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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-QSB/A
QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 52-1910135
--------------- ---------------
(State or jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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SUITE 200
666 ELEVENTH STREET, N.W., WASHINGTON, D.C. 20001
----------------------------------------------------------
(Address and telephone number of principal executive offices)
(202) 639-9700
-------------------------
(Issuer's telephone number)
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 share outstanding of each of the issuer's classes
of common equity, at June 30, 1998: 2,227,057
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COMPLETE WELLNESS CENTERS, INC.
FORM 10-QSB/A
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS -
JUNE 30, 1998 AND DECEMBER 31, 1997 ............................ 1
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 ............... 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997.............. 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ................ 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................ 8
PART II. OTHER INFORMATION ................................................... 14
SIGNATURES .......................................................... 15
</TABLE>
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ITEM 1 FINANCIAL STATEMENTS
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED) (NOTE)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $1,861,889 $804,924
Patient receivables, net of allowance for doubtful
accounts of $5,730,151 and $1,885,279 5,442,423 2,997,122
Inventory 685,027 39,483
Prepaid expenses 203,729 42,882
Other assets 103,834 156,573
Deposits 79,808 150,000
----------- -----------
Total current assets 8,376,710 4,190,984
Furniture and equipment, net 576,618 504,215
----------- -----------
Total assets $8,953,328 $4,695,199
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $1,671,410 $1,156,865
Accrued management fees and leases 3,670,659 3,117,135
Accrued interest 0 8,298
Advances from affiliates 45,433 154,976
Notes payable - current 51,698 45,433
----------- -----------
Total current liabilities 5,439,200 4,482,707
Convertible note payable 0 25,000
Note payable 0 500,000
Minority interest 0 7,179
Redeemable Preferred Stock, $.01 par value per share, 8%
cumulative, 104,401 shares currently issued and outstanding 4,813,614 0
Stockholders' equity/(deficit):
Common Stock, $.0001665 par value per share,
10,000,000 shares authorized, 2,339,523 shares and 2,183,589
issued and outstanding respectively 389 363
Additional capital 5,352,390 5,044,365
Accumulated deficit (6,652,265) (5,364,415)
----------- -----------
Total stockholders' deficit (1,299,486) (319,687)
----------- -----------
Total liabilities and stockholders' deficit $8,953,328 $4,695,199
=========== ===========
</TABLE>
Note: The Balance Sheet at December 31, 1997 has been extended from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Integrated medical clinics $5,091,647 $1,842,460 $10,018,316 $2,804,702
Weight management centers 2,993,054 0 5,303,951 0
Other income 66,085 0 151,767 0
---------- ---------- ----------- -----------
Total operating revenue 8,150,786 1,842,460 15,474,034 2,804,702
Direct expenses:
Salary and consulting costs 1,897,298 685,074 3,739,895 1,101,932
Management fees 2,096,093 884,691 4,983,717 1,241,765
Cost of weight management revenue 617,434 --- 1,081,679 ---
Rent 716,646 74,084 1,253,714 110,735
Advertising and marketing 386,523 28,672 605,853 52,885
Bad debt expense 1,124,921 254,483 2,169,540 473,144
---------- ---------- ----------- -----------
Total direct expenses 6,838,915 1,927,004 13,834,398 2,980,461
Network development cost 224,019 --- 427,676 ---
General and administrative 1,638,861 654,502 2,125,743 1,029,281
Depreciation and amortization 23,627 21,122 109,908 36,303
---------- ---------- ----------- -----------
Operating loss (574,636) (760,168) (1,023,691) (1,241,343)
Interest expense 0 1,757 1,487 24,869
Interest income 3,885 44,084 26,846 47,370
Minority interest 0 5,851 (7,179) 5,851
---------- ---------- ----------- -----------
Net loss before income taxes (570,751) (711,990) (1,005,511) (1,212,991)
Income taxes 0 204 1,045 4,204
---------- ---------- ----------- -----------
Net loss after income taxes ($570,751) ($712,194) ($1,006,556) ($1,217,195)
========== ========== =========== ===========
Loss per share - basic ($0.22) ($0.38) ($0.40) ($0.70)
========== ========== =========== ===========
Weighted average common shares - basic 2,543,610 1,860,767 2,539,020 1,745,016
========== ========== =========== ===========
</TABLE>
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
1998 1997
-------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($1,006,556) ($1,217,195)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Minority interest 0 (5,851)
Depreciation and amortization 112,629 36,303
Provision for bad debt 4,044,872 473,144
Amortization of debt discount 0 2,000
Recognition of compensatory granting
non-qualified stock options 67,319 4,271
Recognition of the granting of common
stock warrants 14,426 0
Changes in operating assets and
liabilities:
Accounts receivables (6,528,454) (988,962)
Advances to officers and other
current assets (375,386) (78,556)
Current tax liability 0 35,727
Deferred taxes 0 (31,523)
Accounts payable and other current liabilities 953,584 214,973
----------- -----------
Net cash used in operating activities (2,717,566) (1,555,669)
INVESTING ACTIVITIES
Purchase of equipment (64,228) (168,975)
Investment in subsidiaries (199,536) 50,000
----------- -----------
Net cash used in investing activities (263,536) (118,975)
FINANCING ACTIVITIES
Payment of notes (525,000) 0
Payment of bridge loan 0 (1,100,000)
Proceeds from sale of preferred stock 4,560,158 0
Proceeds from sale of common stock 2,909 4,686,060
Proceeds from notes payable 0 17,481
----------- -----------
Net cash provided by financing activities 4,038,067 3,603,541
----------- -----------
Net increase in cash and cash equivalents 1,056,965 1,928,897
Cash and cash equivalents at beginning
of period 804,924 298,509
----------- -----------
Cash and cash equivalents at end of period $1,861,889 $2,227,406
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMETNS
(UNAUDITED)
JUNE 30, 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 in the accompanying condensed consolidated financial statements.
Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of 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 Form 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 Senior 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 "Redeemable Preferred Stock") with two
investment groups (the "Investors"). 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 Senior Redeemable Preferred Stock purchase by the
Investors on January 17, 1998, of which $500,000 was used to retire the Bridge
Loan and a $4,000,000 Senior Redeemable Preferred Stock purchase by the
Investors on January 23, 1998.
The cost of the offering to the Company of approximately $468,000 was
paid out of the proceeds of the Redeemable Preferred Stock offering. Accretion
of the transaction cost is being recognized over the period of issuance to the
dates of mandatory redemption.
The Redeemable Preferred Stock was sold at $50 per share and carries a
$0.01 par value. The Redeemable 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 the form of additional Redeemable
Preferred Stock. After December 31, 2000 the dividend rate will increase to 12%.
The Redeemable Preferred Stock has a liquidation preference of $50 per share
plus accrued and unpaid dividends. The Investors have mandatory redemption
rights with respect to $3,000,000 of the Redeemable Preferred Stock,
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plus any dividends paid thereon in the form of additional Redeemable Preferred
Stock, 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 Redeemable
Preferred Stock, plus any dividends paid in the form of additional Redeemable
Preferred Stock, are subject to mandatory redemption no later than five years
after closing the transaction (January 23, 2003). The Redeemable Preferred Stock
is redeemable at $50 per share plus accrued and unpaid dividends.
Additionally, the Investors 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.
The Investors have the right to prohibit any significant transactions,
financing, dividends and related party transactions as part of the general
conditions of the transaction. Further, the Investors have demand and piggyback
registration rights for any common stock issued or issuable pursuant to the
Warrants.
On July 2, 1998, the Company entered into a Second Supplement to the
Investment Agreement with the Investors whereby certain terms and conditions of
the $5,000,000 private placement of Redeemable Preferred Stock were amended or
were canceled and new preferred and common stock was issued to the Investors.
The significant provisions of the new issuances are as follows:
(I) The Company issued 100,000 shares of newly authorized Senior
Convertible Preferred Stock (the "Convertible Preferred Stock"),
$0.01 par value at $50 per share, to the Investors in exchange for
the Redeemable Preferred Stock which was canceled upon receipt by
the Company. The Convertible Preferred Stock accrues dividends at
8% per annum if paid in cash and 10% per annum if paid in the form
of additional Convertible Preferred Stock. Dividends are payable
quarterly. Dividends, in the form of additional Preferred Stock,
were paid out as of March 31 and June 30, 1998.
(II) The Convertible Preferred Stock's liquidation preference is
calculated as $50 per share plus an amount equal to all dividends
(whether or not earned or declared) accumulated and unpaid to the
date of final distribution.
(III) Conversion of the Convertible Preferred Stock is based on the
liquidation preference divided by the lower of $1.75 or 75% of the
current market price per share of the Company's Common Stock on
the trading day immediately prior to the conversion date, subject
to certain anti-dilution provisions. Conversion of the Convertible
Preferred Stock, at the option of the Investors, can occur at any
time on or after January 3, 1999 or, if the Company is unable to
obtain shareholder approval to increase its authorized shares of
common stock to 50,000,000 from 10,000,000 shares, at any time on
or after August 31, 1998.
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(IV) The Convertible Preferred Stock is redeemable, at the Company's
option, in whole but not in part, from July 2, 1998 through
January 3, 1999 at the liquidation preference, except that the
dividend rate shall be 12% per annum.
(V) The Investors are entitled to maintain one representative on the
Company's board of directors so long as the Convertible Preferred
Stock is outstanding. In the event the Company is unable to obtain
shareholder approval to increase its authorized shares of common
stock to 50,000,000 from 10,000,000 shares, the Investors are
entitled to maintain majority representation on the Company's
board of directors. The Investors' right to representation on the
Company's board of directors terminates upon redemption or
conversion of the Convertible Preferred Stock.
(VI) Warrants issued to the Investors in connection with the Redeemable
Preferred Stock issuance were returned to the Company and
canceled.
(VII) The Company issued 100,000 fully paid for and non-assessable
shares of the Company's common stock to the Investors. All common
stock issued or issuable to the Investors upon conversion of the
Convertible Preferred Stock contain certain demand registration
rights, the Company will bear all costs associated with such
registrations, if any.
NOTE D - AMENDMENT OF SMOKENDERS SHAREHOLDERS' AGREEMENT
On June 1, 1998, the Company amended certain agreements with its
Smokenders subsidiary. On or before September 30, 1998 the Company shall
contribute to Smokenders $23,000 as additional capital and $75,000 in return
for a secured note bearing interest at 12%, payable on or before September 30,
1999. Additionally, the Company eliminated the $22,000 of promissory notes due
from Mr. Mrazek, CEO of Smokenders, as part of the original shareholder
agreement. The Company also agreed to grant the managers of Smokenders up to an
additional 3,000 shares of Smokenders stock 1,500 of which vested at the grant
date and 1,500 of which are subject to time vesting schedules through August 1,
1999. All options are exercisable for 5 year periods, contain anti-dilution
provisions, and are not exercisable until January 1, 2000 except under certain
circumstances. The exercise of these options will result in the managers having
35% of the outstanding shares of Common Stock and the Company having 65% of the
outstanding shares of Common Stock of Smokenders. All shares of Common Stock of
Smokenders to be issued pursuant to this agreement are non-public restricted
securities exempt from regulation requirements of the Securities Act of 1933 as
amended. The shareholders of Smokenders have certain put and call options as
well as non-mandatory repurchase options and liquidation requirements in the
event selling shareholders are not able to obtain buyers for their stock.
NOTE E - ACQUISITIONS
In January 1998 the Company, through its wholly owned subsidiary Complete
Wellness Weight Management ("CWWM"), completed its acquisition of 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 and assignment of the
outstanding obligations of the centers of approximately $380,000. The Company
has included the results of operations of these centers in its accompanying
condensed consolidated financial statements from February 1, 1998 (date
acquisition was fully consummated) through the end of each subsequent period
presented. The Company recognized revenues and income from operations of
$5,303,951 and $263,457 respectively, during the six months ended June 30, 1998.
On May 29, 1998 the Company, by unanimous consent of the Board of
Directors, agreed to purchase all of the outstanding units of Complete Wellness
Centers, LLC ("CWC,LLC"), a Delaware limited liability company, of which the
Company has a 1% equity interest and irrevocable proxies from a majority of
interest holders in the LLC. The acquisition will be accomplished by the
issuance of 77,821 shares of Common Stock valued at $200,000, based upon the
average closing bid price of the Company's Common
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Stock for the thirty (30) trading days prior to June 1, 1998. Such shares shall
be subject to SEC Rule 144, but shall have piggyback registration rights. Former
and current employees, directors, and immediate relatives of management, owning
37.6% of the LLC's equity shall receive a discount to 26.32% of the $200,000
valuation of the LLC; the remaining investors shall receive the balance of the
valuation on a pro rata basis in accordance with their respective investments.
In July 1998, the Company purchased Accident and Industrial Injury
Associates ("AIIA"), a chiropractic preferred provider network of approximately
2,700 providers located throughout the United States in exchange for warrants
to purchase 20,000 shares of its common stock for $3.31 per share which expire
in 5 years and contain certain piggyback registration rights. The Company will
account for this transaction under the purchase method. The primary assets
acquired were members of the network and databases related to the operations
thereof. The Company contemporaneously sold 30% of its interest in AIIA to its
86.67% owned subsidiary, Optimum Health Services, Inc. ("Optimum") in exchange
for a $12,000 note bearing interest at 6.1% per annum, due January 31, 2000.
Optimum will manage the network on behalf of the Company and receive an
additional 20% interest in AIIA over three years as compensation for such
services. The Company has committed to fund the initial working capital
requirements of AIIA, up to approximately $10,000, after which, the Company and
Optimum will fund all future working capital requirements equally.
NOTE F - DISCONTINUANCE OF BUSINESS
On May 13, 1998, the Company's Board of Directors adopted a plan to
divest the operations of 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 filed a registration statement
with the SEC on July 16, 1998 related to the offering of 1,000,000 shares of
its common stock to its shareholders and anticipates raising a maximum of
$1,000,000 of additional capital. As of August 10, 1998, the SEC has not
declared Optimum's registration statement effective.
On the date of closing of Optimum's offering, 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 100,000 shares of Optimum's common stock at $1.00
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 June 30, 1998, Optimum had losses from
operations of $427,676 with $2,668 in revenues.
On July 7, 1998, the Company committed to a formal plan to discontinue
the operations of Compete Billing, Inc. ("CBI"), one of its wholly owned
subsidiaries. The Company plans to cease operations on August 15, 1998 and
convert all billing done by CBI back to the respective medical clinics that are
CBI's clients. The Company does not expect to incur any expenses as a result of
closing CBI.
CBI initiated operation in May 1997. During the year ending December
31, 1997, CBI had losses from operations of $9,597 on revenues of $84,071. For
the period ending June 30, 1998, CBI had losses from operations of $12,375 on
revenues of $73,744.
The combined losses from the discontinuance of these two businesses
through June 30, 1998 was $440,051 on revenues of $76,412.
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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 Condensed Consolidated 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 six months ending June 30, 1998, CWC, LLC
incurred losses of $101,301. At June 30, 1998 CWC, LLC had 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 and other practice development
activities, as well as 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 June 30, 1998 the Company has directly formed 69 medical
corporations with similar affiliation contracts totaling 91 clinics, of which 84
are in operation as of that date. The operations of all the medical corporations
are included in the consolidated financial statements of the company. At June
30, 1998, the Company, as a result of its medical operations had revenues of
$10,018,852 and income from operations of $807,996 including the losses of CWC,
LLC of $101,301 for the period ended June 30, 1998.
During May 1997, the Company incorporated three new wholly owned
subsidiaries. Complete Wellness Research Institute, Inc. ("CWRI") and Complete
Wellness Education, Inc. ("CWEI"), are
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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 June 30, 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 June 30, 1998. CBI had revenues of $73,744 and a loss
from operations of $12,375 for the six months ended June 30, 1998. On July 7,
1998, the Company committed to a formal plan to cease operations of CBI by
August 15, 1998.
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, Inc. ("Optimum"). The Company holds an 86.67% equity interest 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. Optimum entered into two contracts to provide access to its
network to unrelated third party insurers in the first quarter of 1998 and is
expected to continue the expansion of its network and execute additional access
contracts throughout 1998. Included in the Company's June 30, 1998 consolidated
financial statements are the results of operations of this company. At June 30,
1998, Optimum had revenue of $2,668 and a loss from operations of $427,676.
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 filed a registration statement with the SEC on July 16,
1998 related to the offering of 1,000,000 shares of its common stock to its
shareholders and anticipates raising a maximum of $1,000,000 of additional
capital. As of August 10, 1998, the SEC has not declared Optimum's registration
statement effective.
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 100,000
shares of Optimum's common stock at $1.00 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 is being offered in the Company's medical clinics. Smokenders started
operations in August 1997.
9
<PAGE> 12
On June 1, 1998, the Company and Mr. Mrazek, CEO of Smokenders, amended
the original agreement. On or before September 30, 1998 the Company shall
contribute to Smokenders $23,000 as additional capital and $75,000 in cash in
return for a secured note bearing interest at 12%, payable on or before
September 30, 1999. Additionally, the Company eliminated the $22,000 promissory
notes due from Mr. Mrazek as part of the original shareholder agreement. The
Company also agreed to grant the managers of Smokenders up to an additional
3,000 shares of Smokenders stock, 1,500 of which vested at the grant date and
1,500 of which are subject to time vesting schedules through August 1, 1999. All
options are exercisable for 5 year periods, contain anti-dilution provisions,
and are not exercisable until January 1, 2000, except under certain
circumstances. The exercise of these options will result in the managers having
35% of the outstanding shares of Common Stock and the Company having 65% of the
outstanding shares of Common Stock of Smokenders. All shares of Common Stock of
Smokenders to be issued pursuant to this agreement are non-public restricted
securities exempt from regulation requirements of the Securities Act of 1933 as
amended. In addition, the shareholders of Smokenders have certain put and call
options as well as non-mandatory repurchase options and liquidation requirements
in the event selling shareholders are not able to obtain buyers for their stock.
Included in the Company's June 30, 1998 consolidated financial statements
are the results of operations of this company. At June 30, 1998, Smokenders had
revenue of $103,645 and losses from operations of $171,513.
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 June 30, 1998 consolidated financial statements are the
results of operations of CWWM. At June 30, 1998, CWWM had revenues of
$5,303,951 and income from operations of $263,457.
On May 29, 1998 the Company, by unanimous consent of the Board of
Directors, agreed to purchase all of the outstanding units of CWC, LLC. The
acquisition will be accomplished by the issuance of 77,821 shares of Common
Stock valued at $200,000, based upon the average closing bid price of the
Company's Common Stock for the thirty (30) trading days prior to June 1, 1998.
Such shares shall be subject to SEC Rule 144, but shall have piggyback
registration rights. Former and current employees, directors, and immediate
relatives of management, owning 37.6% of the LLC's equity shall receive a
discount to 26.32% of the $200,000 valuation of the LLC; the remaining
investors shall receive the balance of the valuation on a pro rata basis in
accordance with their respective investments.
In July 1998, the Company purchased Accident and Industrial Injury
Associates ("AIIA"), a chiropractic preferred provider network of approximately
2,700 providers located throughout the United States in exchange for warrants
to purchase 20,000 shares of its common stock for $3.31 per share which expire
after 5 years and contain certain piggyback registration rights. The Company
will account for this transaction under the purchase method. The primary assets
acquired were members of the network and databases related to the operations
thereof. The Company contemporaneously sold 30% of its interest in AIIA to
Optimum in exchange for a $12,000 note bearing interest at 6.1% per annum, due
January 31, 2000. Optimum will manage the network on behalf of the Company and
receive an additional 20% interest in AIIA over three years as compensation for
such services. The Company has committed to fund the initial working capital
requirements of AIIA, up to approximately $10,000, after which, the Company and
Optimum will fund all future working capital requirements equally.
10
<PAGE> 13
RESULTS FROM OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1997
Revenue. During the three and six months ended June 30, 1998 the Company
had revenues of $8,150,786 and $15,474,034 respectively, as compared to
$1,842,460 and $2,804,702 for the three and six months ended June 30, 1997. The
increase of $6,308,326 for the three month period was due primarily to the net
addition of 57 Integrated Medical Centers after June 1997, which contributed
$3,249,187 of the increase with the remainder made up by new subsidiaries which
initiated operations after June 1997. The increase of $12,669,332 for the six
month period was due primarily to the net addition of 57 Integrated Medical
Centers after June 1997, which contributed $7,213,614 of the increase with the
remainder made up of new subsidiaries which initiated operations after June
1997.
Salary and Consulting Costs. During the three and six months ended June
30, 1998 the Company incurred salary and consulting costs of $1,897,298 and
$3,739,895 respectively, as compared to $685,074 and $1,101,932 for the three
and six months ended June 30, 1997. The increase of $1,212,224 for the three
month period and an increase of $2,637,963 for the six month period was due to
an increase in costs resulting from the hiring of additional employees in the
administrative capacity at the corporate headquarters and the medical capacity
at the clinics, the addition of 57 Integrated Medical Centers after June 1997,
the additional employees associated with the new subsidiaries, and the
recognition of $85,245 compensation expense in 1998 related to stock grants and
stock options.
Management Fees. During the three and six months ended June 30, 1998 the
Company incurred management fees of $2,096,093 and $4,983,717 respectively, as
compared to $884,691 and $1,241,765 for the three and six months ended June 30,
1997. 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 $1,211,402 for the three month period and the increase
of $3,741,952 for the six month period was due primarily to the net addition of
57 Integrated Medical Centers after June 1997.
Rent. During the three and six months ended June 30, 1998 the Company
incurred rent expenses of $716,646 and $1,253,714 respectively, as compared to
$74,084 and $110,735 for the three and six months ended June 30, 1997. Rent
consists of amounts incurred for administrative and medical office space and
certain equipment leased by the company at the medical 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. The increase of $642,562
for the three month period and the increase of $1,142,979 for the six month
period was due primarily to the net addition of 57 Integrated Medical Centers
after June 1997, the move to new corporate headquarters and office space for new
subsidiaries which initiated operations after June 1997.
Advertising and Marketing. During the three and six months ended June 30,
1998 the Company incurred advertising and marketing expenses of $386,523 and
$605,853 respectively, as compared to $28,672 and $52,885 for the three and six
months ended June 30, 1997. The increase of $357,851 for the three month period
and the increase of $552,968 for the six month period was attributed to
additional national advertising for clinic recruitment and national advertising
for the weight loss and smoking cessation subsidiaries.
Bad Debt Expense. During the three and six months ended June 30, 1998 the
Company bad debt expenses of $1,124,921 and $2,169,540 respectively, as compared
to $254,483 and $473,144 for the three and six months ended June 30, 1997. The
Company has adopted a policy of fully reserving for any accounts receivable that
are not collected within 90 days. The increase of $870,438 for the three month
period and the increase of $1,696,396 for the six month period was due to an
increase in reserves for accounts receivable not collected within 90 days.
11
<PAGE> 14
Network Development Costs. All network development costs relate to the
activities of Optimum Health Services, Inc. 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 and six
months ended June 30, 1998, the Company's Optimum subsidiary experienced network
development costs of $224,019 and $427,676 respectively.
General and Administrative. During the three and six month periods ended
June 30, 1998, the Company incurred general and administrative expenses of
$1,638,861 and $2,125,743 respectively, as compared to $654,502 and $1,029,281
for the three and six months ended June 30, 1997. The increase of $984,359 for
the three month period was due primarily to the net addition of 57 Integrated
Medical Centers after June 1997 and three new subsidiaries and consists of
increases of (i) $58,970 in insurance costs, (ii) $472,171 in legal and
accounting costs, (iii) $36,648 in travel and entertainment costs and (iv)
$416,562 in various costs such as automobile, telephone, postage and printing
and reproduction. The increase of $1,096,462 for the six month period was due
primarily to the net addition of 57 Integrated Medical Centers after June 1997
and three new subsidiaries and consists of increases of (i) $559,989 in legal
and accounting costs, (ii) $50,493 in travel and entertainment costs, and (iii)
$485,980 in various costs such as automotive, telephone, postage, printing
and reproduction.
Depreciation and Amortization. During the three and six months ended June
30, 1998, the Company incurred depreciation and amortization expense of $23,627
and $109,908, respectively, as compared to $21,122 and $36,303 for the three and
six months ended June 30, 1997. The increase of $2,505 for the three month
period and $73,605 for the six month period resulted from the addition of fixed
assets, primarily computer equipment, which tend to have depreciable lives of
five years or less, the addition of three new subsidiaries, and the acceleration
of depreciation on assets formerly used in CWC, LLC.
Operating Loss. The consolidated operating loss of the Company decreased
from $760,168 and $1,241,343 for the three and six months ended June 30, 1997 to
$574,636 and $1,023,691 for the three and six months ended June 30, 1998. The
loss, excluding the discontinued operations of Optimum and CBI, would have been
$760,168 and $1,241,343 for the three and six months ended June 30, 1997 and
$342,066 and $583,640 for the three and six months ended June 30, 1998. 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 and six months ended June 30, 1998 the
Company had interest expense of $0 and $1,487, respectively, as compared to
$1,757 and $24,869 for the three and six months ended June 30, 1997. The
decrease of $1,757 for the three month period and $23,382 for the six month
period resulted from the retirement of the bridge financing loan repaid in
February 1997.
Interest Income. During the three and six months ended June 30, 1998 ,
the Company had interest income of $3,885 and $26,846, respectively as compared
to $44,084 and $47,370 for the three and six month periods ended June 30, 1997.
The decrease of $40,199 for the three month period and the decrease of $20,524
for the six month period resulted from a lower amount of invested funds in 1998
as compared to the same period in 1997.
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 a
gain of $15,752 and a loss of $101,301 for the three and six months ended June
30, 1998, respectively, as compared to a loss of $71,808 and $76,718 for the
three and six month periods ended June 30, 1997. 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 $(171,718), $68,878 and
$319,375, respectively, as of the period ended June 30, 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 $0 and $7,179 of the net losses
12
<PAGE> 15
incurred by Optimum for the three and six months ended June 30, 1998 based on
the minority interest owners investment in and percentage ownership of Optimum
and limitations due to the limited net equity.
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 and six months ended June 30, 1998, the Company had incurred a net loss of
$570,751 and $1,006,556, respectively, as compared to $712,194 and $1,217,185
for the three and six months ended June 30, 1997. At June 30, 1998, the Company
had working capital of $2,937,510 and an accumulated deficit of $6,652,265. Net
cash used in operations for the six months ended June 30, 1998 was $2,717,566,
as compared to $1,555,669 for the six months ended June 30, 1997. Net cash used
in operations exclusive of Optimum and CBI was $2,343,903 for the six months
ended June 30, 1998 as compared to $1,541,254 for the six months ended June 30,
1997. 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 increases in accounts receivable net of accounts
payable and other current liabilities. For the six months ended June 30, 1998
the Company used $64,228, as compared to $168,975 for the six months ended June
30,1997, for the purchase of equipment.
The Company intends to develop no fewer than 20 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 $730,000 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
$200,000 after June 30, 1998 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.
The Company has committed to fund future working capital requirements of
Smokenders and AIIA totaling $98,000 and $25,000, respectively, of which a total
of $15,000 has been funded through June 30, 1998 and is reflected in the
accompanying condensed consolidated financial statements.
Cash to fund continuing operations of the Company's business plan, until
positive cash flow is achieved, development of planned additional medical
clinics, weight loss clinics and amounts committed to Optimum until the date of
divestiture are expected to be provided by existing working capital as of June
30, 1998.
13
<PAGE> 16
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, June 3, 1998
Item 5 - Other Events- Election of New Director
Item 7 - Exhibit - Press Release
Form 14A, May 4, 1998 - Proxy
Form 14A, April 23, 1998 - Proxy
14
<PAGE> 17
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: October 1, 1998
Complete Wellness Centers, Inc.
By /s/ Michael T. Brigante
-------------------------
Michael T. Brigante-
Chief Financial Officer
15
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