the Company.
COMPETITION
The managed health care industry, including the provider practice
management industry, is highly competitive. The Company competes with other
companies for physicians and other practitioners of health care services as well
as for patients. The Company competes not only with national and regional
physician practice management companies, but also with local providers, many of
which are trying to combine their own services with those of other providers
into integrated delivery networks. Certain of the companies are significantly
larger, provide a wider variety of services, have greater financial and other
resources, have greater experience furnishing provider practice management
services, and have longer established relationships with buyers of these
services, than the Company, and provide at least some of the services provided
by the Company. In addition, companies with greater resources than the Company
that are not presently engaged in the provision of integrated provider practice
management services could decide to enter the business and engage in activities
similar to those in which the Company engages. There can be no assurance that
the Company will be able to compete effectively.
EMPLOYEES
As of January 31, 1997, the Company had 11 employees and the seven Medcorps
had a total of 30 employees. The Company's 11 employees consisted of 8 in
finance and administration and 3 in sales and marketing. Neither the Company's
employees nor those of the Medcorps are represented by any labor union. The
Company believes that relations with its employees are satisfactory.
PROPERTIES
The Company does not own any property. The Company's executive and
administrative offices are located in approximately 1,350 square feet of office
space in Washington, DC. The Company pays $1,350 per month rent, on a
month-to-month basis.
After the completion of this Offering, the Company intends to lease
approximately 3,000 to 5,000 square feet of space for its executive offices in
Montgomery County, Maryland. The Company has received a low interest rate loan
commitment in the amount of $45,000 from the Montgomery County Economic
Development Fund in order to defray its relocation costs. The loan is to bear
interest at the rate of 7% per annum with a ten year amortization, with payment
deferred until the end of 1997. The loan is to be secured by the Company's
capital assets. The loan will be converted to a grant if the Company generates
more than 50 jobs and establishes a new Integrated Medical Center in Montgomery
County by the end of 1997. The loan commitment expires on March 31, 1997.
PROFESSIONAL LIABILITY
The Integrated Medical Centers employ health care practitioners for the
delivery of health care services to the public. They are exposed to the risk of
professional liability claims. The Company does not itself provide such services
or control the provision of health care services by the Integrated Medical
Centers' practitioners or their compliance with regulatory and other
requirements in that regard. The Company might nevertheless be held liable for
medical negligence on their part.
The Company has obtained an insurance policy that, subject to certain
conditions, provides both it and its subsidiaries medical malpractice insurance
and managed care errors and omissions insurance retroactive to the Integration
Dates of the Company's current Integrated Medical Centers and one former
Integrated Medical Center. The policy provides coverage for $1,000,000 per claim
per Integrated Medical Center, subject to an aggregate limit of $3,000,000 per
Integrated Medical Center per year. The policy will also cover the Company with
respect to Integrated Medical Centers as they are opened. There is no deductible
under the policy.
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The foregoing policy is a "claims made" policy. Thus, it provides coverage
for covered claims made during the policy's term but not for losses occurring
during the policy's term for which a claim is made subsequent to the expiration
of the term. Further, the policy remains contingent on, among other things, the
Company paying the initial premium of approximately $40,000 by March 10, 1997.
As to future Integrated Medical Centers, the Company must submit an application
and pay the premium with respect thereto within two weeks and 30 days of the
desired effective date of coverage, respectively. The policy is also subject to
bi-annual audits of patient visits.
There can be no assurance, however, that the Company, its employees, or the
licensed health care practitioners employed by or associated with the Medcorps
will not be subject to claims in amounts that exceed the coverage limits under
the policy or that such coverage will be available when needed. Further, there
can be no assurance that professional liability insurance will continue to be
available to the Company in the future at adequate levels or at an acceptable
cost to the Company. A successful claim against the Company in excess of the
Company's insurance coverage could have a material adverse effect upon the
Company's business. Claims against the Company, regardless of their merits or
eventual outcome, also may have an adverse effect upon the Company.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or its
properties is subject. A former employee has raised the possibility of
instituting a legal or arbitration proceeding regarding the alleged breach by
the Company of an employment agreement with the former employee. The Company
believes that it has meritorious defenses against his claims, and if a
proceeding is commenced, intends to vigorously defend itself. Management
believes that if a legal or arbitration proceeding were instituted and decided
against the Company, it would not have a material adverse effect on the Company.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND KEY EMPLOYEES
The names and ages of the directors, executive officers, and key employees
of the Company, and their positions with the Company, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------------------------------
<S> <C> <C>
C. Thomas McMillen(2)......... 44 Chairman of the Board, Chief Executive Officer, and
Director
E. Eugene Sharer(2)........... 63 President, Chief Operating Officer, Chief Financial
Officer, Treasurer and Director
Danielle F. Milano, M.D. ..... 41 Vice President-Medical Affairs and Secretary
Eric S. Kaplan, D.C........... 44 Senior Director of Operations and Development
Robert J. Mrazek(1)........... 51 Director
James T. McMillen, M.D.(1).... 51 Director
Robert S. Libauer(1)(2)....... 77 Director
</TABLE>
- ---------------
(1) Member of the Audit and Compensation Committees.
(2) Member of the Acquisition and Affiliation Committee.
C. Thomas McMillen, the Company's founder, has been the Chairman of the
Board of Directors and Chief Executive Officer since its formation in November
1994. He was also the President of the Company until April 1996. In 1993, Mr.
McMillen formed McMillen and Company, Inc., a health care consulting firm, and
subsequently from November 1993 through March 1994, assumed the role of Chief
Administrative Officer of Clinicorp, Inc., a publicly-traded physician practice
management company. Mr. McMillen was also a director of Clinicorp, Inc. from
January 1993 through December 1994. Clinicorp, Inc. filed for Chapter 11
bankruptcy protection in June 1996. From 1987 to 1993, Mr. McMillen served three
consecutive terms in the U.S. House of Representatives from the 4th
Congressional District of Maryland. He was named by President Clinton to
Co-Chair the President's Council on Physical Fitness and Sports in 1993. Mr.
McMillen was a collegiate all-American basketball player at the University of
Maryland and a member of the 1972 United States Olympic Basketball Team. He
completed his education at Oxford University on a Rhodes Scholarship and played
professional basketball for 11 years in the National Basketball Association,
before becoming a Member of Congress. Mr. McMillen is currently a member of the
Board of Directors of Kellstrom Industries, Inc., Commodore Applied
Technologies, Inc., CHG Inc., a subsidiary of Chemring Group, PLC, and Orion
Acquisition Corporation I (of which he is also the secretary and treasurer). Mr.
McMillen was also a director of Integrated Communication Network, Inc. ("ICNI")
until his resignation in December 1996. In July and September 1996, two class
action lawsuits were filed against ICNI and all of its directors and officers
alleging that the prospectus for ICNI's initial public offering in June 1995 did
not adequately disclose certain risks associated with an investment in its
securities. Mr. McMillen became a director of ICNI upon the effectiveness of the
registration statement of which such prospectus formed a part. Mr. McMillen is
the brother of James J. McMillen, a director of the Company.
E. Eugene Sharer has been President, Chief Operating Officer, and a
director of the Company since April 1996, and Chief Financial Officer and
Treasurer since February 1997. From 1990 to 1995 he was President and Chief
Operating Officer of R.O.W. Sciences, Inc., a health research company. In August
1995, Mr. Sharer formed Sharer Associates, a management consulting company. From
1989 to 1990 he was Executive Vice President, Chief Operating Officer and
Director of Iverson Technology Corporation and from 1985 through 1988, he was
President and Director of Calculon Corporation and a Vice President of Atlantic
Research Corporation, the parent company of Calculon. Between 1980 and 1985, Mr.
Sharer was Vice President of the Systems Group at Computer Sciences Corporation.
He currently serves as a director and member of the Executive Committee,
Secretary, chair of the Membership Committee and chair of the Nominating
Committee of the Suburban Maryland High Technology Council. He also serves on
the Industrial and Professional Advisory Committee of the Department of Computer
Science and Engineering, College of Engineering at the Pennsylvania State
University.
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Danielle F. Milano, M.D., has been Vice President -- Medical Affairs since
January 1996 and Secretary since February 1997. From October 1994 to December
1995, she was Medical Director of Rivington House Health Care Facility in New
York, New York. From October 1990 to October 1994, Dr. Milano was attending
physician at New York University School of Medicine and Director of the AIDS
Clinic at Bellevue Hospital in New York, New York. She is a graduate of New York
University School of Medicine, completed her residency at Lenox Hill hospital
and is board certified in internal medicine.
Eric S. Kaplan, D.C., has been Senior Director of Operations and
Development since August 1996. From June 1993 to August 1996, Dr. Kaplan was
president of two subsidiaries of Clinicorp, Inc., Medical Diagnostic Imaging of
America and Clinicare Wellness Centers. From 1978 to June 1993, he was the
founder and owner of six chiropractic, weight loss, and medical clinics in south
Florida.
Robert S. Libauer has been a director of the Company since June 1995. Since
1971, he has been the managing partner of Libauer and Company, a financial
consulting firm.
James J. McMillen, M.D., has been a director of the Company since November
1994. From 1977 to the present, Dr. McMillen has been in private medical
practice in St. Joseph, Missouri. He is board certified in internal medicine.
Dr. McMillen is the brother of C. Thomas McMillen.
Robert J. Mrazek has been a director of the Company since January 1995.
Since 1993, Mr. Mrazek has been a legislative affairs consultant. From 1983 to
January 1993, he served five consecutive terms in the U.S. House of
Representatives from the 3rd Congressional District of New York.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee, a Compensation
Committee, and an Acquisition and Affiliation Committee.
Audit Committee. The Audit Committee has the responsibility for reviewing
and supervising the financial controls of the Company. The Audit Committee makes
recommendations to the Board of Directors of the Company with respect to the
Company's financial statements and the appointment of independent auditors,
reviews significant audit and accounting policies and practices, meets with the
Company's independent public accountants concerning, among other things, the
scope of audits and reports, and reviews the performance of overall accounting
and financial controls of the Company. The Audit Committee consists of Mr.
Mrazek, Dr. McMillen, and Mr. Libauer.
Compensation Committee. The Compensation Committee has the responsibility
for reviewing the performance of the officers of the Company and recommending to
the Board of Directors of the Company salary and bonus amounts for all officers
of the Company, subject to the terms of existing employment agreements. The
Compensation Committee also has the responsibility for oversight and
administration of the Company's long-term incentive plans and other compensatory
plans. The Compensation Committee consists of Mr. Mrazek, Dr. McMillen, and Mr.
Libauer.
Acquisition and Affiliation Committee. The Acquisition and Affiliation
Committee has the responsibility for reviewing and approving affiliations or
strategic alliances with chiropractors and their existing chiropractic
practices, corporations, governmental entities, or other entities as well as
acquisitions of other businesses. Proposed acquisitions involving the issuance
of equity securities of the Company will be referred to the Board of Directors.
The members of the Acquisition and Affiliation Committee are Mr. McMillen, Mr.
Sharer, and Mr. Libauer.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual
compensation of the Company's Chief Executive Officer for services in all
capacities to the Company during the Company's last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
FISCAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY
- ------------------------------------------------------------------------ ------ ------------
<S> <C> <C>
C. Thomas McMillen...................................................... 1996 *
Chief Executive Officer
</TABLE>
- ---------------
* Mr. McMillen did not receive any cash compensation for fiscal years 1995 or
1996, nor were any options granted to him. For fiscal year 1996, compensation
in the amount of $22,500 was accrued. In addition, the Company advanced to him
without interest approximately $37,000 in 1996, which he has agreed to pay
upon consummation of this Offering. See "Certain Relationships and Related
Transactions." No other executive officer received compensation in excess of
$100,000 during the Company's last fiscal year.
DIRECTOR COMPENSATION
The Company does not currently compensate, and does not anticipate
compensating its directors for their services as directors, except that each of
the Company's non-employee directors, after the completion of the Offering, will
receive a director's fee of $500 per meeting for attendance at Board of
Directors or committee meetings. In addition, each of the Company's directors
receives reimbursement of all ordinary and necessary expenses incurred in
attending any meeting or any committee meeting of the Board of Directors.
Currently, all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
The Company's executive officers are appointed annually and serve at the
direction of the Board of Directors, subject to the terms of existing employment
agreements.
EMPLOYMENT AGREEMENTS
In July 1996, the Company entered into an employment agreement with Mr.
McMillen providing for his employment, as Chairman of the Board and Chief
Executive Officer, for a term expiring in March 1999. The employment agreement
provides for an annual base salary for Mr. McMillen of $90,000 that shall
increase to $150,000 upon the closing of the Offering. All salary payments are
being accrued until the closing of the Offering and will be paid with a portion
of the net proceeds of the Offering. See "Use of Proceeds." Mr. McMillen may
participate in all executive benefit plans and has the use of a Company car. The
agreement also provides, among other things, that if his employment is
terminated without cause (as defined in the agreement), the Company will pay an
amount equal to one year's base salary, payable over a one year period.
In March 1996 the Company entered into an employment agreement with Mr.
Sharer providing for his employment as President and Chief Operating Officer for
a term expiring in March 1999. The employment agreement provides for an annual
base salary for Mr. Sharer of $150,000 effective upon closing of this Offering,
and for participation in all executive benefit plans, as well as an automobile
allowance of $1,000 per month. Mr. Sharer was granted options to purchase
116,667 shares of the Company's Common Stock at an exercise price of $0.03 per
share. On the date of such grant, 16,667 of those options were exercisable, of
which 10,000 were exercised. The remaining options will vest in equal
installments on April 1, 1997, April 1, 1998, and March 31, 1999. The agreement
also provides, among other things, that, if his employment is terminated without
cause (as defined in the agreement) the Company will pay to him an amount equal
to one year's base salary, payable over a one year period.
In January 1996, the Company entered into an employment agreement with Dr.
Milano, providing for her employment as Vice President-Medical Affairs, for a
term expiring on December 31, 1998. The employment agreement provides for an
annual base salary of $120,000 beginning August 1, 1996, of which $6,000 per
month will be accrued until the closing of the Offering and paid with a portion
of the net proceeds of the
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<PAGE> 51
Offering, and for participation in all executive benefit plans plus an
automobile allowance of $500 per month. See "Use of Proceeds." Dr. Milano was
granted options to purchase 46,667 shares of the Company's Common Stock at an
exercise price of $0.03 per share. The options have vested as to 16,667 shares
and will vest as to 15,000 shares on October 1, 1997, and as to 15,000 shares on
September 30, 1998. Any additional compensation Dr. Milano receives for services
as a Qualified Physician (as described under "Business -- Agreements with
Affiliated Chiropractors and Other Licensed Practitioners -- Formation of
Integrated Medical Centers") will be offset against her base salary. See
"Certain Transactions." The agreement also provides, among other things, that,
if her employment is terminated without cause (as defined in the agreement), the
Company will pay her an amount equal to six month's salary, payable over a six
month period.
Each of the employment agreements with Messrs. McMillen and Sharer and with
Dr. Milano requires the full-time services of such employees. Mr. McMillen's
employment agreement requires that he devote a minimum of 40 hours per week to
his responsibilities as Chairman and Chief Executive Officer. The agreements
also contain covenants restricting the employee from engaging in any activities
competitive with the business of the Company during the term of such agreement
and for a period of one year thereafter, and prohibiting the employee from
disclosing confidential information regarding the Company.
STOCK OPTION PLANS
1994 Stock Option Plan. The Company's 1994 Stock Option Plan (the "1994
Plan") was adopted by the Company's Board of Directors and approved by the
shareholders of the Company in December 1994. The 1994 Plan was amended by the
Board of Directors, with shareholder approval, in 1995, so as to increase the
number of shares available under the 1994 Plan to 400,000 from 60,000. The
purpose of the 1994 Plan is to attract and retain qualified personnel, to
provide additional incentives to employees, officers, directors, consultants and
advisors of the Company, and to promote the Company's business. As of the date
of this Prospectus, options to purchase 351,166 shares of Common Stock at a
weighted average per share exercise price of $0.60 were outstanding. A total of
11,167 shares of Common Stock are available for grant under the 1994 Plan, of
which options to purchase 11,000 shares will be granted to Kats Management at an
exercise price per share equal to 75% of the initial public offering price per
share upon consummation of the Offering. See "Business -- Expansion Strategy."
The 1994 Plan will terminate in April 2004, unless sooner terminated by the
Board of Directors.
The 1994 Plan provides for the grant of both incentive stock options,
intended to qualify as such under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and nonqualified stock options. The Board may
delegate administration of the 1994 Plan to the Compensation Committee. Subject
to the limitations set forth in the 1994 Plan, the Board of Directors (or the
Compensation Committee) has the authority to select the persons to whom grants
are to be made, to designate the number of shares to be covered by each option,
to determine whether an option is to be an incentive stock option or a
nonqualified stock option, to establish vesting schedules, and, subject to
certain restrictions, to specify the type of consideration to be paid to the
Company upon exercise and to specify other terms of the options. The maximum
term of options granted under the 1994 Plan is ten years. Options granted under
the 1994 Plan are non-transferable and generally expire 90 days after the
termination of an optionee's service to the Company.
Although no specific vesting schedule is required under the 1994 Plan,
options previously granted under the 1994 Plan have generally provided for
vesting in three equal annual installments. The exercise price of incentive
stock options must equal at least the fair market value of the Common Stock on
the date of grant, except that the exercise price of incentive stock options
granted to any person who at the time of grant owns stock possessing more than
10% of the total combined voting power of all classes of stock must be at least
110% of the fair market value of such stock on the date of grant.
1996 Stock Option Plan. In October 1996, the Board of Directors of the
Company, with shareholder approval, adopted its 1996 Stock Option Plan (the
"1996 Plan") covering up to 200,000 shares of the Common Stock, pursuant to
which officers, directors, employees, advisors and consultants to the Company
are eligible to receive incentive and/or nonqualified stock options. The 1996
Plan, which expires in Septem-
50
<PAGE> 52
ber 2006, will be administrated by the Compensation Committee of the Board of
Directors. The selection of participants, allotment of shares, determination of
price, and other conditions relating to the grant of options will be determined
by the Compensation Committee in its sole discretion. Incentive stock options
granted under the 1996 Plan are exercisable for a period of up to 10 years from
the date of grant at an exercise price which is not less than the fair market
value of the Common Stock on the date of the grant, except that the term of an
incentive stock option granted under the 1996 Plan to a shareholder owning more
than 10% of the outstanding Common Stock may not exceed five years and its
exercise price may not be less than 110% of the fair market value of the Common
Stock on the date of the grant. Subject to the consummation of this Offering,
options to purchase an aggregate of 24,000 shares, exercisable at the initial
public offering price per share for a ten-year period, will be granted to all of
the members of the Company's Advisory Board. See "-- Advisory Board." No other
options have been granted under the 1996 Plan.
1996 Restricted Stock Option Plan for Health Care Professionals. In
October 1996, the Board of Directors adopted, and the stockholders of the
Company approved, the 1996 Restricted Stock Option Plan for Health Care
Professionals (the "1996 Professionals Plan"), which expires in October 2006.
The 1996 Professionals Plan permits the Company to grant nonqualified stock
options to licensed health care professionals affiliated with the Company and in
most cases employed by an Integrated Medical Center. The aggregate amount of
Common Stock with respect to which options may be granted may not exceed 100,000
shares. The Board of Directors has delegated to the Compensation Committee the
authority to grant options under such a plan, to construct and interpret such
plan, and to make all other determinations and take all actions necessary or
advisable for the administration of such plan. The exercise price for options
granted under the 1996 Professionals Plan may be no less than 85% of the fair
market value of the Common Stock on the date of grant. Options granted under the
1996 Professionals Plan will expire no later than the tenth anniversary of the
date of grant. No options had been granted under the 1996 Professionals Plan as
of the date of this Prospectus. See "Business -- Government
Regulation -- Federal Medicare and Medicaid Related Regulation" for a discussion
of certain regulatory constraints on the grant of options under the 1996
Professionals Plan.
EXECUTIVE BONUS PLAN
Effective January 1, 1996, the Company established an Executive Bonus Plan
for Key Executives (the "Bonus Plan") to reward executive officers and other key
employees based upon the performance of the Company and such individuals. Under
the Bonus Plan, the Company has discretion to award bonuses in an aggregate
amount equal to 10% of the Company's pre-tax income for a particular fiscal year
(the "Bonus Fund"). The maximum amount of the Bonus Fund for any year is $5
million. Under the terms of existing employment agreements, which expire on
various dates from December 1998 through August 1999, the Bonus Fund has been
allocated as follows: 30% to Mr. McMillen, 30% to Mr. Sharer, 10% to Dr. Milano,
and 20% to Dr. Kaplan, with 10% available for other employees. Awards under the
Bonus Fund are not exclusive of other bonuses that may be awarded by the Board
of Directors or the Compensation Committee from time to time.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Company has included in its Certificate of Incorporation and By-laws
provisions to (i) eliminate the personal liability of its directors and officers
for monetary damages resulting from breaches of their fiduciary duty (provided
that such provisions do not eliminate liability for breaches of the duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware General Corporation Law, or for any transaction from which the director
and/or officer derived an improper personal benefit), and (ii) indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law, including circumstances in which indemnification is otherwise
discretionary. The Company believes that these provisions are necessary to
attract and retain qualified persons as directors and officers.
The Company has not entered into indemnification agreements with any of its
directors and officers with the exceptions of the Company's Vice
President-Medical Affairs in her capacity as the sole stockholder, officer, and
director of an Illinois professional corporation formed in connection with an
Integrated Medical Center, and with the Company's President in his capacity as
an officer of certain medical corporations in
51
<PAGE> 53
Florida and Virginia affiliated with the Company. The Company may in the future
enter into separate indemnification agreements with its directors and officers
containing provisions which may in some respects be broader than the specific
indemnification provisions contained in the Company's Certificate of
Incorporation and By-laws.
ADVISORY BOARD
Subject to the consummation of the Offering, the Company has established an
Advisory Board (the "Advisory Board") initially comprised of three members with
experience in the areas of scientific, clinical, and regulatory strategy and
standards. The Advisory Board will meet periodically with the Company's Board of
Directors and management to discuss matters relating to the Company's business
activities. Members of the Advisory Board will be reimbursed by the Company for
out-of-pocket expenses incurred in serving on the Advisory Board. The Company
will grant to members of the Advisory Board, subject to the consummation of this
Offering, options to purchase up to 24,000 shares of Common Stock at an exercise
price equal to the initial public offering price per share, vesting over three
years. The members of the Company's Advisory Board and their primary
professional or academic affiliations are listed below.
Marc S. Micozzi, M.D., Ph.D., is Chairman of the Advisory Board and
Distinguished Scientist in the American Registry of Pathology, Inc., and the
executive director of the College of Physicians of Philadelphia. From 1986 to
1995, he served as the founding Director of the National Museum of Health and
Medicine in Washington, working with former Surgeon General C. Everett Koop,
S.D. to develop national health education programs for health professionals and
the public. Prior to 1986, Dr. Micozzi was a Senior Investigator at the National
Cancer Institute, National Institutes of Health, Bethesda, Maryland. He recently
authored the Fundamentals of Complementary and Alternative Medicine, a textbook
for physicians and medical students that lays the foundation for a broad
understanding of complementary and alternative medicine. He was the founding
editor of the Journal of Alternative and Complementary Medicine.
Richard A Lippin, M.D., is currently the Corporate Medical Director for
ARCO Chemical Company where he is responsible for the management of occupational
and environmental medical programs for ARCO Chemical Company worldwide. Dr.
Lippin has served on the Board of Directors of the American College of
Occupational and Environmental Medicine and currently serves on the governing
council of the College of Physicians of Philadelphia. He is also a member of the
faculty at Thomas Jefferson University in Philadelphia, Pennsylvania. Dr. Lippin
is the founder and immediate past president of the International Arts and
Medicine Association.
James M. Rippe, M.D., is currently the Director of the Center for Clinical
and Lifestyle Research and Associate Professor of Medicine (Cardiology) at Tufts
University School of Medicine. Dr. Rippe has written over 100 publications on
issues in medicine, health and fitness, and weight management. He has also
written 14 books including seven medical texts and seven books on health and
fitness for the general public. His recent book, Fit Over Forty, was published
in May 1996. Dr. Rippe has served as a Senior Medical Advisor on corporate
fitness to Johnson and Johnson Health Management. He serves as Chairman of the
Advisory Board for the "Healthy Growing Up" program. Dr. Rippe is Medical and
Child Development Director for the Discovery Zone and also serves as the Medical
Advisor of the International Health, Racquet, and Sports Club Association and
the Association of Quality Clubs. In 1989, Dr. Rippe was named Fitness Educator
of the Year by the International Dance Exercise Association ("IDEA"). In 1990 he
was named one of the 10 national "Healthy American Fitness Leaders" by the
United States Jaycees and the President's Council on Physical Fitness and
Sports. In 1992, he received a Lifetime Achievement Award from IDEA.
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<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's voting securities as of February 1, 1997, prior to
the Offering, and after the Offering, assuming the automatic conversion of all
outstanding shares of Series A Preferred Stock into Common Stock on the
effective date of the Offering and as adjusted to reflect the sale of the Shares
offered hereby by (i) each shareholder known by the Company to be the beneficial
owner of more than 5% of any class of the Company's voting securities, (ii) each
director of the Company and (iii) all officers and directors of the Company as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the securities listed below have sole investment and voting power with
respect to such securities, subject to community property laws where applicable.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF CLASS
OF CLASS BENEFICIALLY OWNED
BENEFICIALLY -------------------------------------
NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- -------------------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
COMMON STOCK
C. Thomas McMillen(1)....................... 394,500 55.2% 21.2%
725 Independence Avenue, S.E.
Washington, D.C. 20003
Robert S. Libauer(2)........................ 79,199 11.0% 4.2%
3701 Old Court Road, Unit 9
Baltimore, MD 21208
Danielle F. Milano, M.D.(3)................. 22,667 3.1% 1.2%
725 Independence Avenue, S.E.
Washington, D.C. 20003
Robert J. Mrazek(4)......................... 16,500 2.3% *
301 Constitution Ave., N.E.
Washington, D.C. 20002
E. Eugene Sharer(5)......................... 16,667 2.3% *
725 Independence Avenue, S.E.
Washington, D.C. 20003
James J. McMillen, M.D.(4).................. 6,000 * *
4004 Miller Road
St. Joseph, MO 64505
Reach Laboratories, Inc.(6)................. 110,000 15.4% 5.9%
1000 NBC Center
Lincoln, NE 68508
R. Michael Floyd............................ 72,866 10.2% 3.9%
5817 Ogden Court
Bethesda, MD 20816
All officers and directors as a group (six
persons).................................. 513,033 67.7% 26.9%
PREFERRED STOCK
Zev E. Kaplan............................... 500 37.0% --
3012 W. Charleston Boulevard
Suite 140
Las Vegas, NV 89102
Joel Babbit................................. 300 22.2% --
3350 Peachtree Road
Suite 1550
Atlanta, GA 30324
Peter G. Kelly.............................. 250 18.5% --
211 North Union Street
Suite 300
Alexandria, VA 22314
</TABLE>
53
<PAGE> 55
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CLASS PERCENTAGE OF CLASS
BENEFICIALLY BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
------------------------ ---------------- --------------- --------------
<S> <C> <C> <C>
George C. Finley............................ 100 7.4% --
95 Glastonbury Boulevard
Glastonbury, CT 06033
Pamela H. Shriver........................... 100 7.4% --
2510 Stone Mill Road
Baltimore, MD 21208
</TABLE>
- ---------------
* Percentage ownership is less than 1%
(1) Includes 34,500 shares as to which Mr. McMillen has sole voting power until
December 31, 2000, pursuant to irrevocable proxies from four other holders
of Common Stock. See "Certain Transactions."
(2) Includes 6,333 shares subject to warrants currently exercisable.
(3) Includes 16,667 shares subject to stock options currently exercisable.
Excludes 3,333 shares subject to warrants that are currently exercisable and
owned by Dr. Milano's father, as to which she disclaims beneficial interest.
(4) Mr. Mrazek and Dr. McMillen have each given Mr. McMillen an irrevocable
proxy to vote their respective shares until December 31, 2000. See "Certain
Transactions."
(5) Includes 6,667 shares subject to stock options currently exercisable. Does
not include 33,333 shares subject to stock options that will become
exercisable on April 1, 1997.
(6) The beneficial owners of Reach Laboratories, Inc. are Richard R. Endicott
and Janice G. Peterson.
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<PAGE> 56
SELLING SECURITY HOLDERS
The registration statement, of which this Prospectus forms a part, also
relates to the registration by the Company, for the account of the Selling
Security Holders, of an aggregate of (i) 183,333 shares of Common Stock
(assuming an initial public offering price per Share of $6.00 issuable upon
exercise of the Bridge Warrants, and (ii) the Bridge Warrants. The Selling
Security Holders' Securities are not being underwritten by the Representative in
connection with this Offering. The Selling Security Holders have agreed with the
Company not to directly or indirectly offer, sell, transfer or otherwise
encumber or dispose of any of their Common Stock for a period of 90 days after
the date of this Prospectus without the consent of the Representative. See
"Shares Eligible for Future Sale" and "Underwriting."
The sale of the Selling Security Holders' Securities by the Selling
Security Holders may be effected from time to time in transactions (which may
include block transactions by or for the account of the Selling Security
Holders) in the over-the-counter market or in negotiated transactions, or
through the writing of options on the Selling Security Holders' Securities, a
combination of such methods of sale, or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices.
The Selling Security Holders may effect such transactions by selling the
Selling Security Holders' Securities directly to purchasers, through
broker-dealers acting as agents for the Selling Security Holders, or to
broker-dealers who may purchase shares as principals and thereafter sell the
Selling Security Holders' Securities from time to time in the over-the-counter
market, in negotiated transactions, or otherwise. Such broker-dealers, if any,
may receive compensation in the form of discounts, concessions or commissions
from the Selling Security Holders and/or the purchasers for whom such
broker-dealers may act as agents or to whom they may sell as principals or both
(which compensation as to a particular broker-dealer may be in excess of
customary commissions).
The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales, might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit upon the resale of such securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
Sales of any shares of Common Stock by the Selling Security Holders may
depress the price of the Common Stock in any market that may develop for the
Common Stock.
55
<PAGE> 57
The following table sets forth certain information with respect to Selling
Security Holders for whom the Company is registering shares of Common Stock and
Bridge Warrants for resale to the public. None of the Selling Security Holders
has had any position with, held any office, or had any other material
relationship with the Company except that Complete Management, Inc. has signed a
letter of intent with the Company to develop Integrated Medical Centers in the
New York City metropolitan area and Jason Elkin is a consultant to the Company.
See "Business -- Expansion Strategy" and "Certain Transactions."
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
SECURITIES SECURITIES BEING SECURITIES OWNED
NAME OWNED(1) REGISTERED AFTER OFFERING(2)
- --------------------------------------------------- --------- ---------------- -----------------
<S> <C> <C> <C>
Complete Management, Inc.(3)
Common Stock..................................... 66,667 66,667 -0-
Bridge Warrants.................................. 66,667 66,667 -0-
Jason Elkin(4)
Common Stock..................................... 25,000 25,000 -0-
Bridge Warrants.................................. 25,000 25,000 -0-
Joseph D. Gersh
Common Stock..................................... 8,333 8,333 -0-
Bridge Warrants.................................. 8,333 8,333 -0-
Kanter Family Foundation(5)
Common Stock..................................... 8,333 8,333 -0-
Bridge Warrants.................................. 8,333 8,333 -0-
Stefanie Rubin
Common Stock..................................... 8,333 8,333 -0-
Bridge Warrants.................................. 8,333 8,333 -0-
Arthur Steinberg IRA
Common Stock..................................... 4,167 4,167 -0-
Bridge Warrants.................................. 4,167 4,167 -0-
Robert Steinberg
Common Stock..................................... 4,167 4,167 -0-
Bridge Warrants.................................. 4,167 4,167 -0-
Glenn Sutton, III
Common Stock..................................... 8,333 8,333 -0-
Bridge Warrants.................................. 8,333 8,333 -0-
Universal Partners, L.P.(6)
Common Stock..................................... 8,333 8,333 -0-
Bridge Warrants.................................. 8,333 8,333 -0-
Christine Wally
Common Stock..................................... 8,333 8,333 -0-
Bridge Warrants.................................. 8,333 8,333 -0-
Winfield Capital Corporation(7)
Common Stock..................................... 33,333 33,333 -0-
Bridge Warrants.................................. 33,333 33,333 -0-
</TABLE>
- ---------------
(1) Number of shares of Common Stock represents number of shares issuable upon
exercise of the Bridge Warrants.
(2) Assumes that all Bridge Warrants will be exercised and that all shares
issuable upon such exercise will be sold.
(3) The principals of Complete Management, Inc. are Steven Rabinovici, David
Jacaruso, Arthur L. Goldberg, Dennis Shields, Joseph M. Scotti, Dennis W.
Simmons, Robert Keating, John T. Dooley, Richard DeMaio, Claire Cardone,
Kenneth Theobalds, Steven Cohn, Laurence Shields and Steven A. Hirsh.
(4) Mr. Elkin also holds currently exercisable options to purchase 5,000 shares
of Common Stock.
(5) The principals of the Kanter Family Foundation are Joel Kanter, Joshua
Kanter, Janise Kanter and Ricki Kanter.
(6) The principals of Universal Partners, L.P. are Joel Kanter and Robert Mauer.
(7) The principals of Winfield Capital Corporation are Paul A. Perlin, David
Greenberg, R. Scot Perlin, Joel I. Brand, Barry J. Gordon, Allen L.
Weingarten and Scott A. Ziegler.
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<PAGE> 58
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Six of the Company's seven Integrated Medical Centers are owned by CWC LLC.
The Company is the managing member of CWC LLC and owns 1% of its membership
interests. As managing member the Company receives (i) a base fee of $7,500 per
month, increased by $2,000 per month for each clinic acquired and/or managed by
CWC LLC in excess of two clinics, and (ii) a commission in an amount equal to 1%
of the prior year's revenue of any new clinic acquired and/or managed by CWC
LLC. In addition, the Company is entitled to receive 50% of any cash flow
distributions after the other members of CWC LLC have received a 12% preferred
cumulative non-compounded annual return. The Company, as managing member, has
the authority and responsibility to make substantially all management decisions
for CWC LLC. In addition, the holders of more than 50% of the CWC LLC membership
interests have granted the Company an irrevocable proxy to vote their membership
interests as the Company sees fit. The proxy is valid for the life of CWC LLC.
As a result of these irrevocable proxies, the financial statements of the
Company and CWC LLC are consolidated for financial reporting purposes. In the
future, the Company does not plan to open any additional Integrated Medical
Centers owned directly or indirectly by CWC LLC, nor does it plan for CWC LLC to
raise any additional capital.
The Company has an option to purchase all of the membership interests of
CWC LLC at an exercise price in an amount such that the other members would
receive a 12% preferred, cumulative, non-compounded, annual return plus a
multiple of their capital contributions ranging from 2 in the first year (1997)
to 4 in the seventh year (2003), after taking into account any previously
returned capital contribution and preferred cumulative return. The exercise
price is payable to the members within 120 days of the Company's exercise of the
option. The price may be paid, at the Company's election, either in cash, or, if
any class of the Company's securities is publicly traded, 75% in cash and 25% in
securities of that class valued at their initial public offering price. If
securities constitute part of the exercise price, the securities will not be
registered under the Securities Act or applicable state securities laws.
CWC LLC has outstanding 13.3 Class A Units (membership interests other than
that of the managing member). The following officers and directors of the
Company or members of their immediate family hold the following interests in CWC
LLC: a trust for the benefit of Wilma Sharer, the spouse of the Company's
President and Chief Operating Officer, holds two Class A Units; Danielle Milano,
the Company's Vice President-Medical Affairs, holds 1/5 of one Class A Unit; and
Robert Libauer, a director of the Company, holds 2 19/50 Class A Units. Each
such person granted to the Company an irrevocable proxy to vote such person's
respective ownership interest in CWC LLC.
In August 1996, the Company entered into a consulting agreement with
J.E.M., Inc. ("JEM"), the sole stockholders of which are Dr. Kaplan, the
Company's Senior Director of Operations and Development, and his wife. Under the
terms of the consulting agreement, JEM agreed to provide advice and assistance
to the Company in connection with identifying and affiliating with chiropractors
and their existing chiropractic practices and identifying, acquiring, and/or
managing businesses engaged in providing services ancillary to those provided by
Integrated Medical Centers. The Company agreed to pay JEM $6,000 per month for
its services. The term of the consulting agreement expires in August 1999 and
may be terminated sooner by mutual agreement of the parties, by the Company for
"cause," defined as a violation by JEM of any material provision of the
consulting agreement not remedied within 30 days after notification or JEM's
conviction of a felony, upon termination of the employment agreement between Dr.
Kaplan and the Company, or JEM's failure to meet certain performance goals.
The Company, Mr. McMillen, Dr. McMillen, Mr. Mrazek, two other holders of
Common Stock and all holders of Series A Preferred Stock are parties to a
certain Stockholders' Agreement dated March 20, 1995 (the "Stockholders'
Agreement"), pursuant to which such stockholders agreed to various restrictions
on their ability to transfer the shares of Common Stock or Series A Preferred
Stock owned by them, among other things. The holders of the Series A Preferred
Stock, voting together as a class, were given the right to elect one director to
the Company's Board of Directors. The holders of the Series A Preferred Stock
have not exercised this right to date. In addition, the holders of both the
Series A Preferred Stock and the holders of Common Stock who are parties to the
Stockholders' Agreement were given the preemptive right to purchase a
57
<PAGE> 59
pro rata portion of any issuance of equity securities of the Company other than
issuances pursuant to the exercise of options granted under the 1994 Plan. The
preemptive rights do not apply to any public offering of equity securities
pursuant to a registration statement filed with the Commission, and expire in
such event. All such holders have waived their preemptive rights for each
issuance of equity securities by the Company prior to the date of this
Prospectus other than pursuant to the exercise of stock options. The
Stockholders' Agreement is to expire on March 20, 2015 or upon the earlier
voluntary written agreement of the Company and such stockholders. The Company
believes that the parties to the Stockholders' Agreement will agree to terminate
it upon the consummation of this Offering.
Dr. Milano is a "Qualified M.D." and serves as an officer, director, and
the sole stockholder of an Integrated Medical Center in Illinois, Complete
Wellness Medical Center of East Main Street, Carbondale, P.C. ("CWC
Carbondale"). See "Business -- Agreements With Affiliated Chiropractors and
Other Licensed Practitioners -- Formation of Integrated Medical Centers." In
September 1996, Dr. Milano, CWC Carbondale, and the Company entered into a Stock
Transfer Agreement (the "Stock Transfer Agreement") pursuant to which (i) Dr.
Milano agreed not to sell, encumber, or otherwise transfer the shares of stock
in CWC Carbondale owned by her without the written consent of CWC Carbondale and
the Company and (ii) the Company has the right, following the provision of
notice, to direct the transfer of all or part of such shares to such transferee
as it may designate for the sum of ten dollars, provided that the transferee is
licensed to practice medicine in the State of Illinois. In order to facilitate
the transfer, the Stock Transfer Agreement required the contemporaneous
execution by Dr. Milano of a stock transfer assignment, a resignation as an
officer and director of CWC Carbondale, and an Agreement for Sale of Business by
Transfer of Capital Stock under which Dr. Milano agreed to transfer her shares
in CWC Carbondale for the sum of ten dollars to a transferee to be designated by
the Company for this purpose. In accordance with the Stock Transfer Agreement,
the Company holds the stock transfer assignment, the resignation, and the
Agreement for Sale of Business by Transfer of Capital Stock in escrow.
Additionally, the Stock Transfer Agreement prohibits Dr. Milano, without prior
written consent of CWC Carbondale and the Company, from amending the charter or
bylaws of CWC Carbondale, agreeing to the merger or consolidation of CWC
Carbondale with or into another corporation, dissolving or liquidating CWC
Carbondale, authorizing the issuance of any additional shares of stock of CWC
Carbondale, or approving any contract with Dr. Milano herself, members of her
family, or related parties. The Company and Dr. Milano also entered into an
indemnification agreement pursuant to which the Company agreed to indemnify her
from and against claims made against her in her capacity as an officer or
director of CWC Carbondale. See "Management -- Limitation of Directors' and
Officers' Liability and Indemnification."
As of the date of this Prospectus, the Company has advanced approximately
$37,000 to Mr. McMillen without interest. Mr. McMillen has agreed to repay such
amount upon consummation of the Offering.
Dr. McMillen, Mr. Mrazek, and two other individuals have each given Mr.
McMillen a proxy to vote on their behalf all of the shares of Common Stock owned
by them. Each proxy is irrevocable and valid until December 31, 2000. See
"Principal Stockholders."
The Company believes that all prior transactions between the Company, its
officers, directors or other affiliates of the Company have been on terms no
less favorable than could have been obtained from unaffiliated third parties.
Any future transactions with officers, directors, 5% stockholders or affiliates
must be for valid business reasons, be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties, and be approved by a
majority of the independent outside members of the Company's Board of Directors
who do not have an interest in the transaction.
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<PAGE> 60
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Certificate of Incorporation to issue an
aggregate of 10,000,000 shares of Common Stock, par value $.0001665 per share,
and 2,000,000 shares of preferred stock, par value $.01 per share (the
"Preferred Stock"), of which 1,500 shares are designated as the Series A
Preferred Stock. As of September 30, 1996, 714,967 shares of Common Stock were
outstanding and held of record by nine stockholders, and 1,350 shares of Series
A Preferred Stock were outstanding and held of record by seven stockholders.
Upon consummation of this Offering, the outstanding shares of Series A Preferred
Stock will automatically convert into 145,800 shares of Common Stock, and an
aggregate of 1,860,767 shares of Common Stock will be outstanding.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share and, subject
to the rights of the holders of the Preferred Stock, to receive dividends when
and as declared by the Board of Directors, and to share ratably in the assets of
the Company legally available for distribution in the event of the liquidation,
dissolution or winding up of the Company. Holders of the Common Stock do not
have subscription, redemption or conversion rights, nor do they have any
preemptive rights other than holders of Common Stock who are parties to the
Stockholders' Agreement, as and to the extent provided in the Stockholders'
Agreement. See "Certain Transactions." In the event the Company were to elect to
sell additional shares of its Common Stock following this Offering, investors in
this Offering would have no prior right to purchase such additional shares. As a
result, their percentage equity interest in the Company would be diluted. The
shares of Common Stock offered hereby will be, when issued and paid for, fully
paid and not liable for further call or assessment. Holders of the Common Stock
do not have cumulative voting rights, which means that the holders of more than
half of the outstanding shares of Common Stock (subject to the rights of the
holders of the Preferred Stock) can elect all of the Company's directors, if
they choose to do so. In such event, the holders of the remaining shares of
Common Stock would not be able to elect any directors. The Board is empowered to
fill any vacancies on the Board. Except as otherwise required by Delaware law,
and subject to the rights of the holders of Preferred Stock, all stockholder
action is taken by vote of a majority of the outstanding shares of Common Stock
voting as a single class present at a meeting of stockholders at which a quorum
(consisting of a majority of the outstanding shares of the Common Stock) is
present in person or by proxy.
PREFERRED STOCK
Preferred Stock may be issued in one or more series and having such rights,
privileges and limitations, including voting rights, conversion privileges
and/or redemption rights, as may, from time to time, be determined by the Board
of Directors of the Company. Preferred Stock may be issued in the future in
connection with acquisitions, financings or such other matters as the Board of
Directors deems to be appropriate. In the event that any such shares of
Preferred Stock are to be issued, a Certificate of Designation, setting forth
the series of such Preferred Stock and the relative rights, privileges and
limitations with respect thereto, shall be filed with the Secretary of State of
the State of Delaware. The effect of such Preferred Stock is that the Company's
Board of Directors alone, within the bounds and subject to the federal
securities laws and Delaware law, may be able to authorize the issuance of
Preferred Stock which could have the effect of delaying, deferring or preventing
a change in control of the Company without further action by the stockholders
and may adversely affect the voting and other rights of holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may also
adversely affect the voting power of the holders of Common Stock, including the
loss of voting control to others.
The Company has designated 1,500 shares as Series A Preferred Stock and has
issued 1,350 shares of these shares. The holders who purchased 1,350 shares of
the Series A Preferred Stock and whose shares will convert into 145,800 shares
Common Stock upon this Offering, have certain piggyback registration rights.
Accordingly, if the Company proposes to register any of its securities, either
for its own account or for the
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account of other stockholders, the Company is required to notify such holders
and to include in such registration all of the 145,800 shares of Common Stock
requested to be included by them, subject to the discretion of the managing
underwriter. The holders of Series A Preferred Stock have agreed that they will
not seek to register any of their securities as part of this Offering. In
addition, such holders have entered into lock-up agreements with the
Representative. See "Shares Eligible for Future Sale" and "Underwriting".
WARRANTS
The following is a summary of certain provisions of the Warrants, but such
summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company and
American Stock Transfer & Trust Company (the "Warrant Agent"). A copy of the
Warrant Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. See "Additional Information."
Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time, one share of Common Stock at a price of $
per share [120% of the initial public offering price per share of Common Stock],
subject to adjustment in accordance with the anti-dilution and other provisions
referred to below, at any time commencing , 1997 [six months after the
date of this Prospectus] until , 2002 [five years after the date of
this Prospectus]. The holder of any Warrant may exercise such Warrant by
surrendering the certificate representing the Warrant to the Warrant Agent, with
the subscription form thereon properly completed and executed, together with
payment of the exercise price. No fractional shares will be issued upon the
exercise of the Warrants.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock, or sale by the Company of
shares of its Common Stock or other securities convertible into Common Stock
(exclusive of options and shares under the 1994 Plan, 1996 Plan and 1996
Professionals Plan, and other limited exceptions) at a price below the then
applicable exercise price of the Warrants. Additionally, an adjustment would be
made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving
corporation) or sale of all or substantially all of the assets of the Company,
in order to enable warrant holders to acquire the kind and number of shares of
stock or other securities or property receivable in such event by a holder of
the number of shares of Common Stock that have been purchased upon the exercise
of the Warrant.
Redemption Provisions. Commencing , 1998 [18 months after the
date of this Prospectus], the Warrants are subject to redemption, in whole but
not in part, at $.10 per Warrant on 30 days' prior written notice, provided that
the average closing bid price of the Common Stock as reported on Nasdaq SCM
equals or exceeds $ per share [160% of the initial public offering price]
(subject to adjustment for stock dividends, stock splits, combinations or
reclassifications of the Common Stock), for any 20 trading days within a period
of 30 consecutive trading days ending on the fifth trading day prior to the date
of the notice of redemption. In the event the Company exercises the right to
redeem the Warrants, such Warrants will be exercisable until the close of
business on the business day immediately preceding the date for redemption fixed
in such notice. If any Warrant called for redemption is not exercised by such
time, it will cease to be exercisable and the holder will be entitled only to
the redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time (or commencing six months from the date of this Prospectus with respect to
exercise) on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants become wholly void and of no value. If a
market for the Warrants develops, the holder may sell the Warrants instead of
exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the Warrant holders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
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less than 30 days on not less than 30 days' prior written notice to the Warrant
holders and the Representative. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price and the
expiration date with respect to any Warrant requires the consent of two-thirds
of the warrant holders. No other modifications may be made to the Warrants
without the consent of two-thirds of the warrant holders. The Warrants are not
exercisable unless, at the time of the exercise, the Company has a current
prospectus covering the shares of Common Stock issuable upon exercise of the
Warrants, and such shares have been registered, qualified or deemed to be exempt
under the securities laws of the state of residence of the exercising holder of
the Warrants. Although the Company will use its best efforts to have all of the
shares of Common Stock issuable upon exercise of the Warrants registered or
qualified on or before the exercise date and to maintain a current prospectus
relating thereto until the expiration of the Warrants, there can be no assurance
that it will be able to do so. The Warrants are separately transferable
immediately upon issuance. Although the Securities will not knowingly be sold to
purchasers in jurisdictions in which the Securities are not registered or
otherwise qualified for sale, purchasers might buy Warrants in the after-market
or may move to jurisdictions in which the shares underlying the Warrants are not
so registered or qualified during the period that the Warrants are exercisable.
In this event, the Company would be unable to issue shares to those persons
desiring to exercise their Warrants, and holders of Warrants would have no
choice but to attempt to sell the Warrants in a jurisdiction where such sale is
permissible or allow them to expire unexercised.
ANTI-TAKEOVER PROVISIONS
Upon consummation of this Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the Board of Directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66 2/3%
of the corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is: (i) the owner of 15%
or more of the outstanding voting stock of the corporation; or (ii) an affiliate
or associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaw or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Certificate of Incorporation or Bylaws.
TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Warrants is American Stock Transfer & Trust Company, 40 Wall Street, New
York, New York 10005.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, 1,860,767 shares of Common Stock and
1,000,000 Warrants will be outstanding. The 1,000,000 shares of Common Stock and
1,000,000 Warrants sold in the Offering (1,150,000 shares of Common Stock and
1,150,000 Warrants if the Over-allotment Option is exercised in full) will be
freely tradeable without restriction or further registration under the
Securities Act unless acquired by an "affiliate" of the Company (as that term is
defined in the Securities Act) which securities will be subject to the resale
limitations of Rule 144 under the Securities Act ("Rule 144"). In addition, the
Company has agreed that the Bridge Warrants and the shares of Common Stock
issuable upon exercise of the Bridge Warrants would be included in the
registration statement of which this Prospectus forms a part. Assuming a price
per Share of $6.00 in this Offering, a total of 183,333 shares of Common Stock
will be issuable upon exercise of the Bridge Warrants. The Selling Security
Holders have agreed not to, directly or indirectly, offer, sell, transfer,
pledge, assign, hypothecate, or otherwise encumber or dispose of any such shares
for a period of 90 days after the date of this Prospectus without the consent of
the Representative.
The remaining 860,767 shares of Common Stock which will be outstanding upon
consummation of the Offering were issued by the Company in transactions that
were exempt from the registration requirements under the Securities Act at
various times from November 1994 through August 1996, and are therefore
"restricted securities" within the meaning of Rule 144 ("Restricted
Securities"). In general, Rule 144 allows a person who has beneficially owned
Restricted Securities for at least two years, including persons who may be
deemed affiliates of the Company, to sell, within any three-month period, up to
the number of Restricted Securities that does not exceed the greater of (i) one
percent of the Common Stock or other units of the class outstanding, and (ii)
the average weekly trading volume in such securities during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. A person who is not deemed to have been an affiliate of the Company
at any time during the 90 days preceding a sale and who has beneficially owned
his Restricted Securities for at least three years would be entitled to sell
such Restricted Securities without regard to the volume limitations described
above and the other conditions of Rule 144.
Notwithstanding the foregoing, each officer and director of the Company,
substantially all holders of the shares of Common Stock and all holders of any
options, warrants or other securities convertible, exercisable or exchangeable
for shares of Common Stock have agreed not to, directly or indirectly, offer,
sell, transfer, pledge, assign, hypothecate or otherwise encumber or dispose of
any of the Company's securities, whether presently owned, for a period of 13
months after the date of this Prospectus without the prior written consent of
the Representative (the "Lock-Up Period"). An appropriate legend shall be marked
on the back of the stock certificates representing all such securities. Market
sales of a substantial number of shares of Common Stock, or the availability of
such shares for sale in the public market, could adversely affect prevailing
market prices of the Common Stock. In addition, sales of either the Warrants or
the underlying shares of Common Stock or even the existence of the Warrants, may
depress the price of the Common Stock or the Redeemable Warrants in any market
which may develop for such securities. Upon the termination of the Lock-Up
Period, approximately 713,100 Restricted Securities will be immediately eligible
for sale in the public market in reliance on Rule 144. The Commission has
proposed certain amendments to Rule 144 that would reduce by one year the
holding periods required for shares subject to Rule 144 to become eligible for
resale in the public market. This proposal, if adopted, would increase the
number of shares of Common Stock eligible for immediate resale following the
expiration of the Lock-up Period. No assurance can be given as to whether or
when the proposal will be adopted by the Commission.
A total of 700,000 shares of Common Stock are reserved for issuance under
the Company's three stock option plans. Upon completion of the Offering, options
to purchase an aggregate of 144,331 shares of Common Stock will be outstanding.
Each holder of options has agreed not to sell the shares issuable upon exercise
of such options until the expiration of the Lock-Up Period. Upon expiration of
the Lock-Up Period, options to purchase 323,550 shares will be exercisable. The
Company intends to file a registration statement on Form S-8 registering shares
issuable upon exercise of options granted under the plans, as and to the extent
permitted by the eligibility requirements of Form S-8. Upon such registration,
such shares will be eligible for resale in the public market.
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UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions of
the Underwriting Agreement (the "Underwriting Agreement"), to purchase from the
Company, and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the respective number of shares of Common Stock and Warrants
set forth opposite their names:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF NUMBER OF
UNDERWRITERS COMMON STOCK WARRANTS
- ------------------------------------------------------------------- ------------ ---------
<S> <C> <C>
National Securities Corporation....................................
------------ ---------
Total.................................................... 1,000,000 1,000,000
=========== ========
</TABLE>
The Underwriters are committed to purchase all the shares of Common Stock
and Warrants offered hereby, if any of such Securities are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions not in excess of $ per share of
Common Stock and $ per Warrant. Such dealers may reallow a concession
not in excess of $ per share of Common Stock and $ per Warrant
to certain other dealers. After the commencement of the Offering, the public
offering price, concession and reallowance may be changed by the Representative.
The Representative has informed the Company that it does not expect sales
to discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representative a non-accountable expense allowance equal to
3% of the gross proceeds derived from the sale of the Securities underwritten,
of which $50,000 has been paid to date.
The Company has granted to the Underwriters an Over-allotment Option,
exercisable during the 45-day period from the date of this Prospectus, to
purchase up to an additional 150,000 shares of Common Stock and/or an additional
150,000 Warrants at the initial public offering price per Share and per Warrant,
respectively, offered hereby, less underwriting discounts and the
non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the
Securities offered hereby. To the extent such option is exercised in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional Securities proportionate to
its initial commitment.
All officers and directors of the Company, substantially all stockholders
of the Company, and all holders of any options, warrants or other securities
convertible, exercisable or exchangeable for Common Stock have agreed not to
offer, agree or offer to sell, sell, transfer, assign, encumber, grant an option
for the purchase or sale of, pledge or otherwise dispose of any beneficial
interest in such securities for a period of 13 months following the date of this
Prospectus without the prior written consent of the Representative ("Lock-up
Period"). An appropriate legend shall be marked on the face of certificates
representing all such securities. The Selling Security Holders have agreed not
to offer, agree or offer to sell, sell, transfer, assign, encumber, grant an
option for the purchase or sale of, pledge or otherwise dispose of any
beneficial interest in the Common Stock issuable upon exercise of the Bridge
Warrants for a period of 90 days following the date of this Prospectus without
the consent of the Representative.
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<PAGE> 65
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the Company
up to 100,000 shares of Common Stock and/or up to 100,000 Warrants (the
"Representative's Warrants"). The Representative's Warrants are initially
exercisable at a price of $ per share [125% of the initial public
offering price per share of Common Stock] and $ per Warrant [125% of
the initial public offering price per Warrant] for a period of four years,
commencing one year from the effective date of the Registration Statement and
are restricted from sale, transfer, assignment or hypothecation for a period of
twelve months from the effective date of the Registration Statement, except to
officers of the Representative. The Representative's Warrants provide for
adjustment in the number of shares of Common Stock and Warrants issuable upon
the exercise thereof as a result of certain subdivisions and combinations of the
Common Stock. The Representative's Warrants grant to the holders thereof certain
rights of registration for the securities issuable upon exercise thereof.
The Company has agreed, at the request of the Representative, that for
three years after the date of this Prospectus, it will use its best efforts to
cause one individual designated by the Representative to be elected to the
Company's Board of Directors. The Company has also agreed to reimburse the
Representative for approximately $5,000 in due diligence expenses incurred in
connection with this Offering.
Prior to this Offering, there has been no public market for the Common
Stock or the Warrants. Consequently, the initial public offering prices of the
Common Stock and the Warrants and the exercise price of the Warrants have been
determined by negotiation between the Company and the Representative and do not
necessarily bear any relationship to the Company's asset value, net worth, or
other established criteria of value. The factors considered in such
negotiations, in addition to prevailing market conditions, included the history
of and prospects for the industry in which the Company competes, an assessment
of the Company's management, the prospects of the Company, its capital
structure, the market for initial public offerings and certain other factors as
were deemed relevant.
Upon the exercise of any Warrants more than one year after the date of this
Prospectus, which exercise was solicited by the Representative, and to the
extent not inconsistent with the guidelines of the National Association of
Securities Dealers, Inc. ("NASD") and the Rules and Regulations of the
Commission, the Company has agreed to pay the Representative a commission that
will not exceed 5% of the aggregate exercise price of such Warrants in
connection with bona fide services provided by the Representative relating to
any warrant solicitation undertaken by the Representative. In addition, the
individual must designate the firm entitled to payment of such warrant
solicitation fee. A warrant solicitation fee will be paid only to the
Representative or another NASD member when such NASD member is specifically
designated in writing as the soliciting broker. However, no compensation will be
paid to the Representative in connection with the exercise of the Warrants if
(a) the market price of the Common Stock is lower than the exercise price, (b)
the Warrants are held in a discretionary account, or (c) the exercise of the
Warrants is not solicited by the Representative . Unless granted an exemption by
the Commission from Rule 10b-6 under the Exchange Act, the Representative and
any soliciting broker-dealers will be prohibited from engaging in any
market-making activities or solicited brokerage activities with regard to the
Company's securities for the period from nine business days (or such other
applicable period(s) as Rule 10b-6 may provide) prior to any solicitation of the
exercise of the Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right that the
Representative and any soliciting broker-dealers may have to receive a fee for
the exercise of the Warrants following such solicitation. As a result, the
Representative and any soliciting broker-dealers may be unable to continue to
provide a market for the Common Stock or Warrants during certain periods while
the Warrants are exercisable. If the Representative has engaged in any of the
activities prohibited by Rule 10b-6 during the periods described above, the
Representative has undertaken to waive unconditionally its rights to receive a
commission on the exercise of such Warrants.
In August 1996, the Representative acted as a non-exclusive placement agent
for a portion of the Bridge Financing. The Representative received a 10%
commission in the amount of $40,000.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration Statement
of which this Prospectus is a part. See "Additional Information."
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LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Storch & Brenner, Washington, D.C. A partner of Storch & Brenner owns
8,400 shares of the Company's Common Stock. Winston & Strawn, Chicago, Illinois
has served as special health care regulatory counsel to the Company in
connection with this Offering. Orrick, Herrington & Sutcliffe LLP, New York, New
York, has acted as counsel to the Underwriters in connection with this Offering.
EXPERTS
The consolidated financial statements of Complete Wellness Centers, Inc. as
of December 31, 1995, and for the year then ended and for the period from the
date of inception (November 17, 1994) through December 31, 1994, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement under the Securities
Act with respect to the Securities offered hereby. This Prospectus, filed as a
part of the Registration Statement, does not contain certain information set
forth in or annexed as exhibits to the Registration Statement. For further
information regarding the Company and the Securities offered hereby, reference
is made to the Registration Statement and to the exhibits filed as a part
thereof, which may be inspected at the office of the Commission without charge
or copies of which may be obtained therefrom upon request to the Commission and
payment of the prescribed fee. Statements contained in this Prospectus and the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement and such
exhibits and schedules may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the Commission: New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048, and
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material is also available
electronically by means of the Commission's home page on the Internet at
http:/www.sec.gov.
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COMPLETE WELLNESS CENTERS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM THE DATE OF INCEPTION (NOVEMBER 17, 1994)
THROUGH DECEMBER 31, 1994 AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 (AUDITED)
WITH REPORT OF INDEPENDENT AUDITORS,
AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Financial Statements
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Operations............................................... F-4
Consolidated Statements of Stockholders' Deficit.................................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Complete Wellness Centers, Inc.
We have audited the accompanying consolidated balance sheet of Complete
Wellness Centers, Inc. (the "Company"), as of December 31, 1995 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended and for the period from the date of inception (November 17,
1994) through December 31, 1994. 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 audit 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 consolidated financial position of
the Company at December 31, 1995 and the consolidated results of its operations
and its cash flows for the year then ended and for the period from the date of
inception (November 17, 1994) through December 31, 1994 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Washington, DC
July 18, 1996, except for Notes 1, 5 and 7 as
to which the date is November 13, 1996
F-2
<PAGE> 69
COMPLETE WELLNESS CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 63,834 $ 722,293
Patient receivables, net of allowance for doubtful accounts
of $5,650 and $61,608......................................... 3,120 573,519
Advances to officers and other assets............................ 1,753 37,012
-------- ----------
Total current assets............................................... 68,707 1,332,824
Furniture and equipment, net....................................... 57,324 217,088
-------- ----------
Total assets....................................................... $ 126,031 $ 1,549,912
======== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................. $ 135,925 $ 206,103
Accrued liabilities.............................................. -- 463,982
Notes payable.................................................... 730 1,096,770
-------- ----------
Total current liabilities.......................................... 136,655 1,766,855
Convertible note payable........................................... 25,000 25,000
Minority interest.................................................. 24,543 326,793
Stockholders' deficit:
Preferred Stock, $.01 par value per share, 2,000,000 shares
authorized of which 1,500 are designated Series A, 12%
Cumulative Convertible Preferred Stock, 1,350 shares issued
and outstanding............................................... 14 14
Common Stock, $.0001665 par value per share; 10,000,000 shares
authorized, 567,300 shares issued and outstanding, 714,967
shares issued and outstanding at December 31, 1995 and
September 30, 1996, respectively.............................. 95 119
Additional capital............................................... 137,013 149,370
Accumulated deficit.............................................. (197,289) (718,239)
-------- ----------
Total stockholders' deficit........................................ (60,167) (568,736)
-------- ----------
Total liabilities and stockholders' deficit........................ $ 126,031 $ 1,549,912
======== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 70
COMPLETE WELLNESS CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM THE
DATE OF INCEPTION NINE MONTHS ENDED
(NOVEMBER 17, 1994) SEPTEMBER 30,
THROUGH YEAR ENDED ----------------------
DECEMBER 31, 1994 DECEMBER 31, 1995 1995 1996
------------------- ----------------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue:
Patient revenue................. $ -- $ 22,114 $ 8,618 $ 869,122
Management services income...... -- -- -- 4,160
------- --------- -------- ---------
-- 22,114 8,618 873,282
Direct expenses:
Salary and consulting costs..... 1,400 93,131 59,283 249,293
Management fees................. -- 29,669 4,146 438,948
Rent............................ -- 4,501 400 160,988
Advertising and marketing....... -- 25,821 11,909 36,828
------- --------- -------- ---------
Total direct expenses............. 1,400 153,122 75,738 886,057
General and administrative........ -- 253,024 28,818 607,770
Depreciation and amortization..... -- 6,490 1,623 24,598
------- --------- -------- ---------
Operating deficit................. (1,400) (390,522) (97,561) (645,143)
Interest expense.................. -- 930 13 24,229
Interest income................... -- 1,106 496 4,663
Minority interest................. -- 194,457 2,927 143,759
------- --------- -------- ---------
Net loss.......................... $(1,400) $(195,889) $(94,151) $(520,950)
======= ========= ======== =========
Pro forma net loss per share data
(Unaudited -- Note 10):
Net loss per common and
common equivalent shares... $ (0.26) $ (0.43)
Weighted average number of
common and common
equivalent shares
outstanding................ 753,924 1,225,633
</TABLE>
See accompanying notes.
F-4
<PAGE> 71
COMPLETE WELLNESS CENTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ---------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Date of inception (November 17,
1994)............................... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock............ -- -- 378,000 63 -- -- 63
Net loss............................ -- -- -- -- -- (1,400) (1,400)
----- --- ------- ---- -------- --------- ---------
Balance at December 31, 1994.......... -- -- 378,000 63 -- (1,400) (1,337)
Issuance of common stock............ -- -- 189,300 32 1,893 -- 1,925
Issuance of preferred stock......... 1,350 14 -- -- 134,986 -- 135,000
Recognition of the granting of below
market stock options.............. -- -- -- -- 1 -- 1
Recognition of the granting of below
market common stock warrants...... -- -- -- -- 133 -- 133
Net loss............................ -- -- -- -- -- (195,889) (195,889)
----- --- ------- ---- -------- --------- ---------
Balance at December 31, 1995.......... 1,350 14 567,300 95 137,013 (197,289) (60,167)
Issuance of common stock............ -- -- 110,000 18 -- -- 18
Exercise of stock options for shares
of Complete Wellness Centers, Inc.
common stock...................... -- -- 37,667 6 1,449 -- 1,455
Recognition of the granting of below
market stock options.............. -- -- -- -- 4,988 -- 4,988
Recognition of the granting of below
market common stock warrants...... -- -- -- -- 5,920 -- 5,920
Net loss............................ -- -- -- -- -- (520,950) (520,950)
----- --- ------- ---- -------- --------- ---------
Balance at September 30, 1996
(unaudited)......................... 1,350 $ 14 714,967 $119 $149,370 $(718,239) $(568,736)
===== === ======= ==== ======== ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 72
COMPLETE WELLNESS CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DATE OF
INCEPTION
(NOVEMBER 17, NINE MONTHS ENDED
1994) THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -----------------------
1994 1995 1995 1996
------------- ------------ -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................. $(1,400) $ (195,889) $(94,151) $ (520,950)
Adjustments to reconcile net loss to net
cash used in operating activities:
Minority interest....................... -- (194,457) (2,927) (143,759)
Depreciation and amortization........... -- 6,490 1,623 24,598
Provision for bad debts................. -- 5,650 -- 70,000
Amortization of debt discount........... -- -- -- 1,960
Recognition of the compensatory granting
of non-qualified stock options....... -- 1 -- 4,988
Recognition of the granting of common
stock warrants....................... -- 133 -- --
Recognition of common stock issued for
services rendered.................... -- 1,893 1,893 --
Changes in operating assets and
liabilities:
Patient receivables.................. -- (8,770) (6,235) (640,390)
Advances to officers and other
current assets..................... -- (1,753) (20,095) (35,259)
Accounts payable..................... 1,337 134,588 29,713 70,178
Accrued liabilities.................. -- -- -- 463,982
------- --------- --------- ----------
Net cash used in operating activities..... (63) (252,114) (90,179) (704,652)
INVESTING ACTIVITIES
Purchase of equipment..................... -- (38,814) (26,129) (184,362)
------- --------- --------- ----------
Net cash used in investing activities..... -- (38,814) (26,129) (184,362)
FINANCING ACTIVITIES
Proceeds from notes payable............... -- 39,730 -- 1,100,000
Proceeds from sale of common stock........ 63 32 32 18
Proceeds from sale of preferred stock..... -- 135,000 1,000 --
Proceeds from sale of equity in Complete
Wellness Centers, LLC................... -- 219,000 169,000 446,000
Payments of notes payable................. -- (39,000) -- --
Exercise of stock options................. -- -- -- 1,455
------- --------- --------- ----------
Net cash provided by financing
activities.............................. -- 354,762 170,032 1,547,473
------- --------- --------- ----------
Net increase in cash and cash
equivalents............................. -- 63,834 53,724 658,459
Cash and cash equivalents at beginning
of year................................. -- -- -- 63,834
------- --------- --------- ----------
Cash and cash equivalents at end of
year.................................... $ -- $ 63,834 $ 53,724 $ 722,293
======= ========= ========= ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 73
COMPLETE WELLNESS CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM THE DATE OF INCEPTION (NOVEMBER 17, 1994)
THROUGH DECEMBER 31, 1994 AND AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995 (AUDITED) AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Complete Wellness Centers, Inc. (the "Company") was incorporated in
Delaware in November 1994 and was in the development stage through December 31,
1994. The Company develops and operates integrated medical centers (the
"Integrated Medical Centers") primarily in the States of Virginia and Florida.
As of and for the year ended December 31, 1995, the Company's sole operation is
the management of an Integrated Medical Center located in Virginia.
The Company is the managing member of Complete Wellness Centers, LLC ("CWC,
LLC") and has a 1% equity ownership interest. CWC, LLC acquired certain
furniture and equipment of a chiropractic clinic for $15,000 in cash and a
$25,000 note payable. The assets were used to establish an Integrated Medical
Center at the same location as the previous chiropractic clinic. No working
capital, patient files or employees were transferred as a result of the
transaction. The Integrated Medical Center is managed by the Company.
CWC, LLC was formed in Delaware in March 1995 and was capitalized through
the issuance of 13.3 Class A units. The Company has an option for a seven-year
period to purchase all of the units at an exercise price in an amount such that
the Class A members shall receive a 12% cumulative preferred return plus a
multiple of their capital contribution ranging from two in the first year to
four in the seventh year. The exercise price shall be paid by the Company to the
Class A members within 120 days of the Company exercising the call option and is
payable either in cash or a combination of cash and, if it is publicly traded at
the exercise date, stock of the Company. The Company has obtained irrevocable
proxies valid for the life of CWC, LLC from the holders of a majority of the
Class A units to exercise all of their voting rights.
The consolidated financial statements reflect the accounts of Complete
Wellness Centers, Inc. and CWC, LLC and its wholly-owned subsidiary Complete
Wellness Center of Fredericksburg, Inc. Significant intercompany transactions
have been eliminated. The financial statements of CWC, LLC are consolidated with
the Company's financial statements because the Company has unilateral, perpetual
and non-temporary control (via signed irrevocable proxies from the holders of a
majority in interest of the membership interests of CWC, LLC) over the assets
and business operations of CWC, LLC and, notwithstanding the lack of technical
majority ownership, consolidation of CWC, LLC is necessary to present fairly the
financial position and results of operations of the Company.
The Company has recorded its obligation to the Class A members holding 99%
of the members interest of CWC, LLC as minority interest.
The Company's initial strategy was to develop approximately 25 Integrated
Medical Centers through December 31, 1996. Management expected the cash flow
generated from the Company's Integrated Medical Centers and the bridge loan (see
Note 5) to provide sufficient working capital resources to enable the Company to
implement this plan. To date the Company has developed 8 Integrated Medical
Centers, and now hopes to complete approximately 63 additional Integrated
Medical Centers in 1997. Throughout the development period the Company has
experienced continued operating losses and negative cash flows. The capital
needs of continuing operations and the expected expansion will require the
Company to obtain additional capital through incurring additional debt or the
completion of private or public equity offerings. The Company does not currently
have any committed sources of additional capital and substantially all of its
assets are secured as collateral for notes issued in connection with the 1996
bridge loan. There can be no assurance that the Company will be able to raise
additional capital when needed on satisfactory terms or at all. If the
F-7
<PAGE> 74
COMPLETE WELLNESS CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND BASIS OF PRESENTATION -- (CONTINUED)
Company is unable to secure additional sources of financing, when needed, its
expansion strategy could be materially adversely affected.
The Company entered into contracts with twenty chiropractors during the
nine months ended September 30, 1996 to develop Integrated Medical Centers. The
total costs of developing these centers are expected to be approximately
$600,000.
Under the agreements entered into in 1996, the Company will open new
Integrated Medical Centers in the same location as chiropractors' existing
chiropractic practices (the "Affiliated Practices"). The Integrated Medical
Centers will employ a physician (the "MD") on a salaried basis to supervise the
provision of health care services. Where permitted by state law, the Integrated
Medical Centers will be wholly-owned by the Company. In other jurisdictions, the
Integrated Medical Centers will be wholly-owned by another MD. The chiropractor
will continue to operate his or her existing Affiliated Practice separately from
the Integrated Medical Center. The Company will not acquire the Affiliated
Practice, its patient base, or its tangible assets. In addition, no
consideration will be paid to the chiropractor at inception of the arrangements.
The Company also entered into contractual arrangements with each
chiropractor whereby (1) the Company will lease from the chiropractor or the
chiropractor's existing chiropractic practice certain facilities and equipment
for the use of the Integrated Medical Center, (2) a management company
controlled by the chiropractor will provide substantially all administrative
services to the Integrated Medical Center, (3) the Company will provide certain
management services to the Integrated Medical Centers on behalf of the
management company controlled by the chiropractor, and (4) the Integrated
Medical Center will pay the chiropractor a fixed salary to render chiropractic
services to patients of the Integrated Medical Center. The Company will not
provide management services to, and will not receive any fees from, the existing
Affiliated Practice. The agreements are for an initial period of either five or
ten years.
The Company recognizes all revenue and expenses of the Integrated Medical
Centers formed as wholly-owned subsidiaries of the Company or CWC LLC. The
financial results of Integrated Medical Centers organized as physician-owned
professional corporations are not consolidated in the Company's financial
statements. In such cases, the Company recognizes only the fees derived by the
Company through its management agreements.
Patient revenue from services is reported at the estimated realizable
amounts from patients and third party payors for services rendered.
Substantially all of the patient service revenue of the Integrated Medical
Centers is paid by the patients and traditional commercial insurers. The
Integrated Medical Centers do not currently have any HMO contracts.
Management or other contractual fees earned by the Company that are related
to wholly-owned Integrated Medical Centers, regardless of the source of payment,
are eliminated in the Company's consolidated financial statements. Net
management fees to be received by the Company related to physician-owned
Integrated Medical Centers are computed as a percentage of the patient billings
of the Integrated Medical Center. Such fees are recognized monthly based upon
the reported accrual basis operating results of the Centers.
2. SIGNIFICANT ACCOUNTING POLICIES
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 financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE> 75
COMPLETE WELLNESS CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include currency on
hand, demand deposits, and all highly liquid investments with an original
maturity of three months or less.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at the lower of cost or net realizable
value. Maintenance and repairs are charged to expense as incurred. Depreciation
is computed using the straight-line method at rates intended to amortize the
cost of the related assets over their estimated useful lives.
Furniture and equipment of the Company are reviewed for impairment whenever
events or circumstances indicate that the asset's undiscounted expected cash
flows are not sufficient to recover its carrying amount. The Company measures an
impairment loss by comparing the fair value of the asset to its carrying amount.
Fair value of an asset is calculated as the present value of expected future
cash flows.
INCOME TAXES
Income taxes are provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis (i.e., temporary differences).
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees.
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based
Compensation, which provides an alternative to APB Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for stock-based compensation issued
to employees. The Statement allows for a fair-value-based method of accounting
for employee stock options and similar equity instruments and requires certain
disclosure of the pro forma effect on net income and earnings per share of its
fair-value-based accounting for those arrangements if the fair value method of
accounting is not adopted. These disclosure requirements are effective for
fiscal years beginning after December 15, 1995, or upon initial adoption of the
statement, if earlier. The Company has elected to continue to account for
stock-based compensation arrangements under APB Opinion No. 25 and accordingly
recognizes compensation expense for the stock option grants as the difference
between the fair value and the exercise price at the grant date but will provide
the required pro forma disclosures in the December 31, 1996 consolidated
financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has determined the estimated fair value of financial instruments
using available market information and valuation methodologies. Cash
equivalents, accounts receivable, accounts payable and accrued liabilities and
other current assets and liabilities are carried at amounts which reasonably
approximate their fair values. Considerable judgment is necessary to interpret
market data and develop estimated fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize on disposition of the financial instruments. The use of different market
assumptions or estimation methodologies may have an effect on the estimated fair
value amounts.
F-9
<PAGE> 76
COMPLETE WELLNESS CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended September
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Details of the allowance for doubtful accounts receivable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Beginning balance.................................. $ -- $ 5,650
Bad debt expense................................... 5,650 70,000
Accounts written off............................... -- 14,042
------ -------
Ending balance..................................... $5,650 $61,608
====== =======
</TABLE>
4. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER
ASSET 31, SEPTEMBER 30,
LIVES 1995 1996
----- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment.................... 5 $63,814 $ 248,176
Less accumulated depreciation and
amortization............................. (6,490) (31,088)
------- --------
$57,324 $ 217,088
======= ========
</TABLE>
No interest has been capitalized through September 30, 1996.
The Company leases space of its wholly owned Integrated Medical Center
(Complete Wellness Center of Fredericksburg) and its corporate office space on a
month-by-month basis.
5. DEBT
CONVERTIBLE NOTE PAYABLE
The convertible note payable bears interest at 8% and is due July 17, 2000.
Interest is payable quarterly while the principal is payable in one installment
on the due date. The note is secured by a lien on the assets of Complete
Wellness Centers of Fredericksburg. In the event of an initial public offering
for CWC, LLC, the note, at the lendee's option, will be convertible into
membership interests of CWC, LLC at the initial public offering price.
1995 FINANCING
In November 1995 the Company issued $39,730 of subordinated promissory
notes bearing interest at 12%. In connection with the financing, the lendors
have been issued detachable warrants with an exercise price of $.003333 to
purchase 13,243 shares of the Company's Common Stock. Interest expense of $133
was recorded for these warrants. The Company repaid $39,000 of these notes in
1995.
F-10
<PAGE> 77
COMPLETE WELLNESS CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT -- (CONTINUED)
1996 BRIDGE LOAN
On August 15, 1996, the Company completed a private placement of $1.1
million of 12% notes. In connection with the agreement, the lendors have been
issued detachable warrants with an exercise price of $0.003 to purchase 183,333
shares of Common Stock, assuming an initial public offering price of $6.00 per
share (176,000 shares if the Company does not close an Initial Public Offering
("IPO") by June 30, 1997). An additional 3,333 warrants with an exercise price
of $0.003 were given to a broker/dealer as consideration for assisting with the
financing. The fair value of the lender and broker/dealer warrants, $5,920, was
recognized as a discount on the loan of which $1,960 was amortized through
September 30, 1996. The outstanding notes bear interest at 12% and are callable
on June 30, 1997 at the sole discretion of the lendors. Accrued interest is
payable quarterly beginning January 1, 1997; principal is payable in one
installment on the earlier of an IPO or the due date. The loan is secured by
substantially all of the Company's assets. In the event of an IPO by the
Company, the principal amount plus accrued interest becomes due.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities recognized as of December 31, 1995 are
presented below:
<TABLE>
<CAPTION>
DECEMBER
31, SEPTEMBER 30,
1995 1996
----------- -------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Start up costs........................................... $ 448 $ 284
Non-qualified stock options.............................. -- 1,996
Bad debt expense......................................... 2,260 30,596
Operating loss carryforward.............................. 76,687 257,108
-------- ---------
Total deferred tax assets.................................. 79,395 289,984
Less valuation allowance................................... (78,915) (287,536)
-------- ---------
Net deferred tax assets.................................... 480 2,448
Deferred tax liabilities:
Depreciation............................................. (480) (2,448)
-------- ---------
Total deferred tax liabilities............................. (480) (2,448)
Net deferred tax amount.................................... $ -- $ --
======== =========
</TABLE>
At September 30, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $521,000, which expire in 2011.
The Company has a cumulative pretax loss for financial reporting purposes.
Recognition of deferred tax assets will require generation of future taxable
income. There can be no assurance that the Company will generate any earnings or
any specific level of earnings in future years. Therefore, the Company
established a valuation allowance on deferred tax assets of $78,915 and $287,536
as of December 31, 1995 and September 30, 1996, (unaudited) respectively. These
carryforwards may be significantly limited under the Internal Revenue Service
Code as a result of ownership changes resulting from the Company's redeemable
convertible Preferred Stock financing and other equity offerings.
F-11
<PAGE> 78
COMPLETE WELLNESS CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (CONTINUED)
Significant components of the provision for income taxes are as follows for
the period ended:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 30,
1995 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current:
Federal.......................................... -- --
State............................................ -- --
-------- ---------
Total current...................................... -- --
Deferred:
Federal.......................................... $ (65,971) $ (175,646)
State............................................ (12,385) (32,975)
Increase in valuation allowance.................. 78,356 208,621
-------- ---------
Total deferred..................................... $ -- $ --
======== =========
</TABLE>
The effective tax rate on income before income taxes varies from the
statutory federal income tax rate are as follows for the period ended:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 30,
1995 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Statutory rate..................................... (34)% (34)%
State taxes, net................................... (6)% (6)%
Valuation allowance................................ 40% 40%
--- ---
0% 0%
=== ===
</TABLE>
7. STOCKHOLDERS' EQUITY
STOCK SPLIT
During 1995 the Company effected a one-hundred and eighty-for-one stock
split of the Company's Common Stock and increased the number of authorized
shares from 20,000 to 10,000,000. Pursuant to the authorization of the Board of
Directors and Stockholders, the Company effected, on November 13, 1996, a
one-for-three stock split. Authorized shares of Common Stock remain at
10,000,000. All share amounts reflected herein reflect the one-for-three stock
split.
CONVERTIBLE PREFERRED STOCK
The Series A Convertible Preferred Stock ("Series A Preferred Stock") has a
12% cumulative preferred return payable upon declaration by the Board of
Directors and liquidation preference equal to $100 per share plus accrued but
unpaid dividends. There are no accrued, undeclared dividends at September 30,
1996. Each share of Series A Preferred Stock is convertible to 108 shares of
Common Stock at the option of the holder and automatically in the event of an
IPO of the Company's Common Stock. Beginning on March 17, 1996, at the
unilateral option of the Company the Series A Preferred Stock may be redeemed
for $112 per share plus accrued dividends. The holders of Series A Preferred
Stock shares are entitled to vote on all matters submitted to a vote of the
stockholders of the Company. The preferred shareholders have the number of votes
equal to the number of whole shares of Common Stock into which each share of
Series A Preferred Stock is then convertible.
F-12
<PAGE> 79
COMPLETE WELLNESS CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTION PLAN
The Company has a stock option plan providing for the grant of incentive
and nonqualified stock options to employees, directors, consultants and
advisors. Pursuant to the Plan, 400,000 shares of Common Stock have been
reserved for issuance. No options are exercisable at December 31, 1995. At
December 31, 1995 the following options have been granted:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
DATE OF GRANT SHARES GRANTED PRICE FAIR VALUE
------------------------------------------------ ---------------- -------- ----------
<S> <C> <C> <C>
December 1, 1995................................ 4,333 $.03 $ .004
December 1, 1995................................ 36,667 $.03 $ .01
</TABLE>
The 36,667 options granted December 1, 1995 include 33,333 performance
options exercisable only upon the attainment of certain revenue goals. Options
generally vest 33 1/3% each year beginning on the anniversary of the grant date.
No options have been forfeited as of December 31, 1995. Through September 30,
1996, 36,667 options were forfeited.
The 4,333 shares were granted to a consultant. The fair value of these
securities was $.004 per share as determined by an independent valuation
company. Nominal expense was recorded for these options as of December 31, 1995.
The following additional options were granted in the 9 months ended
September 30, 1996 (unaudited):
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS/WARRANTS
GRANT DATE GRANTED EXERCISE PRICE FAIR VALUE
------------------------------------------------ ---------------- -------------- ----------
<S> <C> <C> <C>
Employee Options
January 1, 1996................................. 56,667 $ .03 $.03
March 1, 1996................................... 40,000 $ .03 $.04
March 18, 1996.................................. 1,500 $ .03 $.04
April 1, 1996................................... 116,667 $ .03 $.04
May 30, 1996.................................... 1,000 $ .03 $.05
June 14, 1996................................... 1,000 $ .03 $.06
June 15, 1996................................... 1,000 $ .03 $.06
August 26, 1996................................. 46,667 $ .60 $.06
September 23, 1996.............................. 5,000 $ 4.50 $.06
Consulting Options
January 19, 1996................................ 23,333 $ .03 $.01
January 31, 1996................................ 50,000 $ .03 $.01
May 1, 1996..................................... 13,332 $ .03 $.03
July 1, 1996.................................... 5,000 $ .60 $.02
September 12, 1996.............................. 16,667 $ 4.5 $.48
September 26, 1996.............................. 6,667 $ 4.5 $.48
</TABLE>
The Company has recorded $1,011 of compensation expense related to employee
stock options granted below market value and $3,965 of expense related to
Consulting Stock options granted below market value in the 9 months ended
September 30, 1996.
A total of 545,800 and 845,800 shares of Common Stock have been reserved
for stock option plans and conversion of preferred stock as of December 31, 1995
and September 30, 1996 (unaudited), respectively.
F-13
<PAGE> 80
COMPLETE WELLNESS CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS
The Company's Chief Executive Officer's (employed since inception of the
Company) employment contract requires him to serve without cash compensation
until July 1, 1996. As of July 1, 1996 he began accruing compensation at $90,000
per annum, payable upon the closing of an IPO. The Company's Chief Operating
Officer's (employed in the second quarter of 1996) employment contract requires
him to serve without cash compensation until the closing of an IPO.
The Company leases certain furniture and equipment located at the corporate
office from its Chief Executive Officer. The lease payments are $1,000 per month
and are on a month-by-month basis.
Future minimum lease payment under an automobile lease as of December 31,
1995 is approximately $4,500 payable in installments in 1996.
In September 1996 the Company entered into a master license agreement (the
"License Agreement") with Bally Total Fitness Corporation ("Bally's"), with
respect to the development of Integrated Medical Centers within selected Bally's
health clubs throughout the United States. Pursuant to the License Agreement,
the Company will pay Bally's a license fee equal to the greater of $15 ($10 for
the first year) per square foot of the space used by the Integrated Medical
Center or 12.5% of the fees the Company receives for its services to each
Integrated Medical Center the Company develops at a Bally's Total Fitness
Center. The initial term of the license agreement is five years, with five
one-year mutual renewals. Bally's may terminate the agreement as to an
Integrated Medical Center after September 16, 1998 absent the periodic payment
of certain minimum license fees with respect to that Integrated Medical Center.
The first Integrated Medical Center to be developed by the Company at a Bally's
Total Fitness Center is expected to be located in White Marsh, Maryland. If it
meets the Company's expectations, the Company expects to develop additional
Integrated Medical Centers at other Bally's Total Fitness Centers. In such
event, the Company expects to select Bally's Total Fitness Centers located near
other Integrated Medical Centers. Integrated Medical Centers developed pursuant
to the License Agreement will not treat patients covered by any federal or state
funded health care program.
10. PRO FORMA NET LOSS PER COMMON SHARE (UNAUDITED)
The Company's pro forma net loss per share calculations are based upon the
weighted average number of shares of Common Stock outstanding and the number of
shares of Common Stock resulting from the assumed conversion of the Series A
Preferred Stock. Pursuant to the requirements of the Securities and Exchange
Commission (SEC) Staff Accounting Bulletin No. 83, options to purchase Common
Stock issued at prices below the initial public offering price during the twelve
months immediately preceding the contemplated initial filing of the registration
statement relating to the IPO, have been included in the computation of net loss
per share as if they were outstanding for all periods presented (using the
treasury method assuming repurchase of common stock at the estimated IPO price).
Subsequent to the Company's IPO, options under the treasury stock method will be
included to the extent they are dilutive.
F-14
<PAGE> 81
COMPLETE WELLNESS CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PRO FORMA NET LOSS PER COMMON SHARE (UNAUDITED) -- (CONTINUED)
The following table summarizes the computations of share amounts used and
the computation of pro forma net loss per common share presented in the
accompanying statements of operations:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Common and common equivalent shares:
Weighted average number of shares of common stock outstanding.... 567,300 714,967
Assumed conversion of the preferred stock as of January 1,
1995.......................................................... 145,800 145,800
--------- ----------
Number of shares of common stock outstanding during the period
assuming conversion of the preferred stock as of January 1,
1995.......................................................... 713,100 860,767
Options to purchase common stock issued within one year of
registration statement using the treasury stock method........ 40,824 364,866
--------- ----------
Total common and common equivalent shares of stock considered
outstanding during the year...................................... 753,924 1,225,633
========= ==========
Net loss........................................................... $ (195,889) $ (520,950)
========= ==========
Pro forma net loss per common and common equivalent shares......... $ (0.26) $ (0.43)
========= ==========
</TABLE>
11. RELATED PARTY (UNAUDITED)
In August 1996, the Company entered into a consulting agreement with
J.E.M., Inc. ("JEM"), the sole stockholders of which are Dr. Kaplan, the
Company's Senior Director of Operations and Development, and his wife. Under the
terms of the consulting agreement, JEM agreed to provide advice and assistance
to the Company in connection with identifying and affiliating with chiropractors
and their existing chiropractic practices and identifying, acquiring, and/or
managing businesses engaged in providing services ancillary to those provided by
Integrated Medical Centers. The Company agreed to pay JEM $6,000 per month for
its services. The term of the consulting agreement expires in August 1999 and
may be terminated sooner by mutual agreement of the parties, by the Company for
"cause," defined as a violation by JEM of any material provision of the
consulting agreement not remedied within 30 days after notification or JEM's
conviction of a felony, upon termination of the employment agreement between Dr.
Kaplan and the Company, or JEM's failure to meet certain performance goals.
12. SUBSEQUENT EVENTS (UNAUDITED)
INITIAL PUBLIC OFFERING
On December 15, 1996, the Board of Directors authorized management of the
Company to file a registration statement with the SEC permitting the Company to
sell shares of its Common Stock to the public. If the IPO is closed under the
terms presently anticipated, all of the Series A Preferred Stock outstanding
will automatically convert into 145,800 shares of Common Stock.
1996 STOCK OPTIONS
During 1996 the Company instituted another nonqualified stock option plan
for employees, directors, consultants and advisors. Pursuant to the plan, up to
200,000 shares of Common Stock have been reserved for issuance. No options have
been granted, exercised or forfeited.
F-15
<PAGE> 82
COMPLETE WELLNESS CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS (UNAUDITED) -- (CONTINUED)
In 1996 the Company also instituted a separate nonqualified stock option
plan for persons employed by or associated with the Company's Integrated Medical
Centers. Pursuant to the plan, up to 100,000 shares of Common Stock have been
reserved for issuance. No options have been granted, exercised or forfeited.
SHAREHOLDER ADVANCE
The Company has advanced approximately $37,000 to Mr. McMillen without
interest. Mr. McMillen is to repay such amount upon consummation of the
Offering.
JOINT VENTURE
In November 1996 the Company signed a non-binding letter of intent with
Complete Management, Inc. ("CMI"), pursuant to which it is contemplated that the
Company and CMI will form a joint venture to develop Integrated Medical Centers
at selected Bally's Total Fitness Centers or other health clubs in the greater
New York City metropolitan area. The letter of intent contemplates that CMI,
upon execution of a definitive joint venture agreement, will be issued warrants
to purchase 100,000 shares of the Company's Common Stock at an exercise price
equal to 120% of the initial public offering price per share. The Company cannot
predict whether the letter of intent will lead to a definitive agreement or
whether the terms of any such definitive agreement will be the same as the terms
contemplated by the letter of intent. The letter of intent expires February 28,
1997.
CONSULTING AGREEMENT
In November 1996 the Company also entered into a management subcontract
agreement (the "IPM Agreement") with Integrated Physicians Management Co., LLC
("IPM") to manage for IPM nine medical clinics that were integrated by IPM,
subject to the approval of the clinics. In general, IPM's fees under the
contracts with the medical clinics it integrated are either 10% of a clinic's
gross collections for all services or 20% of its gross collections for medical
services only. The Company is to be paid 80% of the fees that IPM would have
been paid in the absence of the IPM Agreement.
Further, in November 1996, the Company entered into a five year consulting
agreement (the "Kats Agreement") with Kats Management, LLC ("Kats Management"),
a company under common control with IPM that has represented to the Company that
it provides management and consulting services to over 600 chiropractic clinics.
Under the Kats Agreement, Kats Management agreed to advise and assist the
Company in (i) identifying and negotiating with chiropractors and their existing
chiropractic practices with which the Company might affiliate for the purpose of
developing additional Integrated Medical Centers and (ii) developing Integrated
Medical Centers. The Company agreed to pay Kats Management for each agreement
entered into by the Company with a chiropractor identified by Kats Management
(i) a commission equal to 20% of the Company's integration fee under such
agreement during the initial term of the agreement (see "-- Agreements With
Affiliated Chiropractors and Other Licensed Practitioners -- Integrated Medical
Center Management and Security Agreement"), (ii) a fixed fee not to exceed $350,
and (iii) a bonus of $10,000 for each of the first five such agreements and
$5,000 for each of the next 25 such agreements. In addition, the Company agreed
to grant Kats Management, subject to a vesting schedule, nonqualified options to
purchase 11,000 shares of Common Stock under the Company's 1994 Stock Option
Plan at an exercise price equal to 75% of the initial public offering price per
share. The Company neither paid nor will pay any percentage-based compensation
under the Kats Agreement pending review of the agreement with counsel.
INTEGRATED MEDICAL CENTER TERMINATION
The Company ceased operating one Integrated Medical Center and plans to
dissolve the Medcorp after having terminated its agreement with the affiliated
chiropractor and his management company for material breach. The Company
anticipates no material adverse financial effect as a result of such
termination.
F-16
<PAGE> 83
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any Underwriter.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any date subsequent to the date hereof. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary..................... 5
Risk Factors........................... 9
The Company............................ 19
Use of Proceeds........................ 20
Capitalization......................... 21
Dividend Policy........................ 22
Dilution............................... 22
Selected Financial Data................ 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 25
Business............................... 31
Management............................. 47
Principal Stockholders................. 53
Selling Security Holders............... 55
Certain Relationships and Related
Transactions......................... 57
Description of Securities.............. 59
Shares Eligible for Future Sale........ 62
Underwriting........................... 63
Legal Matters.......................... 65
Experts................................ 65
Additional Information................. 65
Index to Financial Statements.......... F-1
</TABLE>
------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
COMPLETE WELLNESS CENTERS, INC.
1,000,000 Shares of Common Stock
and
1,000,000 Redeemable Common Stock
Purchase Warrants
-------------------
PROSPECTUS
-------------------
NATIONAL SECURITIES CORPORATION
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 102 of the Delaware General Corporation Law (the
"DGCL"), the Registrant's Certificate of Incorporation contains the following
provision regarding limitation of liability of directors and officers:
A director of this corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for the breach of any
fiduciary duty as a director, except in the case of (a) any breach of the
director's duty of loyalty to the corporation or its stockholders, (b) acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (c) under section 174 of the General Corporation
Law of the State of Delaware or (d) for any transaction from which the
director derives an improper personal benefit. Any repeal or modification
of this Article by the stockholders of the corporation shall not adversely
affect any right or protection of a director of the corporation existing at
the time of such repeal or modification with respect to acts or omissions
occurring prior to such repeal or modification.
The Registrant is empowered by Section 145 of the DGCL, subject to the
procedures and limitation stated therein, to indemnify any person against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with any
threatened, pending or completed action, suit or proceeding in which such person
is made a party by reason of his being or having been a director, officer,
employer or agent of the Registrant. The statute provides that indemnification
pursuant to its provisions is not exclusive of other rights of indemnification
to which a person may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise. The Registrant's
Certificate of Incorporation and the Registrant's By-laws both provide for
indemnification of its officers and directors to the full extent permitted by
the DGCL.
The Company intends to apply for directors' and officers' liability
insurance after the filing of this Registration Statement. Such insurance may
insure against any liability asserted against any present or past director or
officer incurred in the capacity of director or officer arising out of such
status, whether or not the Company would have the power to indemnify such
person.
Reference is made to Section 7 of the Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement with respect to certain
indemnification provisions for the benefit of the Registrant and its directors,
officers and controlling persons.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth various expenses, other than the
underwriters' fees, discounts and commissions, which are anticipated to be
incurred in connection with the Offering. All amounts except the SEC
registration fee, the Nasdaq SCM filing fee, and the NASD filing fee are
estimates. None of the expenses will be paid for by selling security holders.
<TABLE>
<S> <C>
SEC registration fee........................................................ $ 6,501.68
Nasdaq SCM filing fee....................................................... 8,194.10
NASD filing fee............................................................. 2,646.00
Blue Sky fees and expenses.................................................. 40,000.00
Transfer Agent's fees and expenses.......................................... 5,000.00
Printing and engraving expenses............................................. 80,000.00
Accounting fees and expenses................................................ 150,000.00
Legal fees and expenses..................................................... 200,000.00
Miscellaneous............................................................... 32,658.22
-----------
Total.................................................................. $525,000.00
===========
</TABLE>
II-1
<PAGE> 85
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning sales by the Company of
unregistered securities within the past three years. Such information with
respect to the Company's Common Stock has been adjusted for (i) a 180-for-1
forward split of the Common Stock in November 1995, and (ii) a 1-for-3 reverse
split of the Common Stock in November 1996. Exemptions from registration for
other transactions are noted below. The consideration paid to the Company in
respect of each issuance of securities was cash, unless otherwise indicated.
(i) Effective November 1994, the Registrant issued a total of 378,000
shares of Common Stock to its four original stockholders (including C.
Thomas McMillen and James J. McMillen), each of whom was also a director
and/or officer of the Registrant at that time, for a price equal to
$.0001665 per share. Exemption from registration under the Act is claimed
pursuant to Section 4(2) thereof.
(ii) Effective January 1995, the Registrant issued a total of 16,500
shares of Common Stock to a newly elected member of its board of directors
(Robert J. Mrazek) for a price equal to $.0001665 per share. Exemption from
registration under the Act is claimed pursuant to Section 4(2) thereof.
(iii) Effective March 1995, the Registrant issued a total of 1,350
shares of its Series A, 12% Cumulative Convertible Preferred Stock, par
value $.01 per share, to seven individuals for a price of $100 per share,
each of whom had a pre-existing business and/or personal relationship with
one or more of the Registrant's officers, directors, or controlling persons
and was either an accredited investor within the meaning of Rule 501(a)
under the Act or a sophisticated investor who had the financial resources
to bear the loss of the investment and the means and opportunity to obtain
information concerning the Registrant. Exemption from registration under
the Act is claimed pursuant to Section 4(2) thereof.
(iv) Effective June 1995, the Registrant issued a total of 158,400
shares of Common Stock to a newly elected member of its board of directors
(Robert S. Libauer) for a price equal to $.0001665 per share. Exemption
from registration under the Act is claimed pursuant to Section 4(2)
thereof.
(v) Effective September 1995, the Registrant issued 6,000 shares of
Common Stock to Danielle S. Milano, now an officer of the Registrant, and
8,400 shares of Common Stock to one of the Registrant's outside attorneys
for a price equal to $.0001665 per share in both cases. Exemption from
registration under the Act is claimed pursuant to Section 4(2) thereof.
(vi) Effective November 1995, the Registrant issued $39,730 aggregate
principal amount of subordinated promissory notes and warrants to purchase
a total of 13,243 shares of Common Stock at an exercise price equal to
$.003 per share to four individuals, one of whom was a director of the
Registrant (Robert S. Libauer) and each of the others of whom had a
pre-existing business and/or personal relationship with one or more of the
Registrant's officers, directors, or controlling persons and was either an
accredited investor within the meaning of Rule 501(a) under the Act or a
sophisticated investor who had the financial resources to bear the loss of
the investment and the means and opportunity to obtain information
concerning the Registrant. Exemption from registration under the Act is
claimed pursuant to Section 4(2) thereof.
(vii) Effective April 1996, the Registrant issued 10,000 shares of
Common Stock to its President and Chief Operating Officer (E. Eugene
Sharer) upon his exercise of options to purchase such shares at an exercise
price of $.03 per share pursuant to the Registrant's 1994 Stock Option
Plan. Exemption from registration under the Act is claimed pursuant to Rule
701 under Section 3(b) thereof.
(viii) Effective April 1996, the Registrant issued 110,000 shares of
Common Stock to a party (Reach Laboratories, Inc.) that had performed
consulting and financial advisory services for the Registrant. The
Registrant's Board of Directors determined the value of such past services
to be no less than $3,300. The investor was an accredited investor within
the meaning of Rule 501(a) under the Act. Exemption from registration under
the Act is claimed pursuant to Section 4(2) thereof.
(ix) Effective May 1996, the Registrant issued 23,333 shares of Common
Stock to a consultant to the Registrant upon the consultant's exercise of
options to purchase such shares at an exercise price of
II-2
<PAGE> 86
$.03 per share pursuant to the Registrant's 1994 Stock Option Plan.
Exemption from registration under the Act is claimed pursuant to Rule 701
under Section 3(b) thereof.
(x) Effective June 1996, the Registrant issued 4,333 shares of Common
Stock to a consultant to the Registrant upon the consultant's exercise of
options to purchase such shares at an exercise price of $.03 per share
pursuant to the Registrant's 1994 Stock Option Plan and a settlement
agreement entered into between such parties in connection with litigation
involving alleged breaches of the consulting agreement between such
parties. Exemption from registration under the Act is claimed pursuant to
Rule 701 under Section 3(b) and/or Section 4(2) thereof.
(xi) Effective August 1996, the Registrant issued $1,100,000 aggregate
principal amount of secured promissory notes and warrants to purchase that
number of shares of Common Stock determined by dividing such amount by the
price per share of Common Stock in the offering subject to this
Registration Statement at an exercise price of $.003 per share to 11
investors, each of whom was an accredited investor within the meaning of
Rule 501(a) under the Act. The registrant also issued a warrant to purchase
that number of shares of Common Stock determined by dividing such aggregate
principal amount by the price per share of Common Stock in the offering
subject to this Registration Statement at an exercise price of $.003 per
share to a broker-dealer who acted as a placement agent for a portion of
the financing. Exemption from registration under the Act is claimed
pursuant to Section 4(2) thereof.
II-3
<PAGE> 87
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------------------------------------------------------------------------
<C> <S>
4.1 Specimen Common Stock Certificate
5.1 Opinion of Storch & Brenner
10.4 Form of Warrant issued to placement agent for the bridge financing completed
in August 1996
10.19 Employment Agreement dated as of January 1, 1996 between the Registrant and
Danielle F. Milano
10.23 Consulting Agreement dated as of August 26, 1996 between the Registrant and
J.E.M., Inc.
10.27 Registrant's Executive Bonus Plan for Key Executives
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Storch & Brenner (included in the Opinion filed as Exhibit 5.1)
27.1 Financial Data Schedule
</TABLE>
ITEM 28. UNDERTAKINGS.
(a) The Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) The Registrant hereby undertakes to provide to the Representative, at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Representative to
permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the act and is, therefore, unenforceable.
II-4
<PAGE> 88
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The Registrant hereby undertakes that it will:
(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of the Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under the Act
as part of this Registration Statement as of the time the Commission
declared it effective.
(2) For determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
(e) The Registrant hereby undertakes that if the underwriter(s) in the
offering covered by this Registration Statement enter into transactions with any
of the selling securityholders named herein, or waive lock-ups applicable to
such selling securities holders, then:
(1) if such transaction or waiver of lock-up relates to not less than
five percent nor more than ten percent of the registered selling security
holders securities, the Registrant will file a "sticker" supplement
pursuant to Rule 424(c) under the Act relating thereto; and
(2) if such transaction or waiver of lock-up relates to more than ten
percent of the registered selling security holders securities, the
Registrant will file a post-effective amendment to the registration
statement relating thereto.
II-5
<PAGE> 89
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2, and has authorized this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned in
Washington, D.C., on February 5, 1997.
COMPLETE WELLNESS CENTERS, INC.
By: /s/ E. EUGENE SHARER
----------------------------------
E. Eugene Sharer, President
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement was signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<C> <C> <S>
/s/ C. THOMAS MCMILLEN Chairman of the Board, Chief February 5, 1997
- ------------------------------------- Executive
C. Thomas McMillen Officer, and Director
(Principal Executive Officer)
/s/ E. EUGENE SHARER President, Chief Operating Officer, February 5, 1997
- ------------------------------------- Chief Financial Officer, Treasurer,
E. Eugene Sharer and Director
(Principal Financial and Accounting
Officer)
/s/ ROBERT S. LIBAUER* Director February 5, 1997
- -------------------------------------
Robert S. Libauer
/s/ JAMES T. MCMILLEN* Director February 5, 1997
- -------------------------------------
James T. McMillen
/s/ ROBERT J. MRAZEK* Director February 5, 1997
- -------------------------------------
Robert J. Mrazek
</TABLE>
*By: /s/ E. EUGENE SHARER
-----------------------------------
E. Eugene Sharer
Attorney-in-fact
II-6
<PAGE> 90
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ------------------------------------------------------------------ ------------
<C> <S>
4.1 Specimen Common Stock Certificate.................................
5.1 Opinion of Storch & Brenner.......................................
10.4 Form of Warrant issued to placement agent for the bridge financing
completed in August 1996..........................................
10.19 Employment Agreement dated as of January 1, 1996 between the
Registrant and Danielle F. Milano.................................
10.23 Consulting Agreement dated as of August 26, 1996 between the
Registrant and J.E.M., Inc........................................
10.27 Registrant's Executive Bonus Plan for Key Executives..............
21.1 Subsidiaries of the Registrant....................................
23.1 Consent of Ernst & Young LLP......................................
23.2 Consent of Storch & Brenner (included in the Opinion filed as
Exhibit 5.1)......................................................
27.1 Financial Data Schedule...........................................
</TABLE>
<PAGE> 1
NUMBER SHARES
C
COMPLETE WELLNESS CENTERS, INC.
INCORPORATED UNDER SEE REVERSE
THE LAWS OF THE FOR CERTAIN
STATE OF DELAWARE DEFINITIONS
CUSIP
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.0001665 PAR VALUE, OF
- ----------------------- COMPLETE WELLNESS CENTERS, INC. ----------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ DANIELLE F. MILANO /s/ E. EUGENE SHARER
SECRETARY PRESIDENT
COMPLETE WELLNESS CENTERS, INC.
CORPORATE
SEAL
1994
DELAWARE
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NY) TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
- -----------------------------------------------
AMERICAN BANK NOTE COMPANY FEB 4, 1997 dw
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 048856fc
(562) 989-2333
(FAX) (562) 426-7450 270-19X Proof FM NEW
- ------------------------------------------------
<PAGE> 2
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preference and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- Custodian
TEN ENT -- as tenants by the entireties ----------------------- ----------------------
JT TEN -- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
----------------------------------------------------
(State)
UNIF TRF MIN ACT -- Custodian (until age )
--------------- -------------------
(Cust)
Under Uniform Transfers
---------------------------------
(Minor)
to Minors Act
------------------------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
---------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
- ----------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------------------
X
--------------------------------------
X
--------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By
---------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15.
- ----------------------------------------------------
AMERICAN BANK NOTE COMPANY FEB 4, 1997 dw
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 048856BK
(562) 989-2333
(FAX) (562) 426-7450
<PAGE> 1
EXHIBIT 5.1
[STORCH & BRENNER LLP LETTERHEAD]
February 5, 1997
Complete Wellness Centers, Inc.
725 Independence Avenue SE
Washington DC 20003
Ladies and Gentlemen:
We have acted as counsel to Complete Wellness Centers, Inc., a Delaware
corporation (Company), in connection with the Company's filing pursuant to the
Securities Act of 1933, as amended, of a Registration Statement on Form SB-2,
Registration No. 333-18291 (Registration Statement) relating to up to 1,150,000
shares of the Company's common stock, par value $.0001665 per share (Common
Stock), and up to 1,150,000 Redeemable Common Stock Purchase Warrants, each
exercisable for one share of the Company's common stock (Redeemable Warrants).
The Company has requested our opinion as to the validity of the Common Stock and
the Redeemable Warrants.
We have examined such corporate records of the Company, including its
certificate of incorporation, as amended, by-laws, minutes, and other documents,
as we deemed necessary as a basis for the opinion hereinafter expressed.
Based upon the foregoing and having regard to the legal considerations that we
deem relevant, we are of the opinion that the Common Stock and the Redeemable
Warrants have been duly and validly authorized and will, after the Registration
Statement has been declared effective by the Securities and Exchange Commission
and upon issuance and delivery against receipt by the Company of the agreed
consideration as set forth in the Registration Statement, be validly issued,
fully paid, and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of this firm therein and in
the Prospectus under the heading "Legal Matters."
Yours truly,
STORCH & BRENNER LLP
By: /s/ Anthony Cipiti, Jr.
----------------------------
Anthony Cipiti, Jr.
<PAGE> 1
Exhibit 10.4
THIS WARRANT HAS NOT BEEN REGISTERED UNDER FEDERAL OR STATE SECURITIES
LAWS. IT MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION
UNDER SUCH LAWS OR THE AVAILABILITY OF AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH LAWS EVIDENCED BY AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE COMMON STOCK
COMPLETE WELLNESS CENTERS, INC.
THIS CERTIFIES THAT, for value received, Roan Capital Partners, L.P. (Holder) is
entitled to purchase, on the terms hereof, shares of common stock of Complete
Wellness Centers, Inc., a Delaware corporation (Company). The following terms
shall apply to this Warrant:
1. EXERCISE OF WARRANT.
The terms and conditions upon which this Warrant may be exercised and the common
stock covered hereby (Warrant Stock) may be purchased are as follows:
1.1. Voluntary Exercise.
(a) This Warrant may be exercised upon or after the first to occur of (i) the
effectiveness of a registration statement (other than a registration statement
on Form S-4 or S-8) under the Securities Act of 1933, as amended, for a firm
commitment underwritten initial public offering of shares of common stock of the
Company or (ii) June 30, 1997. In no case may this Warrant be exercised later
than 5:00 p.m. eastern time on December 31, 1999 (Expiration Date), after which
time this Warrant shall terminate and shall be void.
(b) The Company will mail to the Holder a notice specifying the date on which
the registration statement for any such initial public offering is expected to
be declared effective by the Securities and Exchange Commission (Effective
Date). Such notice shall be mailed at least 60 days prior to the date therein
specified.
1.2. Number of Shares. The number of shares of common stock for which this
Warrant is initially exercisable is (i) that number of shares of common stock of
the Company equal to the quotient obtained by dividing $20,000 by the price per
share of common stock offered to the public in an initial public offering
subject to Section 1.1(a)(i) hereof, or (ii) if such an initial public offering
is not completed on or before June 30, 1997, 9,600 shares of the Company's
common stock, par value $0.0000555 per share, subject to adjustment pursuant to
Section 2 of this Warrant.
1.3. Purchase Price. The per share purchase price for the shares of common stock
to be issued upon exercise of this Warrant shall be $0.001, subject to
adjustment as provided herein.
<PAGE> 2
2
1.4. Method of Exercise. The exercise of the purchase rights evidenced by this
Warrant shall be effected by the following actions if taken within 20 days after
receipt of the notice from the Company of a proposed initial public offering or,
in the absence of such a notice, if taken after June 30, 1997 and prior to the
Expiration Date: (a) the surrender of the Warrant, together with a duly executed
copy of the form of subscription attached hereto, to the Company at its
principal offices and (b) the delivery of the purchase price by check or bank
draft payable to the Company's order or by wire transfer to the Company's
account for the number of shares for which the purchase rights hereunder are
being exercised or any other form of consideration approved by the Company's
board of directors.
1.5. Issuance of Shares. Upon the exercise of the purchase rights evidenced by
this Warrant, a certificate or certificates for the purchased shares shall be
issued to the Holder as soon as practicable. The Holder shall for all purposes
be deemed to have become the holder of record of the number of shares of common
stock evidenced by such certificate from the date on which this Warrant was
surrendered and payment of the purchase price was received by the Company,
regardless of the date of delivery of such certificate.
2. CERTAIN ADJUSTMENTS.
The provisions of this Section 2 shall apply if and only if an initial public
offering subject to Section 1.1(a)(i) hereof is not completed on or before June
30, 1997:
2.1. Common Stock Dividends. If the Company at any time prior to the expiration
of this Warrant shall pay a dividend with respect to common stock payable in
shares of common stock, then the purchase price per share shall be adjusted,
from and after the date of determination of the stockholders entitled to receive
such dividend, to that price determined by multiplying the per share purchase
price in effect by a fraction (i) the numerator of which shall be the total
number of shares of common stock outstanding immediately prior to such dividend
and (ii) the denominator of which shall be the total number of shares of common
stock outstanding immediately after such dividend; provided, however, that the
aggregate purchase price shall not be adjusted.
2.2. Mergers, Consolidations, or Sale of Assets. If at any time there shall be a
capital reorganization (other than a combination or subdivision of Warrant Stock
provided for herein), or a merger or consolidation of the Company with or into
another corporation, or the sale of the Company's properties and assets as, or
substantially as, an entirety to any other person, then, as a part of such
reorganization, merger, consolidation or sale, lawful provision shall be made so
that the Holder shall thereafter be entitled to receive upon exercise of this
Warrant, during the period specified in this Warrant and upon payment of the
purchase price, the number of shares of stock or other securities or property of
the Company or the successor corporation resulting from such reorganization,
merger, consolidation or sale, to which a holder of the common stock deliverable
upon exercise of this Warrant would have been entitled under the provisions of
the agreement in such reorganization, merger, consolidation or sale if this
Warrant had been exercised immediately before that reorganization, merger,
consolidation or sale. In any such case, appropriate
<PAGE> 3
3
adjustment (as determined in good faith by the Company's board of directors)
shall be made in the application of the provisions of this Warrant with respect
to the rights and interests of the Holder after the reorganization, merger,
consolidation or sale to the end that the provisions of this Warrant (including
adjustment of the purchase price then in effect and the number of shares of
Warrant Stock) shall be applicable after that event, as near as reasonably may
be, in relation to any shares or other property deliverable after that event
upon exercise of this Warrant; provided, however, that the aggregate purchase
price shall not be adjusted.
2.3. Splits and Subdivisions. In the event the Company should at any time or
from time to time fix a record date for the effectuation of a split or
subdivision of the outstanding shares of common stock or the determination of
the holders of common stock entitled to receive a dividend or other
distribution payable in additional shares of common stock or other securities
or rights convertible into, or entitling the holder thereof to receive directly
or indirectly, additional shares of common stock (Common Stock Equivalents)
without payment of any consideration by such holder for the additional shares
of common stock or Common Stock Equivalents (including the additional shares of
common stock issuable upon conversion or exercise thereof), then, as of such
record date (or the date of such distribution, split, or subdivision if no
record date is fixed), the purchase price shall be appropriately decreased and
the number of shares of Warrant Stock shall be appropriately increased in
proportion to such increase of outstanding shares; provided, however, that the
aggregate purchase price shall not be adjusted.
2.4. Combination of Shares. If the number of shares of common stock outstanding
at any time after the date hereof is decreased by a combination of the
outstanding shares of common stock, the purchase price per share shall be
appropriately increased and the number of shares of Warrant Stock subject to
Section 1.2(ii) hereof shall be appropriately decreased in proportion to such
decrease in outstanding shares; provided, however, that the aggregate purchase
price shall not be adjusted.
2.5. Adjustments for Other Distributions. In the event the Company shall declare
a distribution payable in securities of other persons, evidences of
indebtedness issued by the Company or other persons, assets (excluding cash
dividends) or options or rights not referred to in subsections 2.1 or 2.3,
then, in each such case for the purpose of this subsection 2.5, upon exercise
of this Warrant the holder hereof shall be entitled to a proportionate share of
any such distribution as though such holder was the holder of the number of
shares of common stock into which this Warrant may be exercised as of the
record date fixed for the determination of the holders of common stock entitled
to receive such distribution; provided, however, that the aggregate purchase
price shall not be adjusted.
2.6. Certificate as to Adjustments. In the case of each adjustment or
readjustment of the purchase price pursuant to this Section 2, the Company will
promptly compute such adjustment or readjustment in accordance with the terms
hereof and cause a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based to be delivered to the holder of this Warrant. The Company will, upon the
<PAGE> 4
4
written request at any time of the holder of this Warrant, furnish or cause to
be furnished to such holder a certificate setting forth:
(a) Such adjustments and readjustments;
(b) The purchase price at the time in effect; and
(c) The number of shares of Warrant Stock and the amount, if any, of
other property at the time receivable upon exercise of this Warrant.
2.7 Notices of Record Date, etc. In the event of:
(a) Any taking by the Company of a record of the holders of any class
of securities of the Company for the purpose of determining the holders thereof
who are entitled to receive any dividend (other than a cash dividend payable
out of earned surplus at the same rate as that of the last such cash dividend
theretofore paid) or other distribution, or any right to subscribe for,
purchase, or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right; or
(b) Any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all of the assets of the Company to any other person or any
consolidation or merger involving the Company; or
(c) Any voluntary or involuntary dissolution, liquidation, or
winding-up of the Company, the Company will mail to the holder of this Warrant
at least five (5) days prior to the earliest date specified therein, a notice
specifying:
(i) The date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character
of such dividend, distribution or right; and
(ii) The date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation, or
winding-up is expected to become effective and the record date for determining
stockholders entitled to vote thereon.
3. FRACTIONAL SHARES.
No fractional share shall be issued in connection with any exercise of this
Warrant. In lieu of the issuance of such fractional share, the Company shall
make a cash payment equal to the then fair market value of such fractional
share as determined in good faith by the Company's board of directors.
<PAGE> 5
5
4. RESERVATION OF COMMON STOCK.
The Company shall at all times reserve and keep available out of its authorized
but unissued shares of commons stock, solely for the purpose of effecting the
exercise of this Warrant, such number of its shares of common stock as shall
from time to time be sufficient to effect the exercise of this Warrant; and if
at any time the number of authorized but unissued shares of common stock shall
not be sufficient to effect the exercise of this Warrant in its entirety, in
addition to such other remedies as shall be available to the holder of this
Warrant, the Company will use its reasonable best efforts to take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of common stock to such number of
shares as shall be sufficient for such purpose.
5. PRIVILEGE OF STOCK OWNERSHIP.
Prior to the exercise of this Warrant, the Holder shall not be entitled, by
virtue of holding this Warrant, to any rights of a stockholder of the Company,
including (without limitation) the right to vote, receive dividends or other
distributions exercise preemptive rights or be notified of stockholder
meetings, and the Holder shall not be entitled to any notice or other
communication concerning the business or affairs of the Company. Nothing in
this Section 5, however, shall limit the right of the Holder to participate in
distributions to the extent set forth in Section 2 or be provided the notices
described in Section 2 if the Holder ultimately exercises this Warrant.
6. LIMITATION OF LIABILITY.
Except as otherwise provided herein, the absence of affirmative action by the
Holder to purchase the Warrant Stock, no mere enumeration herein of the rights
or privileges of the holder hereof shall give rise to any liability of such
holder for the purchase price or as a stockholder of the Company, whether such
liability is asserted by the Company or by creditors of the Company.
7. TRANSFERS AND EXCHANGES.
7.1 Transfers. Subject to the terms and conditions of the Agreement and
compliance with applicable federal and state securities laws, this Warrant is
transferable in whole or in part by the Holder.
7.2 Exchanges. All new warrants issued in connection with transfers or
exchanges shall be identical in form and provision to this Warrant except as to
the number of shares and the identify of the Holder.
8. SUCCESSORS AND ASSIGNS.
The terms and provisions of this Warrant shall be binding upon the Company and
the Holder and their respective successors and assigns, subject to the
restrictions set forth in the Agreement.
<PAGE> 6
6
9. LOSS, THEFT, DESTRUCTION, OR MUTILATION OF WARRANT.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and in case of loss,
theft, or destruction, of indemnity or security reasonably satisfactory to the
Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new warrant of like tenor and
dated as of such cancellation, in lieu of this Warrant.
10. WEEKENDS, HOLIDAYS, ETC.
If the last or appointed day for the taking of any action or the expiration of
any right required or granted herein shall be a Saturday, Sunday, or legal
holiday, then such action may be taken or such right may be exercised on the
next succeeding day that is not a Sunday or legal holiday.
11. GOVERNING LAW
The terms and conditions of this Warrant shall be governed by and construed in
accordance with Delaware law as such laws are applied to agreements which are
entered into solely between Delaware residents and are to be performed entirely
within that state.
Dated: August 15, 1996
COMPLETE WELLNESS CENTERS, INC.
By:____________________________
Its:
<PAGE> 7
SUBSCRIPTION
TO: Complete Wellness Centers, Inc.
-------------------------------
-------------------------------
-------------------------------
Ladies and Gentlemen:
The undersigned, _____________________________________, hereby elects to
purchase, pursuant to the provisions of the Warrant dated August 15, 1996 held
by the undersigned, _________ shares of the common stock of Complete Wellness
Centers, Inc., a Delaware corporation, and tenders herewith payment of the
purchase price of such shares in full.
The undersigned hereby represents and warrants that the undersigned is acquiring
such stock for the undersigned's own account and not for resale or with a view
to, or for resale in connection with, the distribution of any part thereof.
If the number of shares being purchased hereunder is not all of the shares
covered by the Warrant, the undersigned requests that a new warrant for the
balance of shares covered by such Warrant be registered in the name of and
delivered to the undersigned.
Date: _____________________
By: ___________________________
(Signature)
Name:___________________________
Address:___________________________
__________________________
<PAGE> 1
EXHIBIT 10.19
January 1, 1996
Danielle Milano, M.D.
131 E. 31 St., #6F
New York, NY 10016
Dear Dr. Milano:
This letter, when accepted by you in a manner hereinafter provided, will
evidence the agreement (the "Agreement") between Dr. Milano (the "Employee")
and Complete Wellness Centers, Inc., a Delaware corporation, (the "Company"),
for the provision of certain services to be rendered by Employee to the Company
all under the following terms and conditions to wit:
1. EMPLOYMENT DUTIES
The Company shall employ Employee as Vice President of Medical Affairs for
oversight and management of the medical operations of the Company's Clinics
(where "Clinic" shall mean any facility purchased or managed by the Company or
its affiliates through which health care services are rendered). Employee shall
report to the President, subject in all events to the control and supervision
of the Board of Directors.
Employee shall devote her time and best efforts on a substantially full time
basis to the business and affairs of the Company.
2. EMPLOYMENT TERM
This Agreement shall commence on January 1, 1996, and shall end on December 31,
1998 (the "Employment Term") unless extended by the Company and Employee in
writing or unless sooner terminated in accordance with the provisions of this
Agreement.
3. COMPENSATION, EXPENSES, ETC.
In consideration of performance of the services and activities hereby, the
Company shall pay Employee compensation as follows:
A. Effective October 1, 1996, an initial base salary of one
hundred twenty thousand dollars ($120,000) per annum, payable
semi-monthly in arrears. Six thousand dollars ($6,000) per
month of such base compensation shall be accrued until such
time the Company closes its initial public offering at which
time all accrued salary shall be payable in full.
B. Employee shall receive an additional performance bonus (the
"Bonus") equal to ten percent (10%) of the Company's Bonus
Fund, in accordance with the Company's 1995 Bonus Plan for Key
Executives. For the purpose of this Section 3, the "Bonus
Fund" shall be equal to
<PAGE> 2
at least ten percent (10%) of the Company's pre-tax income.
The maximum bonus fund is $5 million.
C. Employee shall receive an additional bonus of one thousand
dollars ($1,000), payable one time, for every professional
corporation managed by the Company of which Employee is the
director and shall be initiated after the Company closes its
initial public offering and which will be paid by the
professional corporation for director services provided to
the professional corporation.
D. At such time as the Company closes its initial public
offering, an automobile and parking allowance of five hundred
dollars ($500) per month.
E. Four (4) weeks of compensated vacation which shall vest
ratably throughout the year.
F. The Company shall make available such health benefits and any
other benefits as it makes available to its executive
employees.
G. Upon termination of this Agreement pursuant to Section 5(i)
and 5(ii), Employee shall receive a severance payment equal to
six (6) times the Employee's monthly compensation pursuant to
Section 3(A) for the month prior to termination. Such
severance shall be payable in six (6) monthly installments,
beginning in the second calendar month following the month in
which termination occurs.
H. The Company shall provide Employee with an office and
secretarial services comparable to those of its other
executive employees.
The Company shall deduct the usual withholding taxes from Employee's
compensation consistent with standard practices and applicable federal and
state laws.
The Company shall be entitled to receive any compensation paid to Employee as a
result of services rendered by Employee in any of the Company's affiliated
clinics, or as a result of the Employee serving as the shareholder of a
professional corporation managed by the Company.
The Company shall reimburse Employee for any documented out of pocket expenses
incurred in connection with the duties and responsibilities described herein,
subject to the Company's policies.
4. STOCK OPTIONS
Employee will be granted options to purchase one hundred and forty thousand
(140,000) shares of the Company's common stock at an exercise price of one cent
($.01) per share under the Company's Stock Option Plan. These options will vest
with respect to 50,000 options on October 1, 1996, 45,000 options on October 1,
1997, and 45,000 options on September 30, 1998. These options shall be
exercisable for a period of five (5) years from the date hereof. However, in
the event the Agreement is terminated, such options, shall be exercisable for a
period of three (3) months form the date of
2
<PAGE> 3
termination.
5. TERMINATION
This Agreement may be terminated prior to the end of the Employment Term,
(i) by the written agreement between Company and Employee;
(ii) by the death of Employee or his disability for a period of one
hundred and twenty (120) consecutive days or the adjudicated
mental incompetency of Employee; or
(iii) by the Company for cause, where "cause" shall mean for purpose
of this Agreement:
(a) a violation by Employee of any material
provision of this Agreement, a breach of
fiduciary duty, manifest incompetence, plan
dereliction or neglect of duty, or conduct;
involving moral turpitude, where such
violation, activity, or conduct is not
remedied by Employee within thirty, (30) days
of written notice from the Company
(b) employee's conviction of a felony.
6. COVENANT NOT TO COMPETE; NOT TO SOLICIT
A. During the Employment Term and for one (1) year thereafter,
the Employee will not without the prior written permission of
the Company in each instance directly or indirectly carry on
or participate in a business the same as or similar to or in
competition with that conducted or engaged in by the Company
or any of its subsidiaries or affiliates.
B. The term "carry on or participate in a business the same as or
similar to that conducted or engaged in by the Company or any
of its subsidiaries or affiliates" shall include the Employee,
directly or indirectly, doing any of the following listed
acts, other than carrying on or engaging in activities
expressly permitted under this Agreement:
(i) carrying on or engaging in any such business
as a principal, or solely or jointly with
others as a director, officer, agent,
employee, consultant or partner, or
stockholder or limited partner owning more
than five percent (5%) of the stock or equity
interests in or securities convertible into
more than five percent (5%) of the stock of
or equity interests in any corporation,
association or limited partnership; or
(ii) as agent or principal carrying on or engaging
in any activities or negotiations with
respect to the acquisition or disposition of
any such business; or
(iii) lending credit or money for the purpose of
establishing or operating any such business;
or
(iv) giving advice to any other person, firm,
association, corporation or other entity
engaging in any such business; or
(v) lending or allowing his name or reputation to
be used in any such business; or
C. In the event of a breach or threatened breach by the Employee
of the provisions of this Section 6, the Company shall be
entitled to injunctive relief against the Employee. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to the Employer for such
breach or threatened breach, including without limitation the
recovery of damages from the Employee.
3
<PAGE> 4
D. During the Employment Term and for one (1) year thereafter,
the Employee will not without the prior written permission of
the Company in each instance will not solicit, or attempt to
solicit and employ any employee of the Company or any of its
subsidiaries or affiliates, or commit an act the primary
purpose of which is to induce employee of the Company or any
of its subsidiaries or affiliates to leave such employment or
significantly interfere with, disrupt or attempt to disrupt
any past, present or prospective relationship, contractual or
otherwise, relating to the business activities between the
Company or any of its subsidiaries or affiliates and their
respective prospects.
E. The parties hereto consider the restrictions contained in this
Section 6 to be reasonable. If, however, such restrictions
are found by any court having jurisdiction to be unreasonable
because they are (or any of them is) too broad, then such
restrictions shall nevertheless remain effective, but shall be
considered amended as to protection of business, time or
geographic area in whatever manner is considered reasonable by
that court and, as so amended, shall be enforced.
F. The provisions of this Section 6 shall survive the expiration
or termination, for any reason, or this Agreement and shall be
separately enforceable.
7. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
A. The Employee agrees that he will not, during the Employment
Term or thereafter, make use of, divulge or otherwise
disclose, directly or indirectly, any trade or business secret
(including, without limitation, any customer list, data,
records or financial information constituting a trade or
business secret) concerning the business or policies of the
Company or any of its subsidiaries or affiliates which he may
have learned as a result of his employment during the
Employment Term or prior thereto as shareholder, employee,
officer and/or director or the Company except to the extent
such use or disclosure is necessary to the performance of this
Agreement and in furtherance of the Company's best interest.
The provisions of this Section 7 shall survive the expiration
or termination, for any reason, of this Agreement.
B. The Employee shall not during the Employment Term or for one
(1) year thereafter make use of, divulge or otherwise
disclose, directly or indirectly, any confidential information
concerning the business or policies of the Company or any of
its subsidiaries or affiliates which he may have learned while
a shareholder, employee, officer and/or director of the
Company.
C. In the event of a breach or threatened breach by the Employee
of the provisions of this Section 7, the Company shall be
entitled to an injunction restraining the Employee from
disclosing, in whole or in part, any such trade or business
secret and/or any such confidential information, or from
rendering any services to any person, firm, corporation,
association, or other entity to whom any such trade or
business secret and/or any such confidential information, in
whole or in part, has been disclosed or is threatened to be
4
<PAGE> 5
disclosed. Nothing herein shall be construed as prohibiting
the Company from pursuing any other remedies available to the
Company for such breach or threatened breach, including
without limitation the recovery of damages from the Employee.
D. The provisions of this Section 7 shall survive the expiration
or termination, for any reason, of this Agreement and shall be
separately enforceable.
8. AMENDMENT
This Agreement may be amended only by the written agreement of the Company and
Employee.
9. SUCCESSORS AND ASSIGNS
The Company's rights and obligations under this Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the Company; and
the Company may delegate all or any part of its rights and obligations
hereunder to any affiliate or subsidiary of the Company.
The Employee acknowledges and agrees that this Agreement is personal to him and
his rights and interests hereunder may not be assigned, nor may his obligations
and duties hereunder be delegated with exception of the voting rights assigned
to Employee's spouse by Employee.
10. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws
of the State of Maryland.
11. ENTIRE AGREEMENT
This Agreement supersedes any and all other agreements, either oral or written
heretofore made with respect to the subject matter hereof.
12. SEVERABILITY
Any provision of this Agreement which is found to be unenforceable in any
jurisdiction, shall, as to such jurisdiction only, be ineffective to the extent
of such unenforceability, without invalidating or otherwise affecting the
remaining provisions hereof. If any of the covenants against competition
contained in Section 9 are found by a court having jurisdiction to be
unreasonable in duration, geographical scope, or character of restriction, the
covenant shall not be rendered unenforceable thereby, but rather the duration,
geographical scope, or character of restriction of said covenant shall
respectively be reduced or modified to render the covenant reasonable and the
covenant shall be enforced as modified.
5
<PAGE> 6
13. COUNTERPARTS
This Agreement may be executed simultaneously in counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. This Agreement shall be binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of the parties reflected hereon as signatories.
14. NOTICES
All notices required or permitted under this Agreement shall be in writing and
shall be deemed effective upon personal delivery or upon deposit in the United
States Post Office, by registered or certified mail, postage prepaid, addressed
to:
(i) Employee at the address shown above, or at such other address
or addresses as Employee shall designate to the Company in
accordance with this Section, or
(ii) Company at the address set forth on the above letterhead, or
at such other address as the Company shall designate to
Employee in accordance with this section.
15. PRONOUNS
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms and the singular
form of nouns and pronouns shall include the plural and vice versa.
16. MISCELLANEOUS
A. No delay or omission by the Company or Employee in exercising
any right under this Agreement shall operate as a waiver of
that or any other right. A waiver or consent given by the
Company or Employee on any one occasion shall be effective
only in that instance and shall not be construed as a bar or
waiver of any right on any other occasion.
B. The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or
affect the scope or substance of any of this Agreement.
6
<PAGE> 7
* * *
If the foregoing accurately sets out our agreement with regard to the above,
please indicate your acceptance by executing and returning two copies of this
letter to the undersigned.
Very truly yours,
COMPLETE WELLNESS CENTERS, INC.
By:
-------------------------------
C. Thomas McMillen
Chairman and President
Accepted and agreed to this ___ day of _________________, 1995.
- --------------------
Danielle Milano, MD
"Employee"
7
<PAGE> 1
EXHIBIT 10.23
CONSULTING AGREEMENT
This Amended and Restated Agreement (the "Agreement"), dated as of
August 26, 1996, is entered into by and between Complete Wellness Corporation, a
Delaware Corporation (the "Company"), and J.E.M., Inc., a Delaware Corporation
("JEM").
WITNESSETH
WHEREAS, the Company desires to engage JEM to provide consulting
services.
WHEREAS, JEM shall employ Eric S. Kaplan, D. C., an employee for the
purposes of this Agreement; and
WHEREAS, JEM desires to employ Eric S. Kaplan, D.C. and provide the
aforescribed services, subject to the terms hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, company, and JEM agree as
follows:
1. ENGAGEMENT. Company hereby engages and retains JEM as
follows:
(a) the integration and recruitment of chiropractic clinic with
medical professionals and services("Integration"),
(b) the development of medical clinics that integrate traditional
medical professionals with alternative providers including chiropractic
("Integrated Medical Centers"),
(c) the development of ancillary services to be offered at the
Integrated Medical Center.
Consultant shall report to the president and chief operating officer, subject
in all events to the control and supervision of the Board of Directors.
Consultant shall provide that Eric S. Kaplan, D.C., devote his time and
efforts on a substantially full time basis to the business and affairs of the
Company. It is understood by Consultant and Company that Consultant shall be
primarily located in Florida, but shall be available for travel to the
Company's office, field operations, and developmental projects as needed. Such
travel shall not exceed three (3) working days per week. It is also understood
by Consultant and Company that Eric S. Kaplan, D.C., shall attend the Harvard
Executive Training Program during the months of September and October 1998 and
shall be available to the Company only on weekends during such period.
2. TERM. The term of the Agreement shall commence, on August 26,
1996, and shall terminate on July 31, 1999, unless sooner terminated in
accordance with the terms hereof, or unless extended by a written agreement
between the Company and JEM.
The Agreement may be terminated prior to the end of its term for any of the
following reasons:
(a) a written agreement between JEM and Company;
(b) the death or adjudicated mental incompetency or disability of
Eric S. Kaplan, D.C. for a period of ninety (90) consecutive days;
(c) by the Company for Cause, where "Cause" shall mean (i) a
violation by JEM of any material provision of this Agreement, where such
violation by JEM of any material provision of this Agreement, where such
violation is not remedied by JEM within thirty (30) days of written notice from
the Company or (ii) Eric S. Kaplan, D.C.'s conviction of a felony.
<PAGE> 2
(d) in the event the Company does not close its initial public
offering on or before February 28, 1997.
3. COMPENSATION, EXPENSES, ETC. In consideration of performance
of the services and activities hereby, the Company shall pay Consultant
compensation as follows:
(a) an initial fee four thousand dollars ($4,000) per month,
payable semimonthly, in arrears until such time as the Company closes its
initial public offering. At such time, the base salary shall be increased to
one hundred twenty thousand dollars ($120,000) per annum, payable semimonthly,
in arrears,
(b) consultant shall receive a performance bonus (the "Bonus")
equal to twenty percent (20%) of the Company's Bonus Fund in accordance with
the Company's 1996 Bonus Plan. For purposes of this Section 3, the "Bonus Fund"
shall be equal to ten percent (10%) of the Company's pre-tax income (determined
in accordance with generally accepted accounting principles by the Company's
auditors) within ninety (90) days after the fiscal year (which is December 31),
up to a maximum aggregate bonus fund of five million dollars ($5,000,000) and
payable on the same basis as other executives of the Company subject to the
Bonus Fund,
(c) after the initial public offering is closed, the Consultant
shall receive an automobile allowance of five hundred dollars ($500) per month,
(d) after the initial public offering is closed, the Company will
allow the Consultant four (4) weeks of compensated vacation which shall vest
ratably throughout the year,
(e) after the initial public offering is closed, the Company shall
provide the Consultant with an office and secretarial services comparable to
those of its other executive employees,
(f) upon termination of this Agreement pursuant to sections 2a or
2b and upon the close of the initial public offering, Consultant shall receive
a severance payment equal to twelve (12) times the Consultant's monthly
compensation pursuant to section 3a for the month prior to termination. Such
severance shall be payable in twelve (12) monthly installments, beginning in
the second calendar month following the month in which termination occurs,
4. STOCK OPTIONS. Consultant's grant of stock option pursuant to
the Agreement dated September , 1995 will be reduced to one hundred forty
thousand (140,000) options ("Options"), giving the consultant the right to
purchase one hundred forty thousand (140,000) shares of the Company's common
stock at an exercise price of $.01 per share under the Company's 1994 Stock
Option Plan. The options will be evidenced by a stock option agreement and
will vest with respect to 30,000 options on August 1, 1996 30,000 options on
August 1, 1997, 30,000 options on August 1, 1998, and 30,000 options on July
31, 1999 and shall be exercisable for a period of five years from August 1,
1996.
However, in the event the Agreement is terminated pursuant to section 2,a,b, or
c, such options shall be exercisable for a period of three (3) months from the
date of termination if they vested prior to termination.
5. REIMBURSEMENT OF EXPENSES. The Company shall reimburse JEM
for any documented out of pocket expenses incurred in connection with the
duties and responsibilities described herein, subject to Company's policy with
respect to such expenses, and which are considered reasonable and customary in
the fulfillment of the duties described herein.
6. INDEPENDENT CONTRACTOR. The parties hereto presently believe
and intend that JEM shall be classified, for tax purposes, as an independent
contractor. Accordingly, JEM shall be responsible for all state and federal
taxes incurred in connection with income received for services rendered under
this Agreement. The Company shall not be responsible for any withholding of or
contribution to such taxes.
7. COVENANT NOT TO COMPETE.
(a) JEM covenants and agrees that during the term of this
Agreement and in the event of the Company's close of its initial public
offering, for a period of one (1) year thereafter, JEM shall not, directly or
indirectly:
<PAGE> 3
1. operate or own any interest in any business which
has significant (viewed in relation to the business of the Company) activities
relating to the acquisition, ownership, management of, or consultation
regarding chiropractic and medical care, rehabilitation, physical therapy,
occupational therapy, acupuncture, and/or diagnostic facilities (individually
or collectively the "Clinic") other than affiliates of the Company or up to
five percent (5%) of the equity securities of a publicly traded company.
2. compete with the Company or its subsidiaries or
affiliates in the operation or development of any Clinic within the forty-eight
(48) contiguous states of the United States of America.
3. be employed by or consult with any business which
owns, manages, operates, or engages in the consulting business regarding
Clinics if JEM's employment duties or consultation (other than insignificant
or non-competitive activities) involves Clinic operations.
4. solicit or attempt to solicit any employee of the
Company, or commit an act the primary purpose of which is to induce any
employee of the Company or any of its affiliates to leave the Company's employ,
or significantly interfere with, disrupt or attempt to disrupt any past,
present, or prospective relationship, contractual or otherwise, relating to the
Company's business activities between the Company and its prospects, customers
and suppliers.
Nothing in this subsection (a) will preclude JEM from continuing to provide
management services to chiropractic practices in which JEM had a financial,
contractual or developmental interest prior to the execution of this Agreement
or to which the Company otherwise agrees to in writing.
(b) The parties hereto consider the restrictions contained in
Section 6 to be reasonable. If, however, such restrictions are found by any
court having jurisdiction to be unreasonable because they are (or any of them
is) too broad, then such restriction or restrictions shall nonetheless remain
effective, but shall be considered amended as to protection of business, time,
or geographic area in whatever manner is considered reasonable by that court
and, as so amended, shall be enforced.
(c) The provisions of this section, in the event of the Company's
completion of its initial public offer, shall survive the termination, for any
reason, of this Agreement and shall be separately enforceable.
7. DISCLOSURE OF CONFIDENTIAL INFORMATION. JEM recognizes and
acknowledges that JEM's duties hereunder shall require JEM to have knowledge
of matters unique to the Company, including trade secrets as to processes,
pricing and other matters, and lists of the Company's prospects, customers and
suppliers. JEM acknowledges that such information, processes and lists are
valuable, special and unique assets of the Company's business. Accordingly,
Consultant shall not, during the term of this agreement, and for a period of
one (1) year thereafter, disclose any such information, processes, or lists to
any reason or purpose whatsoever, except for the Company's benefit as
determined in accordance with normal corporate processes. JEM agrees not to
disclose the existence or nature of this Agreement to any third party without
the written approval of the Company. The provisions of this Section 9 shall
survive the termination, for any reason, of this Agreement and shall be
separately enforceable.
8. REPRESENTATION AND WARRANTY. JEM hereby represents and
warrants to Company that JEM has the right to enter into and perform this
Agreement will not violate or constitute a breach of any other agreement or
obligation to which JEM may be a party or otherwise bound. To the fullest
extent permitted by law, JEM agrees to indemnify and hold harmless Company form
and against all damages, losses, costs, and expenses (including reasonable
attorneys' fees and expenses) that may be incurred by the Company by reason of
any violation or breach of this Section 8.
9. AMENDMENT. This Agreement may be amended only by the written
agreement of Company and JEM.
10. ASSIGNMENT. The rights and obligations of Company under this
Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of Company. JEM, may not, however, assign or otherwise
delegate the duties and obligations required hereunder.
<PAGE> 4
11. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the state.
12. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original , but all of which
together shall constitute one and the same instrument. This Agreement shall be
binding when one or more counterparts hereof, individually or taken together,
shall bear the signature of the parties reflected hereon as signatories.
13. ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or written, between the parties hereto relating to the
subject matter hereof.
13. NOTICES. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the United States Post Office, by registered or
certified mail, receipt requested, postage prepaid, addressed to Company or to
JEM, as the case may be, at the addresses listed below, or at such other
addresses as either party may designate to the other in accordance with this
Section 16.
<TABLE>
<S> <C>
If to Company:
Complete Wellness Centers, Inc.
725 Independence Ave., SE
Washington, D.C. 20003
attn: President
If to JEM:
J.E.M., Inc.
attn: President
4727 Marlwood Lane
North Palm Beach, FL 33418
</TABLE>
15. PRONOUNS. Whenever the context may require, any pronouns used
in this agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular forms of nouns and pronouns shall include the plural
and vice versa.
16. THIRD PARTY BENEFICIARIES. None of the provisions of this
Agreement shall be for the benefit of or enforceable by any third party who is
not a signatory to this Agreement.
17. MISCELANEOUS.
(a) No delay or omission by the Company or JEM in exercising any
right under this Agreement shall operate as a waiver of that or any other
right. A waiver or consent given by the Company or JEM on any one occasion
shall be effective only in that instance and shall not be construed as a bar
or waiver of any right on any other occasion.
(b) The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope
or substance of this Agreement.
<PAGE> 5
* * *
IN WITNESS WHEREOF, Company and JEM have executed this instrument, or caused
its execution by a duly authorized officer, as of the day and year first above
written.
COMPLETE WELLNESS CENTERS, INC.
By:
--------------------------
Name: E. Eugene Sharer
Title: President
("Company")
J.E.M., INC.
By:
--------------------------
Name: Bonnie Kaplan
Title:
-----------------------
(J.E.M.)
<PAGE> 1
Exhibit 10.27
COMPLETE WELLNESS CENTERS, INC.
1995 BONUS PLAN FOR KEY EXECUTIVES
1. PURPOSE
The purpose of this Plan is to provide supplementary compensation as a reward
for past service and an incentive for future service to eligible key executives
who through industry, ability, and exceptional service, contribute materially to
the success of the Company.
2. DEFINITIONS
2.1. Board of Directors means the Board of Directors of the Company.
2.2. Bonus Fund means the fund provided for in Article 3 hereof.
2.3. Committee means the Committee of the Board of Directors provided for in
Section 4.1 hereof.
2.4. Company means Complete Wellness Centers, Inc., a Delaware corporation.
2.5. Eligible Employee means any key officer or other salaried executive who is
in service at the end of a Taxable Year and who has been designated by the
Committee as eligible to receive awards hereunder; provided, however, that if in
the judgment of the Committee a key officer or other salaried executive whose
service terminated before the end of a Taxable Year has made an outstanding
contribution to the Company, he or she may receive a pro rata bonus award
despite the early termination of service.
2.6. Net Income means the income of the Company before deduction or provision
for federal, state, and local taxes, as determined in accordance with Section
3.2 hereof.
2.7. Plan means this 1995 Bonus Plan For Key Executives of the Company, as it
may be amended from time to time.
2.8. Taxable Year means the fiscal year of the Company.
3. COMPUTATION OF FUND
3.1. There shall be paid into or set aside for a bonus fund (Bonus Fund) for
each Taxable Year an amount equal to 10% of the Company's Net Income for that
year; provided, however, that the amount of the Bonus Fund for any Taxable year
shall not exceed $5 million.
<PAGE> 2
2
3.2. The amount to be paid into or set aside for the Bonus Fund for any Taxable
Year shall be determined in accordance with generally accepted accounting
principles consistently applied by the independent public accountants employed
to audit the books and records of the Company for that Taxable Year. The
determinations of such accountants shall be final, binding, and conclusive upon
the Company and all other persons who may at any time have any interest in the
Company or the Bonus Fund.
3.3. If all or any part of the amount paid into or set aside for the Bonus Fund
for a Taxable Year is not awarded hereunder for that Taxable Year, it shall be
carried forward and be available for awards hereunder in subsequent Taxable
Years in accordance with Section 5.1 hereof.
4. ADMINISTRATION OF PLAN
4.1. The Plan shall be administered by the Board of Directors or, in its
discretion, a committee consisting of at least two members of the Board of
Directors, who shall be appointed by the Board of Directors from among those of
its members who are not Eligible Employees (Committee). As used herein, the term
"Committee" refers to such committee or, in the absence of the appointment of
such committee, to the Board of Directors. The Committee shall have full power
and authority to construe, interpret, and administer the Plan. Subject to any
applicable provisions of the Company's By-laws, all decisions, actions, or
interpretations of the Committee shall be final, conclusive, and binding upon
all persons, including the Company and Eligible Employees.
4.2. No present or former member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any bonus
awarded hereunder. To the maximum extent permitted by applicable law and the
Company's Certificate of Incorporation and By-laws, each present or former
member of the Committee shall be indemnified and held harmless by the Company
against any cost or expense (including counsel fees) or liability (including any
sum paid in settlement of a claim with the approval of the Company) arising out
of any act or omission to act in connection with the Plan unless arising out of
such person's own fraud or bad faith. Such indemnification shall be in addition
to any rights of indemnification the person may have as a director, officer, or
employee or under the Company's Certificate of Incorporation or By-laws or
otherwise.
5. AMOUNT AND CONDITION OF AWARDS
5.1. The Committee shall after the end of each Taxable Year, in its sole
discretion, determine the total amount to be allocated for distribution from the
Bonus Fund for that Taxable Year, which may be the whole or any part of the
Bonus Fund. Any portion of the amount paid into or set aside for the Bonus Fund
for any Taxable Year and not so allocated for distribution by the Committee
shall be carried forward and, in the discretion of the Committee, may be
allocated and
<PAGE> 3
3
distributed in subsequent Taxable Years.
5.2 The Committee shall, in its sole discretion, determine the amount of
individual bonus awards for Eligible Employees based on its evaluation of such
individual's performance, contribution to the successful management of the
Company, industry, service, compensation, and such other criteria as it shall
consider relevant.
5.3 Notwithstanding any other provision of the Plan, the Committee may, in its
discretion, allocate all or any portion of the Bonus Fund to one or more
Eligible Employees for current and/or future Taxable Years, pursuant to an
employment agreement or otherwise; provided, however, that any such allocation
may not be for more than five consecutive Taxable Years.
6. PAYMENT OF AWARDS
6.1 Awards for any Taxable Year shall be paid within 30 days after the
completion of the audit of the books and records of the Company for such
Taxable Year by its independent public accountants.
6.2 Awards shall be deemed additional compensation to the recipient and payroll
taxes shall be withheld from payments thereof in accordance with all applicable
federal, state, and local laws.
7. GENERAL RESTRICTIONS
7.1 Nothing in the Plan shall be deemed to give any Eligible Employee the right
to continued employment with the Company or to limit or impair the right of the
Company to terminate any Eligible Employee with or without cause at any time.
The Plan shall not constitute a contract between the Company and any Eligible
Employee. No Eligible Employee shall have any right to be granted an award
hereunder, whether or not he or she is selected to participate herein.
7.2 If the Committee shall find that any person to whom any amount is payable
under the Plan is unable to manage his or her affairs because of illness or
accident, or has died, then any payment due such person hereunder may, if the
Committee so directs, be paid to such person's spouse, child(ren), or other
relatives, or an institution maintaining or caring for such person, or any
other individual or entity deemed by the Committee to be a proper recipient on
behalf of such person. Any such payment shall be a complete discharge of any
liability of the Plan, the Committee, and the Company therefor.
8. AMENDMENT OR TERMINATION
The Board of Directors may at any time amend or terminate the Plan in whole or
in part;
<PAGE> 4
4
provided, however, that no amendment or termination shall impair or reduce an
award hereunder that was made but not paid prior to such amendment or
termination.
9. EFFECTIVE DATE
The effective date of the Plan shall be January 1, 1996.
<PAGE> 1
EXHIBIT 21.1
COMPLETE WELLNESS CENTERS, INC.
Subsidiaries of the Registrant
Complete Wellness Medical Center of Paula Drive, Dunedin, Inc.
Complete Wellness Medical Center of 4th Street, St. Petersburg, Inc.
Complete Wellness Medical Center of Stickney Point Road, Sarasota, Inc.
Complete Wellness Medical Center of Centreville, Inc.
Complete Wellness Medical Center of Dale City, Inc.
Complete Wellness Medical Center of Fredericksburg, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated July 18, 1996, except for
Notes 1, 5 and 7 as to which the date is November 13, 1996 in Amendment No. 1
to the Registration Statement (Form SB-2 No. 333-18291) and related Prospectus
of Complete Wellness Centers, Inc. for the registration of 1,000,000 shares of
its common stock and 1,000,000 redeemable common stock purchase warrants.
/s/ ERNST & YOUNG LLP
Washington, D.C.
February 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 722,293
<SECURITIES> 0
<RECEIVABLES> 635,127
<ALLOWANCES> (61,608)
<INVENTORY> 0
<CURRENT-ASSETS> 1,332,824
<PP&E> 217,088
<DEPRECIATION> 31,088
<TOTAL-ASSETS> 1,549,912
<CURRENT-LIABILITIES> 1,766,855
<BONDS> 0
0
14
<COMMON> 119
<OTHER-SE> 568,736
<TOTAL-LIABILITY-AND-EQUITY> 1,549,912
<SALES> 0
<TOTAL-REVENUES> 873,282
<CGS> 0
<TOTAL-COSTS> 1,518,425
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 70,000
<INTEREST-EXPENSE> 24,229
<INCOME-PRETAX> (520,950)
<INCOME-TAX> 0
<INCOME-CONTINUING> (520,950)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (520,950)
<EPS-PRIMARY> (.43)
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