<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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Commission file number 0-22115
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COMPLETE WELLNESS CENTERS, INC.
-------------------------------
(Exact name of small business issuer as
specified in its charter)
Delaware 52-191035
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
666 11th Street, N.W., Washington, D.C. 20003
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(Address of principal executive offices)
(202) 639-9700
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(Issuer's telephone number)
725 Independence Ave., S.E. Washington, D.C. 20003
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(Former name, former address and former fiscal
year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---.
State the number of shares outstanding of each of the issuer's classes of
common equity, at March 31, 1998: 2,183,598.
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COMPLETE WELLNESS CENTERS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION .......................................... 1
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) ............................... 1
CONDENSED CONSOLIDATED BALANCE SHEETS -
MARCH 31, 1998 AND DECEMBER 31, 1997 ........................ 1
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997 ........ 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997 ........ 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ........... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................... 5
PART II. OTHER INFORMATION .............................................. 8
SIGNATURES ..................................................................... 9
</TABLE>
0
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ITEM 1 - FINANCIAL STATEMENTS
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(UNAUDITED) (NOTE)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $2,779,077 $ 804,924
Patient receivables, net of allowance for doubtful
accounts of $4,899,746 and $1,885,279 4,182,538 2,758,841
Integration fees receivable 6,274 238,281
Inventory 716,991 39,483
Prepaid expenses and other assets 96,730 42,882
Advances to officers and other assets 124,189 156,573
Deposits 164,963 150,000
------------ ------------
Total current assets 8,070,762 4,190,984
Furniture and equipment, net 512,699 504,215
------------ ------------
Total assets $8,583,461 $4,695,199
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $1,435,116 $1,156,865
Accrued management fees and leases 3,131,264 3,117,135
Accrued interest 39,449 8,298
Advances from affiliates 155,170 154,976
Notes payable - current 10,274 45,433
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Total current liabilities 4,771,273 4,482,707
Convertible note payable 19,994 25,000
Note payable 0 500,000
Minority interest 0 7,179
Redeemable Preferred Stock, $.01 par value per share, 8%
Cumulative, 100,000 shares currently issued and out-
standing 4,560,158 0
Stockholders' equity/(deficit):
Common Stock, $.0001665 par value per share,
10,000,000 shares authorized, 2,183,598 shares
issued and outstanding 363 363
Additional capital 5,059,732 5,044,365
Accumulated deficit (5,828,059) (5,364,415)
------------ ------------
Total stockholders' equity/(deficit) (767,964) (319,687)
------------ ------------
Total liabilities and stockholders' deficit $8,583,461 $4,695,199
============ ============
</TABLE>
Note: The Balance Sheet at December 31, 1997 has been extracted from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
1
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 31,
1998 1997
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(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue:
Integrated medical clinics $ 4,874,139 $ 962,241
Weight management centers 2,454,338 0
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Total operating revenue 7,328,477 962,241
Direct expenses:
Salary and consulting costs 1,521,834 416,528
Management fees 2,626,890 357,073
Cost of food and supplies 469,476 ---
Rent 508,574 47,584
Advertising and marketing 209,763 24,213
Bad debt expense 1,047,236 218,661
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Total direct expenses 6,383,773 1,064,059
Network development cost 203,658 ---
General and administrative 1,118,588 364,176
Depreciation and amortization 85,783 15,181
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Operating loss (463,325) (481,175)
Interest expense 1,523 23,112
Interest income 21,863 3,286
Minority interest (7,179) 0
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Net loss before income taxes (435,806) (501,001)
Income taxes 0 4,000
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Net loss after income taxes ($435,806) ($505,001)
============= =============
Loss per share - basic ($0.19) ($0.32)
============= =============
Weighted average common shares - basic 2,534,430 1,575,043
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
2
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 31,
1998 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($435,806) ($505,001)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 89,245 15,181
Provision for bad debt 1,047,236 218,661
Amortization of debt discount 0 2,000
Recognition of compensatory granting
non-qualified stock options 931 0
Recognition of the granting of common
stock warrants 14,426 0
Changes in operating assets and
liabilities:
Accounts receivables (4,602,979) (439,694)
Advances to officers and other
current assets 5,935 (47,436)
Deferred taxes (18,000)
Accounts payable and other current 1,501,650 209,917
------------- -------------
Net cash used in operating activities (2,379,362) (564,372)
INVESTING ACTIVITIES
Purchase of equipment (70,846) (54,778)
Investment in subsidiaries (106,959) 0
------------- -------------
Net cash used in investing activities (177,805) (54,778)
FINANCING ACTIVITIES
Payment of bridge loan 0 (1,100,000)
Proceeds from sale of preferred stock 4,531,320 0
Proceeds from notes payable 0 17,481
Proceeds from sale of equity in complete
Wellness Centers, LLC 0 4,699,749
------------- -------------
Net cash provided by financing activities 4,531,320 3,617,230
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Net increase in cash and cash equivalents 1,974,153 2,998,080
Cash and cash equivalents at beginning
of year 804,924 298,509
------------- -------------
Cash and cash equivalents at end of year $ 2,779,077 $ 3,296,589
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMETNS
(UNAUDITED)
MARCH 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. The financial statement information was derived
from unaudited financial statements unless indicated otherwise. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1998 are
not necessarily indicative for the results that may be expected for the year
ending December 31, 1998.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited financial statements
included in the Company's 10-KSB, as amended, dated December 31, 1997. Certain
prior period amounts have been reclassified to conform with the current period
presentation.
NOTE B - NET LOSS PER SHARE
The Company's net loss per share calculations are based upon the
weighted average number of shares of Common Stock outstanding. During the first
quarter 1997, the Company issued 1,145,800 shares of common stock in connection
with the Company's Initial Public Offering. Pursuant to the requirements of the
Securities and Exchange Commission (SEC) staff accounting bulletin No. 98, the
Company considers all potentially dilutive securities issued for nominal
consideration prior to the Company's initial public offering as outstanding for
all periods presented. Other shares issuable upon the exercise of stock options
or conversion of redeemable convertible preferred stock have been excluded from
the computation because the effect of their inclusion would be anti-dilutive.
NOTE C - FINANCING
On January 23, 1998, the Company finalized a $5,000,000 private
placement of Senior Redeemable Preferred Stock (the "Preferred Stock") with
Wexford Management, LLC ("Wexford"). The terms of the offering consisted of a
$500,000 13% Bridge Loan (the "Bridge Loan") received by the Company on
December 16, 1997, a $1,000,000 Preferred Stock purchase by Wexford on January
17, 1998, of which $500,000 was used to retire the Bridge Loan and a $4,000,000
Preferred Stock purchase by Wexford on January 23, 1998.
The cost of the offering to the Company of approximately $468,000 was
paid out of the proceeds of the Preferred Stock offering. Accretion of the
transaction cost is being recognized over the period of issuance to the dates
of mandatory redemption.
The Preferred Stock was sold at $50 per share and carries a $0.01 par
value. The Preferred Stock accrues cash dividends at 8% payable quarterly in
arrears or at 10% payable quarterly in arrears if the Company chooses to pay
the dividend in additional preferred stock. After December 31, 2000 the
dividend rate will increase to 12%. The Preferred Stock has a liquidation
preference of $50 per share plus accrued and unpaid dividends. Wexford has
mandatory redemption rights with respect to $3,000,000 of the
4
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Preferred Shares on the earlier of December 31, 2000 or the completion of any
financing by the Company in excess of $5,000,000. The remaining $2,000,000 of
Preferred Shares are subject to mandatory redemption no later than five years
after closing the transaction (January 23, 2003). The Preferred Stock is
redeemable at $50 per share plus accrued and unpaid dividends.
Additionally, Wexford received warrants (the "Purchase Warrants"),
with a term of seven years, to purchase an aggregate of 2,850,000 of the
Company's publicly traded redeemable common stock purchase warrants (the
"Warrants"). The Purchase Warrants have an exercise price of $0.01. The Warrants
have an exercise price of $1.75. Up to 1,350,000 of the Purchase Warrants are
redeemable by the Company at $0.01 per warrant under certain conditions as
follows:
(I) 337,500 Purchase Warrants are redeemable prior to March
31, 2000 if the fiscal 1999 pre-tax earnings of the Company equals or
exceeds $1.25 per share on a fully diluted basis.
(II) 337,500 Purchase Warrants are redeemable prior to March
31, 2000 if the combined fiscal 1998 and 1999 pre-tax earnings of the
Company equals or exceeds $1.90 per share on a fully diluted basis;
(III) 337,500 Purchase Warrants are redeemable prior to March
31, 2001 if the fiscal 2000 pre-tax earnings of the Company equals or
exceeds $2.00 per share on a fully diluted basis;
(IV) 337,500 Purchase Warrants are redeemable prior to March
31, 2001 if the combined fiscal 1998, 1999, 2000 combined pre-tax
earnings of the Company equals or exceeds $4.10 per share on a fully
diluted basis.
Wexford has the right to prohibit any significant transactions,
financing, dividends and related party transactions as part of the general
conditions of the transaction. Further, Wexford has demand and piggyback
registration rights for any common stock issued or issuable pursuant to the
Warrants.
NOTE D - DISCONTINUANCE OF BUSINESS
On May 13, 1998, the Company's Board of Directors adopted a plan to
divest the operations of the Company's 86.67% owned subsidiary, Optimum Health
Services, Inc. ("Optimum"). Under the plan the Company will issue a dividend to
the Company's shareholders of record on May 13, 1998 in the form of the
Company's common stock in Optimum. Each of the Company's shareholders on the
record date will receive shares of Optimum common stock based on their pro rata
ownership of the Company's stock. Optimum plans to offer to its shareholders
additional common stock in an offering intended to raise a minimum of $200,000
and a maximum of $1,000,000 of additional capital through this offering.
On the date of closing, the Company will convert its advances to
Optimum into a $200,000 senior secured note bearing interest at 12% per annum
due at the earlier of December 31, 1999 or at the date of any financing of
$1,000,000 or more by Optimum. Any remaining unpaid principle and interest will
be due in full on December 31, 1999. The Company will also receive warrants to
purchase 50,000 shares of Optimum's common stock at $5.00 per share for a
period of five years subject to certain put and call options to sell or buy the
warrants pro rata at various prices up to a maximum of $860,000 in the
aggregate. The Company will also provide certain lease guarantees (up to a
maximum of $250,000) to Optimum and enter into a 10 year strategic alliance
with Optimum.
Optimum initiated operations in May 1997. During the year ended
December 31, 1997, Optimum had losses from operations of $317,682 with no
revenues. For the period ended March 31, 1998, Optimum had losses from
operations of $203,660 with no revenues.
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Statements included in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" Section, and in other sections
of this Report and in prior and future filings by the Company with the
Securities and Exchange Commission, in the Company's prior and future press
releases and in oral statements made with the approval of an authorized
executive which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
presently anticipated or projected. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak
only as of the date made. There are important risk factors that in some cases
have affected and in the future could affect the Company's actual results and
could cause the Company's actual financial and operating performance to differ
materially from that expressed in any forward-looking statement. The following
discussion and analysis should be read in conjunction with the Financial
Statements and notes appearing elsewhere in this report.
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. 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.
Throughout 1996 and 1997 CWC, LLC established and terminated affiliations with
7 chiropractic practices. During the first quarter of 1998 CWC, LLC incurred
losses of $117,052. At March 31, 1998 CWC, LLC has no operations. The Company
has no intention of establishing any new affiliations or operations through
CWC, LLC.
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 the 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.
Through March 31, 1998 the Company has directly formed 64 medical
corporations with similar affiliation contracts totaling 89 clinics, of which
85 are in operation. The operations of all the medical corporations are
included in the consolidated financial statements of the company. At March 31,
1998, the Company, as a result of its medical operations had revenues of
$4,926,990 and a loss from operations of $292,690 including the losses of CWC,
LLC of $117,052 for the period ended March 31, 1998.
6
<PAGE> 9
During May 1997, the Company incorporated three new wholly owned
subsidiaries. Complete Wellness Research Institute, Inc. (CWRI) and Complete
Wellness Education, Inc. (CWEI), are Delaware corporations; and Complete
Billing, Inc. (CBI), is a Florida corporation. Two of the three companies
started operations in May 1997. CWEI has not yet begun operations. CWRI
provides clinic research and studies to pharmaceutical, vitamin, natural
product and medical device manufactures within the Company's network of
clinics. CWEI, through its consortium of nationally recognized doctors and
authors, will provide education and wellness articles and periodicals to
national publications and publishers. CBI is a healthcare billing company,
which provides services to medical and chiropractic clinics, both inside the
Company's clinic network and to unaffiliated doctors. Included in the Company's
March 31, 1998 consolidated financial statements are the results of operations
of these companies. CWRI and CWEI did not have any revenues or results from
operations at March 31, 1998. CBI had revenues of $45,038 and a loss from
operations of $3,823.
Also, during May 1997 the Company entered into an agreement to become
the majority shareholder of a new company, Complete Wellness Independent
Physicians Association, Inc. ("CWIPA"), a Delaware corporation, now named
Optimum Health Services ("Optimum"). The Company holds an 86.67% stake in
Optimum, with 13.33% ownership held by the management of Optimum. Optimum plans
to build a network of primary, specialty, hospital and ancillary healthcare
providers, including the Company's network of clinics, to attract managed care
contracts, Medicare, Medicaid and federal and state government contracts and
self funded corporation contracts. Optimum began developing its provider
network in June 1997. It is anticipated that Optimum will be ready to enter
into contracts to provide access to its network in 1998. Included in the
Company's March 31, 1998 consolidated financial statements are the results of
operations of this company, with effect given to the 13.33% minority interest.
At March 31, 1998, Optimum had no revenue and a loss from operations of
$196,479 after giving effect to minority interest of $7,179.
On May 13, 1998, the Company's Board of Directors adopted a plan to
divest the operations of the Company's 86.67% owned subsidiary, Optimum Health
Services, Inc. ("Optimum"). Under the plan the Company will issue a dividend to
the Company's shareholders of record on May 13, 1998 in the form of common stock
in Optimum. Each of the Company's shareholders on the record date will receive
shares of Optimum common stock based on their pro rata ownership of the
Company's stock. Optimum plans to offer to its shareholders additional common
stock in an offering intended to raise a minimum of $200,000 and a maximum of
$1,000,000 of additional capital through this offering.
On the date of closing, the Company will convert its advances to
Optimum into a $200,000 senior secured note bearing interest at 12% per annum
due at the earlier of December 31, 1999 or at the date of any financing of
$1,000,000 or more by Optimum. Any remaining unpaid principle and interest will
be due in full on December 31, 1999. The Company will also receive warrants to
purchase 50,000 shares of Optimum's common stock at $5.00 per share for a
period of five years subject to certain put and call options to sell or buy the
warrants pro rata at various prices up to a maximum of $860,000 in the
aggregate. The Company will also provide certain lease guarantees (up to a
maximum of $250,000) to Optimum and enter into a 10 year strategic alliance
with Optimum.
During July 1997 a subsidiary of the Company acquired all of the
operating assets and business of Oxford Health Plan's Smokenders program for
$50,000. The subsidiary, Complete Wellness Smoking Cessation, Inc. (Smokenders)
also agreed to pay Oxford Health Plan a royalty of 5% on gross revenues for a
10 year period. In forming Smokenders the Company contributed $50,000 cash and
a commitment to provide working capital as needed in an amount not to exceed
$198,000 in return for 88.23% of the common stock. Robert J. Mrazek, the CEO of
Smokenders and a director of the Company is to contribute $22,000 in promissory
notes in return for 11.77% of the common stock. The promissory notes from Mr.
Mrazek will accrue interest at 8%. Unpaid interest and principle on the
promissory notes will be payable no later than September 30, 2000. Smokenders
plans to market its smoking cessation behavioral modification program to
corporations, federal and state government agencies and individuals as well as
seek strategic alliances with pharmaceutical companies to develop an adjunct
product for nicotine replacement therapies. Additionally, the Smokenders
program will be offered in the Company's medical clinics. Smokenders started
operations in August 1997. Included in the Company's March 31, 1998
consolidated
7
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financial statements are the results of operations of this company. At March
31, 1998, Smokenders had revenue of $40,322 and losses from operations of
$112,977.
In January 1998, the Company, through its wholly owned subsidiary
Complete Wellness Weight Management ("CWWM"), acquired 56 weight management
centers from Nutri/Systems, L.P. and a perpetual license to use the
Nutri/System brand name for $150,000 and the assumption of and assignment of
the outstanding obligations of the centers of approximately $380,000. Included
in the Company's March 31, 1998 consolidated financial statements are the
results of operations of CWWM. At March 31, 1998, CWWM had revenues of
$2,310,897 and income from operations of $170,163.
RESULTS FROM OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenue. During the three months ended March 31, 1998 and March 31,
1997 the Company had total revenue of $7,328,477 and $962,241 respectively. The
increase of $6,366,236 was due primarily to the net addition of 69 Integrated
Medical Centers after March 1997, which contributed $4,926,990 of the increase
with the remainder made up by new subsidiaries which initiated operations after
March 1997.
Salary and Consulting Costs. During the three months ended March 31,
1998 and March 31, 1997, the Company incurred salary and consulting costs of
$1,521,834 and $416,528, respectively. The increase of $ 1,105,306 was due to
an increase in the costs resulting from the hiring of additional employees in
the administrative capacity at the corporate headquarters, the medical capacity
at the clinics and commencement of operations at three new subsidiaries during
the first quarter of 1998.
Management Fees. During the three months ended March 31, 1998 and
March 31, 1997, the Company incurred management fees of $2,626,890 and
$357,073, 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 increase of $2,269,817 was due primarily to
the net addition of 69 Integrated Medical Centers after March 1997.
Rent. During the three months ended March 31, 1998 and March 31,
1997, the Company incurred rent expense of $508,514 and $47,584, respectively.
Rent consists of amounts paid for office space and certain equipment by the
Company at the medical and weight loss clinics. Rent for space and equipment
for the medical clinics is paid when the accounts receivable of the medical
clinic are collected by the medical clinic. Rent for the weight loss centers is
paid based on a fixed lease, generally five years in duration. The increase of
$460,990 was due primarily to the net addition of 69 Integrated Medical Centers
after March 1997 and the addition of 56 weight loss centers.
Advertising and Marketing. During the three months ended March 31,
1998 and March 31, 1997, the Company incurred advertising and marketing
expenses of $209,763 and $24,213, respectively. The increase of $185,550 was
attributable primarily to additional national advertising for marketing of the
medical and weight loss centers.
Bad Debt Expense. During the three months ended March 31, 1998 and
March 31, 1997, the Company incurred bad debt expense of $1,047,236 and
$218,661, respectively. The Company has adopted a policy of fully reserving for
any accounts receivable that are not collected within 90 days. The increase of
$828,575 was due to an increase in reserves for doubtful accounts for the
medical clinics.
Network Development Costs. All network development costs relate to the
activities of Optimum. Optimum is developing a network of health care providers
with the intention of entering into contracts with managed care entities for
the provision of medical services. During the three months ended March 31,
1998, the Company's Optimum subsidiary experienced network development costs of
$203,658. Optimum did not have operations during the three months ended March
31, 1997.
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<PAGE> 11
General and Administrative. During the three months ended March 31,
1998 and March 31, 1997, the Company incurred general and administrative
expenses of $1,118,588 and $364,176, respectively. The increase of $754,412 was
due primarily to the net addition of 69 Integrated Medical Centers after March
1997 and three new subsidiaries and consists of increases of (i) $63,384 in
insurance costs, (ii) $389,502 in legal and accounting costs, (iii) $48,929 in
travel and entertainment costs and (iv) $252,597 in various costs such as
automobile, telephone, postage and printing and reproduction.
Depreciation and Amortization. During the three months ended March
31, 1998 and March 31, 1997, the Company incurred depreciation and amortization
expense of $85,783 and $15,181, respectively. The increase of $70,602 resulted
from the addition of fixed assets, primarily computer equipment, which tend to
have depreciable lives of five years or less and the acceleration of
depreciation on assets used in CWC,LLC.
Operating Loss. The consolidated operating loss of the Company
decreased from $481,175 for the three moths ended March 31, 1997 to $463,325
for the three months ended March 31, 1998. The loss, excluding the operations
of Optimum, would have been $481,175 and $259,667 for the three months ended
March 31, 1997 and 1998, respectively. The net improvement in operation results
relates to the addition of the weight loss subsidiary and the increasing number
and improving operating results of the affiliated medical centers.
Interest Expense. During the three months ended March 31, 1998 and
March 31, 1997, the Company had interest expenses of $1,523 and $23,112,
respectively. The decrease of $21,589 resulted from the retirement of the
bridge financing loan repaid in February 1997.
Interest Income. During the three months ended March 31, 1998 and
March 31, 1997, the Company had interest income of $21,863 and $3,286,
respectively. The increase of $18,577 resulted from the investment of funds as
a result of the Company's refinancing in a series of short term securities.
Minority Interest. During 1996, the losses incurred by CWC, LLC
allocable to the minority interest owners of CWC, LLC eliminated all net equity
of the minority interest owners. Accordingly, the Company has reflected 100%
of the operations of the CWC, LLC in its results of operations, which
approximates loss of $117,052 and income of $4,910 for the three months ended
March 31, 1998 and March 31, 1997, respectively, without allocation to the
minority interest owners. In addition, the Company's investments in Complete
Wellness Smoking Cessation, Inc. represents 100% of the equity funding of that
entity. The Company has reflected 100% of the operations, assets and
liabilities of the subsidiary due to the lack of minority interest investment
into the Company, which approximates $(112,977), $43,910 and $235,871
respectively as of March 31, 1998. The Company's investment in Optimum was made
in conjunction with an investment by the minority interest owners. The Company
has included the effects of an allocation of approximately $7,179 of the net
losses incurred by Optimum for the three months ended March 31, 1998 based on
the minority interest owners investment in and percentage ownership of Optimum
and limitations due to the limited net equity.
The Company has evaluated its tax position as of March 31, 1998 and
its expected tax position for the next three to five years and determined that,
based on assumptions and estimates utilized in its evaluation, it is more
likely than not that the Company will not be able to realize the economic
benefits of net operation losses incurred and certain other deferred items.
Accordingly, the Company has recorded a valuation allowance representing 100%
of the net deferred tax assets and has recognized a net tax provision of zero.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses, negative cash flow from
operations and an accumulated deficit each month since its inception. For the
three months ended March 31, 1998 and March 31, 1997 the Company had incurred a
net loss of $435,806 and $505,001, respectively. At March 31, 1998, the Company
had working capital of $3,299,489 and an accumulated deficit of $5,828,059.
Net cash used in operations for the three months ended March 31, 1998 and
March 31, 1997 was $2,379,362 and $564,372,
9
<PAGE> 12
respectively. Net cash used in operations exclusive of Optimum was $2,089,362
and $564,372 for the three months ended March 31, 1998 and March 31, 1997,
respectively. Negative cash flow for each period was attributable primarily to
net losses in each of the periods and increases in 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 periods ended March 31, 1998 and March 31, 1997, the Company used
$70,846 and $54,778, respectively, for purchase of equipment.
The Company intends to develop no fewer than 30 additional medical
clinics by December 31, 1998. The average cost to the Company to develop a
medical clinic is approximately $10,000.
Since the formation of Optimum in May 1997, the Company has invested
approximately $630,000 to finance the costs of developing a provider network.
On May 13, 1998 the Board of Directors approved a plan to divest of the
operations of Optimum. The plan calls for the Company to provide additional
funding of $300,000 and to guarantee, under certain circumstances, operating
leases of Optimum after divestiture up to $250,000.
Recovery of amounts funded to Optimum is dependent upon the successful
completion of the Optimum business plan, including completion of its financing
plan and entering into profitable contracts to provide access to its network.
Cash to fund continuing operations of the Company's medical clinics,
until they begin to provide a positive cash flow, development of planned
additional medical clinics and amounts committed to Optimum until the date of
divestiture will be provided by existing working capital as of March 31, 1998.
10
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K, January 15, 1998
Item 5 - Other Events- Purchase of Selected Assets
Item 7 - Exhibit - Press Release
Item 7 - Asset Purchase Agreement
Form 8-K, February 9, 1998
Item 5 - Other Events - Sale of Senior Redeemable Preferred
Stock
Item 7 - Exhibit - Press Release
Form 8-K, March 11, 1998
Item 5 - Other Events - Completed Sale of Senior Redeemable
Preferred Stock
Item 7 - Exhibit - Pro Forma Financial Statements
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1998
Complete Wellness Centers, Inc.
By /s/ Michael T. Brigante
------------------------
Michael T. Brigante-
Chief Financial Officer
12
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,779,077
<SECURITIES> 0
<RECEIVABLES> 9,082,284
<ALLOWANCES> 4,899,746
<INVENTORY> 716,991
<CURRENT-ASSETS> 8,070,762
<PP&E> 733,930
<DEPRECIATION> 221,231
<TOTAL-ASSETS> 8,583,461
<CURRENT-LIABILITIES> 4,771,273
<BONDS> 0
4,560,158
0
<COMMON> 363
<OTHER-SE> (768,327)
<TOTAL-LIABILITY-AND-EQUITY> 8,583,461
<SALES> 7,328,477
<TOTAL-REVENUES> 7,328,477
<CGS> 469,476
<TOTAL-COSTS> 6,383,773
<OTHER-EXPENSES> 1,408,029
<LOSS-PROVISION> 1,047,236
<INTEREST-EXPENSE> 1523
<INCOME-PRETAX> (435,806)
<INCOME-TAX> 0
<INCOME-CONTINUING> (435,806)
<DISCONTINUED> (203,658)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (435,806)
<EPS-PRIMARY> (0.17)
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